Do Not Do Business With These Chinese Companies Because They do not Respect IP: A Blacklist

China Company Audit Lawyers

There has been much talk this week about the United States blacklisting Chinese companies that steal IP from doing business in the United States.  Per the Washington Post, the White House has been exploring “the possibility of blacklisting Chinese companies that violate numerous U.S. copyright and patent laws by placing them on the Commerce Department’s entity list.”

Once on the list the Chinese companies cannot operate in the United States “without obtaining a special license.” The United States already has such an entity list, but it now mostly includes companies that pose a military or terrorist threat to the United States or aids in violating human rights.

The Washington Post quotes Eric Altbach, a former deputy assistant U.S. Trade Representative focused on China, saying such a list “would put the U.S. government in the position of having to make an assessment of IP claims without a particularly clear process to do it.” Boy, would it.

My friend Mark Cohen, director of the Berkeley Center for Law and Technology and the blogger behind China IPR views this plan as “hopelessly stupid.” I agree.

As the Washington Post article notes, “in the United States [and in many other countries as well], most patent infringement cases are settled with no one admitting wrongdoing, making it difficult to assess if a firm is a repeat violator or not.”

The WaPo article also writes how “groups like the Information Technology and Innovation Foundation, a think tank, have called for the United States and its allies to at least publish a bad actors list to publicly call out Chinese firms and individuals, even if the list doesn’t have the legal ramifications of being on Commerce’s entity list.”

I think even that could prove troubling and a bit weird, for the following reasons:

1. Not sure it’s the role of the U.S. Government to decide what is a good company and what is a bad company. The role of the U.S. Government is to prosecute and sanction companies that engage in illegal activity and when they do that, what they do is public and that can serve as “the list.”

2. I don’t like the idea of any person or company being publicly tarnished by a government without full due process — essentially either an admission of guilt/liability or a finding of guilt/liability after a fair trial/hearing.

What will the be criteria for inclusion on the list? If one U.S. company complains about a Chinese company IP violation will that be enough? Two companies? Three companies?

Not a week goes by without someone (either a potential client or a blog reader telling us about a “cheating” Chinese company and  some of them request we list the cheating company on this blog. We long ago chose not to single out any Chinese companies on here not because we do not believe that they lie and cheat and steal IP, but because our doing so might lead people to believe they are the exception and not the rule.

Again, every Chinese company is an IP risk.

Pretty much every Chinese company will steal your IP if their cost-benefit analysis favors their doing that. In other words, those on the list will likely not be any more of an IP risk than those not on the list and I fear such a list might only create a false sense of security.

I oftentimes begin my speeches on “How to Protect Your IP from Chinese Companies” with the following:

If you are doing business with or in China, you need to plan on someone in China making a play for your intellectual property.  It’s not a matter of if, but when. It may be your partner, your distributer, your manufacturer, your employee your sales manager, your top scientist, your supplier, or your customer who seeks to take and then use your IP.  Big Chinese companies steal IP.  Small Chinese companies steal IP.  State owned Chinese companies steal IP.  Privately owned Chinese companies steal IP.  And despite the beliefs of many just starting out in China, Chinese companies with people who speak great English and invite you to their family weddings also steal IP. I am not saying tevery Chinese company will try to take your IP all the time, but I am saying that if it is in the best interests of a Chinese company to take your IP, the odds that it will do so are about 10,000 to 1.

And the Chinese government to a large extent just goes along with this. As recently as 2010, the Chinese Academy of Sciences’ annual report essentially said that because China is not so good at innovating it needs to do what it can to take technology from others. In 2006, China’s Medium and Long-Term Plan for Science and Technology Development stated that if foreign companies want to compete for government contracts they must transfer their IP to their Chinese partners. International outcry eventually led to this policy being cancelled, but so what?  The Chinese government’s desire to see Chinese companies take foreign technology and its favoritism towards Chinese companies remains.

Even if you think I am being too harsh in my assessment of IP in China or even if you think I am just flat out wrong, it still behooves you to at least act as though every Chinese company is a mortal threat to your IP.”

There is one great reason for instituting such a list, but it does not override the problems I list above. It is in many ways a perfect tit-for-tat for China’s new “Company Tracking System” which will give both foreign and domestic Chinese companies based on how well they hew to The Party line. See China’s New Company Tracking System: Comply, Comply, Comply.

I fully expect this company tracking system will be unfair, arbitrary and corrupt and maybe the U.S. just threatening to engage in something at least somewhat similar for Chinese companies will moderate China’s company tracking system just a bit, at least as against foreign companies.

What do you think?

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