6 Points to Consider if you are Doing Business with China without being Physically Present
In 2018, China’s patent applications grew by 11.6%, recording about 1.5M patent applications in the year. China has contributed greatly to global growth in IP filings and was the main source of growth in worldwide IP filings in 2018. If you find yourself in a situation where you need to do business in China without being physically present, these tips should be able to help you to be more confident in your business dealings.
1. Register your Intellectual Property in China before Licensing Anything to Anyone in China
Intellectual Property rights in China are a very crucial aspect of safeguarding the brand and inventions of any company going into business in the country. The government grants patents on a first-to-file basis and it is, therefore, the first step any company should take when thinking of doing business in China. Foreign companies should register their patents through CNIPA.Because of the first-to-file rule, it is very important for all foreign businesses to carry out due diligence on partners and employees they intend to work with in China. Once filed, a patent would require a patent invalidation application made to the Patent Review Board, in a case where there is an entity contesting ownership of the patent. This could prove to be a lengthy and costly process. Most patent applications for inventions could take between 2 to 5 years, and once granted they can be valid for up to 20 years. Patent applications for utility models & design take about a year and are usually valid for 10 years.
2. Do Not Delegate the Task of Registering Your IP in China to Your Chinese Licensee
Upfront payment is made, work can then begin. Be careful to make it clear that timelines will only be discussed and considered active once confirmation of payment is received. This will help avoid last-minute payments and a push to meet unrealistic deadlines in an attempt to save face.
3. Draft an Enforceable Contract to Protect Your Interests in China Against
Your Chinese Licensee
Every foreign company must put in place comprehensive contracts to protect its intellectual
property while dealing with suppliers, employees, and partners in China. These contracts should be clear, detailed and explicitly understood which means that they should be in both English and Chinese to avoid confusion or misinterpretation. Include non-disclosure agreements and non-compete agreements in the contracts. For safety in case of a breach of contract, the foreign company should also register the IP license with the relevant authority. In this case, with the Intellectual Property Office (CNIPA).
4. Make Sure the Licensee is the Actual Chinese Entity, not a Hong Kong Affiliate
A company may present itself as a Chinese company, however, after thorough research, you may find that it is based in Hong Kong or Taiwan. You should always make sure that the company has a registered office in Mainland China because all licenses only cover you in Mainland China. Doing business with a company that is not licensed in Mainland China is illegal and could result in your company facing legal proceedings without any contractual protection in place. The licensee, if not registered in Mainland China, could also actually steal your IP without legal repercussions. In this case, you will not have legal grounds to file any disputes as your company or patent is not legally registered in mainland China.
5. Only Make an Upfront Payment of the Licensee Fee in an Amount that keeps the Deal Worth it to You Even if the Contract is Terminated Early
Upfront payments are a form of deposit or guarantee and will help you gauge the seriousness of the licensee in doing business with you. Because of the hierarchy and approval processes, while doing business in China, approvals may take a while and at some point, the licensor may be convinced to sign a contract without a financial commitment from their Chinese contact. Ensure that you do not make full payments as this will not cushion you in an event of contract termination. Getting payments from the licensee may sometimes proves to be a hard task due to various reasons. For one, the Chinese government monitors all payments made by Chinese companies to foreign companies. The
local foreign exchange bank, as appointed by the government, may flag payments to the foreign company as suspicious. This, in turn, will trigger a hold on all funds to be paid out. Secondly, Chinese companies opt not to pay if they determine that the benefits of not paying, outweigh the risks associated with non-payment.
6. Prepare in Case of Substantial Contract Damages Like Early Termination and Instances of Infringement
Ensure that the contract sets out clear guidelines on what should happen in a case where there is early termination or infringement. Have all registrations, licenses and invoices legally registered and with duplicate copies in English and Mandarin. For example, if the licensor receives royalty payments, they need to have all their licenses recorded with ECNIPA. This allows them to collect what is due in case of infringement and damages caused due to breach and early termination of contracts.
Excerpt from Market Entry 10x Series (2020), co-published by Brainsfeed and TCP Growth