When President Trump announced a series of steep, punitive tariffs against China, much of the media’s attention was on how they will hurt American businesses and consumers the most. But alleged intellectual property theft by both private and state-owned enterprises in the P.R.C. has raised the ire of Washington for a long time. Chinese businesses often use the guise of negotiating a joint venture to usurp the intellectual property of a business.
The U.S. also objects to Chinese investment rules that require foreign companies to transfer technology as the price of admission for doing business in the country.
Indeed, Jeffrey Schultze, chief investment strategist at ClearBridge Investments, told CNBC that “We have a much more important ruling that’s going to be coming out on allegations that China has stolen intellectual property from U.S. companies.”
Definitely, the theft of IP including trade secrets and proprietary processes is a serious problem. Still, as an intellectual property attorney, I always recommend four steps a company can take to protect its IP when entering into negotiations with Chinese entities; in fact, there is a common-sense approach to use in any negotiation regardless of where a potential joint venture partner is based.
- Sign an initial, tightly-worded non-disclosure agreement. This would cover planning during strategy discussions, including deciding on the type of arrangement that would be entered into by the two companies such as a joint venture or strategic alliance. A joint venture would see the creation of a new legal entity created to govern the creation and ownership of intellectual property, and cover its exploitation.
- Have a “Formation Agreement” covering the IP contribution of both companies to the joint venture. This covers in great specificity what each party will contribute to the joint venture. It will lay out who owns what and whether they’ll continue to own the IP after the new entity begins operating or whether the joint venture will own the IP. It should also specify how the IP will be used by the joint venture.
- Confirm ownership and infringement issues of both IP and trade secrets. This is Due Diligence 101: Does each party actually own clear title to the IP that it will be contributing to a joint venture? Is the IP licensed from a third party? Does a bank have a security interest in any portion of the IP? The documents also need to spell out who owns any IP developed by the joint venture, and what happens to it if the arrangement falls apart or is dissolved for any reason.
- Describe the IP in detail. The JV documents need to detail precisely what will – and what will not – be contributed, how it will be used and which of the parties own IP and trade secrets. If the joint venture will own it, that needs to be detailed, as well. Descriptions of the IP need to be “locked down” so there is no dispute over whether there was an implied licensing of the IP to the joint venture that was never intended to occur. Also, spell out which party will enforce the IP if there is an infringement.
The joint venture agreement also needs to detail who owns any improvements that are made to intellectual property used by the joint venture, and whether either or both parties can commercially exploit IP developed by the new entity.
For many businesses, its intellectual property and trade secrets is among the most-valuable assets it possesses. Protecting it from theft is always a concern but especially when negotiating a joint venture with a third party, whether it’s located in China or on the next street. There are simple precautions to take to increase your own peace of mind as well as to discourage any thievery. An intellectual property lawyer can help protect you on the front end while an IP litigator can enforce your rights if things go wrong.
By Marcus Harris