A TECHNOLOGY-BASED STRATEGY FOR MANUFACTURE OF GOODS FOR THE D0MESTIC AND GLOBAL MARKETS*

I. OVERVIEW

Outsourcing the manufacture of products to China is an idea that is currently in operation or one that is being considered for virtually every labor-intensive product by virtually every western company. This paper looks at the technology-driven intellectual property aspects of outsourcing both in terms of how to maintain protection of trade secrets and other proprietary rights as well as to permit a business evaluation of the costs and demerits of outsourcing. Thus, while the traditional methods of border enforcement and trademark infringement actions can certainly be used in some situations where technology has been pirated, often stolen technology will be embodied in different clothing that the original manufacturer’s garb so that such traditional modes of enforcement will be difficult. Or, where the exact product is knocked off, then both sets of weapons may be utilized.

No American target is too big to take on; for some of the most spectacular and highly visible American product launches in China like a brand new automobile model, the counterfeit article may appear on the Chinese market even before the launch of the genuine article: A new Chevrolet in counterfeit form recently predated the official GM launch of the genuine article; even worse, it was produced by a concern that was a Chinese business partner of GM itself.1

This paper commences with an analysis of the changing intellectual property situation in China. Many situations require outsourcing to China whilst in a few cutting edge technology areas one will turn to the Japanese solution of "blackboxing" – simply bearing the additional costs of local manufacture to protect trade secret jewels. See § II, A Price-driven Manufacturing Landscape.

Before considering enforcement of patents or other intellectual property rights there must be a portfolio of such rights. See § III, An Intellectual Property "Fingerprint". To protect the Chinese production line it is necessary to totally rethink the manner of enforcement. A marketing budget for public relations and enforcement must be built into the business equation where the goal of litigation is not damages but rather to stop infringement. See § IV, Chinese Enforcement: A Different Calculus.

American enforcement remains the gold standard for protection of the American home market. See § V, Parallel American Enforcement. For all but a few industries, intellectual property issues, of course, are only the tail that should not wag the manufacturing do. See § VI, Issues Beyond Intellectual Property. As one of the integers to be considered is the creation of a better-controlled local Chinese arm for manufacturing. See § VII, The Woofie as the Next Step.

While the focus of this paper is on patents and trade secrets, trademark protection against counterfeiters is, of course, of extreme importance; copyrights, too, may be important. These more highly developed bodies of law and practice are outside the scope of the present paper. See § VIII, Trademark and Copyright Protection.2

Chinese business strategy is become increasingly complex as sophistication amongst the Chinese business and law community leadership grows. Piracy in its present form will surely be giving way toward a more complex competition structure. See § IX, An Increasingly Sophisticated China.

II. A PRICE-DRIVEN MANUFACTURING LANDSCAPE

Classically, American manufacturers of the highest quality goods have relied upon a domestic production with highly skilled workers with countless man years of proprietary know how and trade secret skills – all locked behind factory gates often at a location just behind the executive suite. Maximum attention to secrecy coupled with workers steeped in a history of honoring trade secrets coupled with a strong local court system have together made the system work quite well.

Today, every manufacturer is either actually outsourcing production of at least some goods to China – or elsewhere in Asia – or is contemplating such a move, spurred by the competitive pricing push of those concerns who have already or are just now commencing Chinese outsourcing. The game in China is entirely different: The concept of intellectual property rights protection is not yet even out of the first generation, and court enforcement of even patent rights is out of the question in terms of monetary recoupment of damages: An excellent system of specialized patent courts in Shanghai, Beijing and several other provinces does exist, but a low statutory cap on damages makes use of the courts for anything other than injunctive relief a practical impossibility; trade secret enforcement is problematic.

Even a couple of years ago, the answer to many American concerns to outsourcing manufacture to China was a resounding "no". Today, a black and white "no" is not an acceptable answer for most technologies. To be sure, the Japanese electronics industry – which once was a leader in outsourcing manufacturing – is now taking a cautious look at its technological crown jewels. The president of a leading electronics manufacturer speaks of "blackboxing" his intellectual property rights: He maintains domestic manufacturing facilities to avoid loss of its trade secrets.3

Yet, for all but the highest level of technology that is incapable of reverse engineering from the identity of the product, the trend continues to outsource manufacturing to China.

III. AN INTELLECTUAL PROPERTY "FINGERPRINT"

"We don’t have Chinese patents!"

What can we possibly do? We’re outsourcing details of a process we’ve practiced in Kenosha for five years under trade secrecy. Is there anything we can do?

Yes.

A lot!

Americans must rethink their traditional attitude toward process patents.4 Executives who cut their teeth on patent law more than a generation ago are generally hostile to process patents because they learned as part of their patent upbringing that a process patent was generally worthless against imported goods: There historically was no way to enforce a process patent against an importer, certainly not under a patent infringement remedy in the District Court – although enforcement at the International Trade Commission was an option. Furthermore, a process patent that was "obvious", given the identity of the final product, was of dubious validity or even patentability.

What happened over the past twenty some years?

First, since early 1989 it has become an act of U.S. patent infringement for domestic sale of goods produced offshore via a U.S. process patent. The law was amended to provide that "[w]hoever without authority imports into the United States or offers to sell, sells, or uses within the United States a product which is made by a process patented in the United States shall be liable as an infringer[.]"5

Second, it is now clear that if the features of a process are dictated by an unexpected product design, then the process, per se, may be patentable. Additionally, there has been a stronger appreciation by the judiciary of the importance of patents in the United States and, particularly, the key role that patents play as a force to maintain intellectual property-based prosperity in this country.

A. Fingerprinting the Production Line

A primary goal of process patenting for outsourcing is to "fingerprint" the assembly line production with several key process patents that relate to process steps that are necessary to carry out the production as set up by the company. It is not necessary that every last detail be patented, but only that some of the steps are patented – those which cannot be readily avoided without great expense, if at all.

B. New Trade Secrets and Prompt or Delayed Patenting

Where there is an about-to-be commercialized trade secret, there are several considerations that go into the decision as to when to file a patent application.

1. Trade Secrets Obvious from the Identity of the Product

If the process becomes obvious promptly upon release of the identity of the product, then by all means the patent application should be filed before any release of the product or other public disclosure of the product. Thus, once the product is known to the public for this type of process invention, the process invention becomes immediately obvious. While there is a one year grace period for American patent protection, Chinese (and almost all other foreign) patent protection will be forfeited for this type of invention because there is no grace period for filing after disclosure of the invention – or of the product that makes the process invention obvious.

2. Trade Secrets not Obvious from the Product

If the trade secret is something that cannot be "reverse engineered" from the identity of the product, then consideration should be given to filing a United States patent application just shortly before the one year anniversary of first commercialization. This puts into play the one year grace period for filing after commercialization, so care must be taken to file within this one year period. Then, the first publication of the invention is only 18 months after the filing – or a full 30 months after the first commercialization.

Foreign patenting is also possible under the regular route of a PCT application filed one year after the first United States filing – even though this is long after the first commercialization of the invention in the United States. The reason this is possible is that the secret use of the process in the United States is not a patent-defeating event for Chinese or other foreign patent laws – even though a patent is barred in the United States. 6

3. Chinese Patenting Already Commercialized Trade Secrets

While it is well known that a domestic patent cannot be obtained to a trade secret that has been commercialized for more than a year, foreign patent law is entirely different. Thus, even if an assembly line has been in operation for a dozen or more years, if there are trade secret processes that help to "fingerprint" the production line, they can be the subject of foreign patent protection.7 While the disclosure of the patent applications for foreign protection is made public, it is done so only after 18 months from the initial filing.8

C. Contractual Identification of All Trade Secrets

Because a contractual violation, particularly of trade secrets, may be an act of "unfair competition" under American law applicable at the International Trade Commission, it is helpful to tie both the outsourcing owner and employees to a contractual obligation to maintain trade secrets.

1. A Videotaped Agreement

Beyond the usual contract with the employer, it may be useful to have a Chinese language agreement that is both signed and read while being videotaped. Just as a videotaped will plays better to a court than a signed document, alone, so, too, should a videotaped reading of the agreement by the local owner and employee provide a stronger case for a violation of a trade secret or contractual agreement, if there is eventually a breach.

2. Periodic New Agreements

On a periodic basis, and perhaps every time a new employee joins the outsourcing venture or has access to the premises, it may be useful to have a fresh videotaped agreement.

3. Liability on the Eventual Exporter to an ITC Violation

It is important to have agreements with any person who might be involved with the eventual exporter who makes use of expropriated information. Thus, if there is a subcontractor who enters the premises and steals trade secrets and then uses such trade secrets, it would be useful if that subcontractor were under a videotaped confidentiality agreement as a better way to establish a violation by the exporter.

D. Design Patents for the "New Model"

Whenever there is a design change, the new model should be the subject of one or more design patents. Design patents have gotten a bad name in the United States because of their narrow scope of protection that essentially is often limited to the particular design in question.

Precisely!

This is the point. If the goal is to block a knockoff of the production line, what could be better than a design patent?

Design patents are extremely inexpensive and easy to gain through a rapid allowance process. In this sense, they are much better than a regular (utility) patent.

Design patent protection should start with a domestic application; yet, it should be noted that there is only a six month period for foreign filing with a right of priority.9

IV. CHINESE ENFORCMENT: A DIFFERENT CALCULUS

As part of the budget for establishing outsourcing there must be a spendable budget set for the inevitable enforcement efforts that must take place as promptly as possible.

A. This is not the United States

Americans in their domestic enforcement strategies will often wait for an infringement to occur and then sue, expecting to be compensated for the infringement in damages and confident that injunctive relief will then return an exclusive intellectual property-based position to the status quo ante.

This strategy simply will not work for China.

Damages will never be obtained in the sense of a sufficient recovery even to the point of covering attorney fees and ancillary enforcement costs: This has everything to do with a cap on intellectual property infringement damages and nothing to do with prejudice or other criticisms of the courts themselves.

Instead, it must be assumed that there will be infringement if there is no suit – and perhaps even if there is a suit.

A local company profile in China of vigilance and a willingness to immediately sue is absolutely essential if infringement is to be stamped out. If it is possible to sue and then gain a settlement that can be widely publicized in the local press, then by all means this should be done. Public relations should be an integral part of the litigation strategy.

B. Vigilance within the Factory and in China

It should be obvious that there must be a Mandarin-fluent on site presence in the factory, itself, for education of the employees on trade secrets, preservation of the trade secrets, and to keep eyes open for what’s going on amongst competitors. It should be assumed that one or more of the persons with access to the factory floor will seek to take proprietary information to use against the interests of the employer.

Only with eternal and constant vigilance will there be any hope of maintaining the intellectual property rights.

C. Public Relations ….

1. On the Scene in China

It does no good at all to ward off infringers if all efforts to maintain secrecy are kept in silence or if there is settlement with one party that is maintained in secrecy. An open and visible presence in China must be made.

As part of this visible presence, participation with the local American Chamber of Commerce and other local American organizations is helpful, too.

2. Chinese WTO Review until 2011

China is under an annual review for compliance with the World Trade Organization (WTO) and its Trade Related Aspects of Intellectual Property (TRIPS). This will occur until 2011. The Chinese government is extremely sensitive to a successful review each year.

3. Congress and the U.S. Trade Representative

China is a new member of the World Trade Organization (WTO) and its Trade Related Aspects of Intellectual Property (TRIPS), yet this is an intergovernmental mechanism. To influence the United States government to present arguments to the Chinese government a public affairs presence in Washington, D.C., is necessary.

4. Industry Associations

Participation in industry associations in the United States is also important as they may directly deal with both the U.S. government and the Chinese government.

D. Nipping Infringement in the Bud

Even with optimum efforts there still will be infringement.

It must be crushed.

Immediately.

Rumors and facts about various courts in China only muddle the equation. As a fact, there are several courts of initial jurisdiction in China that provide excellent judges who are well trained in patent law, including courts in both Shanghai and Beijing. Depending on a variety of circumstances, one of these courts will generally be the best forum in China for the American plaintiff. Forum shopping will permit selection of that better court.

If an infringement suit is filed early against a weak infringer, the chances are better for reaching a settlement that can then be publicized to further demonstrate the stubbornness of the plaintiff and his will to maintain exclusivity.

If, however, infringement goes on for a considerable period of time before suit the ante is upped, greatly. If suit is only brought when there ar a politically connected party that can only help to tip the scales against the plaintiff.

E. A Complementary Chinese Marketing Strategy

The idea of outsourcing starts with manufacture for the American and other developed country markets. But, what about the Chinese market?

The answer must not be, forget about it.

To do so is to surely invite infringement. If there is no intention to sell in China, then it should be a better arrangement to permit sales in China at a lower cost – perhaps without the trademark, which would provide some profit but which would serve as a prophylactic against infringement. Furthermore, a local Chinese partner would have an incentive to maintain exclusivity and would be an ideal lead plaintiff for local infringement suits.

V. PARALLEL AMERICAN ENFORCEMENT

Concurrently with any Chinese enforcement, the American market should be safeguarded here at home.

A. A Growing Explosion of Litigation

Litigation against Chinese manufacturers for offshore sales to both the United States and Japan have skyrocketed in recent years as more and more the domestic industries in both countries have seen offshore manufacturing as a major threat. This has been in parallel with an enormous number of American and other foreign companies opening offices in China. In the past five years, major overseas concerns have taken a more aggressive attitude to creating a patent portfolio to safeguard technology; "[m]ultinationals, such as Matsushita, IBM and Nokia, have been stepping up their patent rights arrangements on the Chinese mainland since 1999 in such areas as wireless telecommunications, photoelectricity, information technology and bioengineering[.] [A] patent war is on the verge of breaking out as some of the multinationals have basically completed their arrangements[.]"10 In the automotive arena, both American and Japanese automotive companies are now more aggressively enforcing their patent and trademark rights against Chinese competitors. In a dispute over use of the company’s logo, Honda has sued the Chongqing-based Lifan (the largest domestic motorcycle manufacturer) in Shanghai.11 Earlier, Honda sued the same defendant in Beijing for trademark infringement based upon use of "Hongda" as confusingly similar to Honda.12 Honda sued sport utility ma nufacturer Shuanghuan in Beijing for design patent infringement.13 General Motors earlier sued compact car manufacturer Qirui Automotive for patent infringement of its design for GM’s Daiwoo Matiz compact that it plans to market in China as the Chevrolet Spark.14 In 2003, Toyota sued the Chinese car manufacturer Jili for trademark infringement.15 After Korean-based LG had opened a production line in Tianjin, it sued Guangdong-based Galanz in Beijing for alleged patent infringement of its microwave ovens.16 In April 2004, Syngenta AG – having a Shanghai regional headquarters – sued Yancheng Lvye Chemical Co. and Yancheng Yongli Chemical Co. in Nanjing for infringement of its insecticide patent on Thiamethoxam.17

TSMC, a Taiwanese semi-conductor company with only a small production facility in Shanghai, charged a Shanghai-based competitor – SMIC – "improperly obtained TSMC trade secrets and infringed several TSMC patents. The statement alleges that SMIC hired over 100 TSMC employees and asked some of them for TSMC's trade secrets. Moreover, it also alleges that a SMIC official asked a then-TSMC manager to obtained TSMC process information and forward it to SMIC." Instead of suing in China, it chose to bring suit in the Northern District of California.18 Fargo Electronics sued Intra Worldwide in both China and Korea and elsewhere on its ribbon sensor patent which it settled in 2004.19

More and more cases being brought in the District Courts as well: Chinese lithium battery manufacturer BYD was sued by Sanyo in the Southern District of California for patent infringement.20 Other recent patent infringement suits against Chinese manufacturers have been identified as Chamberlain Group v. Capital Prospect Ltd. (of China) (universal transmitters for garage door openers); Climax Molybdenum Co. v. Molychem LLC (ammonium octamolybdate isomers); Cisco Systems v. Huawei Technologies (software code used in routers); Leviton Manufacturing Co. v. 6 Chinese companies (ground fault circuit interrupters).21

While the number of lawsuits in China may be small and growing, the Chinese government has stated that in the period 1985-2000 the Beijing Court, alone, had received 773 cases of "patent difficulties".22

B. The ITC as a Unique Border Guard Weapon

The United States, of course, has district court patent infringement remedies. But, there is a further alternative in the United States as well: A proceeding at the International Trade Commission (the ITC) is an unusual administrative action that should be completed within one year (or 18 months for a complex case) where the goal is not damages but an in rem exclusion order against the particular product being imported – whether by the respondent or anyone else.

Historically, the ITC was exclusively used to protect American manufacturing industries. But, changes in the statute now permit any American industry that has a substantial American presence but offshore manufacturing may use the ITC for border enforcement. Indeed, Japanese industry is now a major user of the ITC as a means to block other Asians who are importers and infringers of its patents.

1. Special Attributes of an ITC Action

a. An In rem Border Protection Measure

The goal of an ITC action is not merely to gain a settlement or even a victory over a particular defendant, but, rather, to gain a general exclusion order. This is an in rem victory that will then block future infringers from having goods enter the United States, not just those of the defeated party to the ITC litigation.

b. Multiple Defendants in a Single Action

Where multiple defendants are infringing, the in rem relief and joint action is an attraction of the ITC. For example, Energizer brought an action against numerous Chinese battery manufacturers;23 Deere has enforced its patent position on riding lawnmowers;24 Deere sued thirteen Chinese agricultural vehicle manufacturers in another suit.25 Fuji Photo Film was able to nab a Chinese manufacturer of "single-use" cameras – "lens-fitted film packages" (LFFP's) – with infringement of fifteen patents owned by Fuji.26 Numerous Chinese Viagra-copy drug manufacturers27 were sued in a single ITC action by Pfizer.28 Other cases have been brought on plastic grocery bags,29 ammonium octamolybdate,30 panel fasteners,31 insect traps,32 magnets33 and malleable iron pipe fittings.34

c. An Expensive Forum to Force the Issue

An ITC action is extremely expensive. The complainant will surely eat through its first $ 100,000 budget just in getting the complaint filed and the early proceedings. But, the cost is also high for the respondent who will often settle the suit – or otherwise be given the reality therapy of this expensive litigation as to the seriousness of the patentee. To the extent this is publicized in China this will have an echo effect, a prophylactic against other infringers choosing the particular product for infringement.

d. An Agency with Great Experience over China

Additionally, the ITC has a wealth of experience in dealing with Chinese respondents through its anti-dumping jurisdiction. The subject matter is quite diverse, including outboard motors,35 cast iron pipe fittings and ball bearings,36 shrimp,37 steel beams,38 melamine china,39 nitromethane,40 tissue paper,41 indigo,42 canned mushrooms,43 foundry coke,44 and magnesium – alone45 or in granular form46 or in pure granular form.47

2. The Res of the ITC Action

There are multiple actions possible at the ITC which fall under its jurisdiction over an "unfair act":

a. Traditional Patents and Other Intellectual Property It goes without saying that the traditional intellectual property actions for patents, designs and trademarks are all within the umbrella of an "unfair act".

b. Trade Secrets and Videotaped Contracts

As noted earlier, it is important to tie down all outsourcing ventures and their employees with contractual agreements to honor trade secrets.48 If this is done, then a violation is an "unfair act." This is true even though only a minority of cases have been brought for trade secret violations, they occur not infrequently.49

Thus, "trade secret misappropriation constitutes an ‘unfair act’ that is cognizable under Section 337. The [ITC]’s subject matter jurisdiction in cases such as trade secret misappropriation, however, is limited to those unfair acts which occur ‘... in the importation of articles into the United States, or in their sale by the owner, importer, consignee, or agent of either ...’ [19 U.S.C. § 1337(a)(1)(A)] Thus, the Commission's jurisdiction depends on the existence of some nexus between the alleged unfair acts and importation."50

VI. ISSUES BEYOND INTELLECTUAL PROPERTY

There are numerous issues that are critical as part of any outsourcing that are briefly touched upon here, including compliance with controls over technology transfer, tax considerations, and payments to foreign officials. A laundry list of other issues includes "[p]rovisions relating to performance bonds, delay damages, intellectual property indemnification and ownership, representations and warranties, dispute resolution and arbitration, training, documentation, and tax issues [that] must be negotiated in the context of the deal."51

A. Governmental Controls Over Technology Transfer

1. American Controls

Import and export compliance issues are of great importance.52

Where technology is transferred to a Chinese outsourcing venture where trade secrets are involved, even if patent applications are filed and a foreign filing license is obtained, there will still be the need for consideration of appropriate licensure as much "additional technology in the form of trade secrets, drawings, data, and know-how must be transferred to provide sufficient information for commercial use of the technology".53

2. Chinese Controls

China has its own set of concerns.54

B. Tax Considerations

Significant tax issues under both domestic and foreign law must be considered.55

C. Payments to Foreign Officials

Payment to officials – whatever the local cultural norms – may violate the Foreign Corrupt Practices Act (FCPA).56

One commentator suggests that "[a]lthough the FCPA is directed at preventing bribery of foreign officials and the influencing of foreign government processes, the FCPA is also a potential trap for the unwary. Gift giving and the payment of a little ‘extra’ in appreciation of services promptly performed is common in Asia. This is in addition to those rather clear-cut instances where sums of money are accepted by foreign officials for preferential treatment in the granting of licenses, approvals, and other special considerations."57 He suggests that "[w]estern concepts of arms length and impartial dealings with government officials and corporate entities are not always directly applicable to Asian traditions and social norms. As is well known, the building and maintenance of relationships in Asia is critical to the success of any business endeavor. Thus, a U.S. company or individual must avoid a violation of the FCPA, while at the same time gaining acceptance into the host country's culture."58

VII. THE WOOFIE AS THE NEXT STEP

Contract manufacture for outsourcing has the advantage of simplicity yet there is a gross lack of control over trade secret manufacturing information. Other business models are therefore considered as providing better control over the intellectual property crown jewels that have may have heretofore been locked behind factory gates.

Much has been written about the formation of the JV – the Joint Venture, or the Woofie – the "WOFE" or Wholly Owned Foreign Entity. Insufficient attention has heretofore been paid to the special treatment of protection of trade secrets of the manufacturing processes, often comprising the crown jewels of a company.

A. Tight Control over Proprietary Information

1. Leadership in the JV or Woofie

The most careful selection must be made of JV or Woofie leadership. [discussion]

2. Information Access to Employees

Paper shredders should be everywhere – both for practical use and as a reminder of the importance of maintaining confidentiality of information within a JV or Woofie. If only a select group of employees is to have access to important information then a careful restriction of access to that information must be carefully controlled. Hard drives should be removed and locked up, if necessary.

Consideration should be given to restricting the type of information given to any one employee so that one employee is not in possession of all the intellectual property.

Local employees who do not "need to know" key information should be excluded from access to that information.

3. Locking up the Hard Drive

B. Enforceable FIE Employment Agreements

 "One size fits all."

This is not the way to approach the creation of employment agreements with the FIE, the Foreign Investment Enterprise.

1. Agreements with the FIE Leadership

A specially tailored employment agreement with the FIE local leading employees is critical, particularly one which effectively deals with national and any local regulations concerning noncompete provisions. In setting up confidentiality and noncompete agreements with the FIE leadership, several factors should be considered.

a. A Regulations-Compliant Agreement

It is insufficient to have a noncompete agreement in the western sense. In addition to the usual recitations found in an American agreement, local Chinese laws must be considered. Perhaps not as widely known as they should be are the 1997 Opinions, more formally the Several Opinions Enhancing Administration of Trade Secrets in Dealing with Job Switch by Scientific Personnel (Ministry of Science, July 2, 1997), discussed in C. Sun, China Intellectual Property § 5.05 (2004). Among other requirements there should be a provision for post-employment payments of at least 50 % per year for up to three years as the statutory quid pro quo for the enforceability of a noncompete agreement. The amount of the fee is based upon the compensation paid to the employee during her or his last year of employment. Id. Additionally, confidentiality rules from local governments may also exist and need to be considered.

b. A Contract Under American Law

The overall agreement should, where possible, specify that it is under American law and to be interpreted [discussion]

c. A Contract in Mandarin and English

A major part of the value of any noncompete agreement is that the employee understands her or his obligations so that there is no breach of the agreement. Obviously, an agreement that is in both Mandarin and English will make the point far better than an agreement that is simply in English.

2. Confidentiality Agreements with All Employees

All employees should have confidentiality agreements, again in Mandarin.

C. A Parallel Parent China Presence

Quite apart from the creation of the JV or the Woofie, consideration should be given to having a local office of the parent organization – whether formal or informally organized – that has native language Mandarin facility and the ability to provide instant information to the parent organization about what’s going on locally amongst both the competition and also the politicians, academics and other local players. This local organization tied to the home country management should be able to provide instant, on the spot analysis of what’s going on, what should be done with the press and the local government, and how the legal and public relations structure of the company’s business should be directed.

Consideration should also be given to an alliance of similarly situated business persons, both locally in China and in Washington, D.C.

Both the business representative as well as any coalitions should be poised to provide information to both the local government as well as the United States government authorities on trade conditions and so forth as part of the overall political process that may drive the local enforcement equation.

D. Prospective Domestic Market Treatment

If a product has been made for export markets but would be highly desirable and suitable for the local Chinese market, it may be an unworkable business strategy to expect that the entire production to be sold outside China – or that the domestic market would be satisfied to pay western list prices. This is particularly true where a western company enters the Chinese market for the first time as an adjunct to local production, or where previous sales have been relatively minor.

Once there is a local production line that is efficiently and profitably making a product for export, the pressure to supply the domestic market at competitive prices will be enormous. Here, particularly where there has been no previous domestic Chinese sales efforts, it would be highly desirable to have a local Chinese partner to distribute the product with an incentive to maintain the trade secrets.

The local enterprise partner should be in a far better position to police counterfeiting and unfair competition. Additionally, the local enterprise should make a far more attractive plaintiff than the overseas American or Japanese original manufacturer.

VIII. TRADEMARK AND COPYRIGHT PROTECTION

Every effort should be made to have a strong trademark for the United States and China. Every effort should be made to safeguard the mark in China. Some subject matter is susceptible of copyright protection which, too, should be sought.

Already, much has been written about how to use copyrigths and trademarks as an effective tool to block counterfeiters – whether in China, at the border through the International Trade Commission or through a federal district court.59

IX. AN INCREASINGLY SOPHSTICATED CHINA

It is important to be up to date on the ever evolving Chinese business scene. What may have been true in the 1990’s is not necessarily true today, and what happened yesterday does not mean that this will be followed tomorrow. Already, there is a new generation of returned Chinese experts who came to America and other western countries in the early 1990’s for schooling and business experience who have returned to Shanghai and elsewhere and are now providing an enhanced level of expertise and leadership in the business and legal cultures of China. To be sure, China is not going to completely change overnight, but the days of the frontier era of intellectual property piracy are numbered – certainly not in days, but in terms of several years. 

Footnotes:

*Paper prepared for a Foley & Lardner Intellectual Property Roundtable, Detroit Office of Foley & Lardner, September 14, 2004. The authors acknowledges with appreciation the knowledge gained from colleagues including, particularly, Catherine Sun, a leading comparative expert on Chinese and American law who is a graduate of both Peking University Law School and the George Washington University Law School (LL.M.). They have benefited from a study of the work of Ms. Sun, China Intellectual Property for Foreign Business (Hong Kong: LexisNexis 2004). Anat Hakim and Larry Shatzer have provided invaluable counsel in the area of trademark and border enforcement.

1 Joann Muller, Counterfeiting Cars in China: Manufacturers step up Countermeasures Worldwide, Forbes.com [on msnbc.com], Feb. 1, 2004 http:// msnbc.msn.com/id/4131724/  ("Piracy is such a way of life in China that people are surprised when a movie, software package or handbag bought there is not ripped off. Now you can add, to the list of counterfeit goods, passenger cars. Months before General Motors began selling its $7,500 Chevrolet Spark in China in December, a $6,000 knockoff version, the Chery QQ, with the same grinning front end but missing some subtle details (like an airbag), was cruising Chinese streets. Even more galling: The manufacturer of the pirated version was partially owned by GM's Chinese business partner.")

2. Anat Hakim, a colleague at Foley & Lardner, has provided the writers valuable guidance in this area, which is acknowledged with appreciation.

3. Sharp Corp. President Katsuhiko Machida, Daily Yomiuri, June 17, 2004, http://www.yomiuri.co.jp/newse/20040617wo13.htm (discussing litigation against Taiwanese manufacturers of LCD screens)(" "Japanese manufacturers are going through hard times, but I think we should stick to domestic production. *** It is extremely important in Japan, where production costs and taxes are high, to keep technology under wraps and to protect intellectual property rights, what the industry calls ‘blackboxing.’").

4. "Process patents" are referred to, here, in terms of patents to the method of making the product on the assembly line. (A "process patent" may otherwise refer to claims to a method of using a product.)

5. 35 USC § 271(g). But, "[a] product which is made by a patented process will, for purposes of this title, not be considered to be so made after *** it is materially changed by subsequent processes[.]" 35 USC § 271(g)(1).

6. Even if an invention is maintained in secrecy, under domestic law "it is a condition upon an inventor's right to a patent that he shall not exploit his discovery competitively after it is ready for patenting; he must content himself with either secrecy, or legal monopoly." Pfaff v. Wells Electronics, Inc., 525 U.S. 55, 68 (1998)(quoting Metallizing Engineering Co. v. Kenyon Bearing & Auto Parts Co., 153 F.2d 516, 520 (2nd Cir. 1946)(L. Hand, J.)).

7. A United States provisional application is filed to the trade secret processes that are unpatentable in the United States. But, they are never prosecuted in the United States (an impossibility for a provisional application). At the one year anniversary of the filing of the provisional application, a Patent Cooperation Treaty (PCT) application is filed in the United States that designates China and other foreign countries.

8. The PCT application is automatically published 18 months from the priority (provisional) filing date.

9. The design patent regime is parallel to or part of the regular patent regime, depending upon the country or region. Design patent protection enjoys a Paris Convention priority period that is only six months – as opposed to one year for patents.

10. Patent war looming large in China: experts, People’s Daily, October 9, 2003, http://english.people.com.cn/200310/09/eng20031009_125605.shtml (citing Yuan Jianzhong, head of an IPR task force with a Taiwan-based institute of information industry)

11. See Japan's Honda Motor Co. sues Chinese motorcycle maker for logo piracy, Detroit Free Press, June 4, 2004.

12. Id.

13. Honda sues China for patent infringement, The Epoch Times (April 6, 2004).

14. Id.

15. Id.

16. LG Sues Galanz for Alleged Patent Infringement, People’s Daily, July 11, 2003, http://english.peopledaily.com.cn/200307/11/eng20030711_119992.shtml. A local press report claims Galanz to be "the world's leading microwave oven manufacturer[;] Galanz covers 40 per cent of the global sales and 50 per cent of the Chinese market share[.]"

17. Syngenta claims that this is the first chemical product patent that is being enforced in China under the 1993 patent law amendment permitting protection of chemical products, per se. Syngenta Sues Two Chinese Companies For Patent Infringement, AgProfessional, http://www.agprofessional.com/show_story.php?id=25201, May 20, 2004.

18. TSMC files complaint against SMIC for patent infringement and trade secret misappropriation (Interfax-China) (December 24, 2003).

19. (BUSINESS WIRE)--May 24, 2004--Fargo Electronics, Inc., Business Wire (May 24, 2004) http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&new sId=20040524005083&newsLang=en

20. Aki Tsukioka, SANYO Energy (USA) Files Lithium Ion Battery Patent Infringement Lawsuit Against BYD of China and Its US Subsidiary, JCNN, http://www.japancorp.net/Article.Asp?Art_ID=3930 (September 26, 2002).

21. Kerry A. Dolan, China's New Suits, Forbes.com, October 27, 2003, http://www.forbes.com/free_forbes/2003/1027/070sidebar.html.

22. China Regulates Judgment on Patent Infringement, People’s Daily, October 11, 2001, http://english.peopledaily.com.cn/200110/11/eng20011011_81991.html

23. In The Matter Of Certain Zero-Mercury-Added Alkaline Batteries, Parts Thereof, And Products Containing Same, USITC Inv. No. 337-TA-493 (Energizer action against battery manufacturers Sichuan Changhong Electric Co., Ltd.; Fujian Nanping Nanfu Battery Co., Ltd.; Golden Power Industries, Ltd.; Guangdong Chaoan Zhenglong Enterprise Co., Ltd.; Guangzhou Tiger Head Battery Group Co., Ltd.; Hi-Watt Battery Industry Co., Ltd.; Ningbo Baowang Battery Co., Ltd; Zhejiang 3-Turn Batteries Co., Ltd.; and Zho ngyin Ningbo Battery Co., Ltd.).

24. In the Matter of Certain Agricultural Tractors, Lawn Tractors, Riding Lawnmowers, and Components Thereof, USITC Inv. No. 337-TA-486, Pub. No. 3625 (2003)(suit against respondent Beiqi Futian Automobile Co., Ltd. of Beijing).

25. John Deere identified thirteen Chinese of twenty four respondents (Agracat, Bolton, China America, Crossroads, Dale Ilgen, Dongfeng, Jiangling, Jiangsu, Lenar, Pacific, SamTrac, Task Master, and Workhorse) as infringing and diluting Deere's green and yellow trademarks. In the Matter of Certain Agricultural Vehicles and Components Thereof Final Initial and Recommended Determinations, USITC Inv. No. 337-TA-487, Administrative Law Judge Order (2004).

26 In the Matter of Certain Lens-Fitted Film Packages, Inv. No. 337-TA-406, subsequent proceedings against other parties sub nom Jazz Photo Corp. v. International Trade Com'n, 264 F.3d 1094, 1109 n. 3 (Fed. Cir. 2001)("We take note that one of the original respondents admitted that it was building new LFFP cameras in China. These im ported cameras were held to infringe, and are not part of this appeal.").

27. Zhejiang Medicines & Health Products Import & Export Co., Ltd. (Hangzhou), Jiangxi Jilin Chemical Corp. Ltd. (Fujian), Tianjin Shuaike Chemical Co., Ltd. (Xiqing), Lianyungang Foreign Trade Co. (Jiangsu), Sino Health Care Company Of Sichuan (Chengdu) and China Jiangsu International (Nanjing).

28. In the Matter of Sildenafil or any Pharmaceutically Acceptable Salt thereof, such as Sildenafil Citrate, and Products Containing Same, USITC Inv. No. 337-TA-489.

29. In The Matter Of Certain Plastic Grocery And Retail Bags, USITC Inv. No. 337-TA-492, Order No. 8, Administrative Law Judge Order (2003)(suit including Nantong Huasheng Plastic Products Co., Jiangzao, as respondent).

30. In The Matter Of Certain Ammonium Octamolybdate Isomers, USITC Inv. No. 337-TA-477, Administrative Law Judge Order (2003)(manufacture by Anhui Wonder Trade Co. Ltd. of Anhui, China).

31. In The Matter Of Certain Panel Fasteners, Products Containing Same, And Components Thereof, USITC Inv. No. 337-TA-480, Order No. 7, Administrative Law Ningbo Foreign Trading Company, Ltd. (Ningbo, China)).

32. In the Matter of Certain Insect Traps, USITC Inv. No. 337-TA-498 (action against Guangdong Dong Fang Imp. & Exp. Corp. of Shenzhen, China).

33. San Huan New Materials High Tech, Inc. v. International Trade Com'n, 161 F.3d 1347 (Fed. Cir. 1998).

34. Malleable Iron Pipe Fittings from China, USITC Inv. No. 731-TA-1021 (Final), Pub. No. 3649, Commission Determination (2003).

35. Outboard Engines in Japan, USITC Inv. No. 731-TA-1069 (Preliminary), Pub. No. 3673 (Com’n det. 2004)("Many of Bombardier's models are *** sourced from outside the United States, but not wholly from Japan. From affiliates in *** China (Bombardier Recreational Products Asia, Ltd.), Bombardier imports several of its *** models.").

36. Non-Malleable Cast Iron Pipe Fittings from China, Inv. No. 731-TA-990, USITC Pub. No. 3586 (2003); Ball Bearings from China, Inv. No. 731-TA-989, USITC Pub. No. 3593 (2003).

37. Shrimp and Prawns From Brazil, China, Ecuador, India, Thailand, and Vietnam, USITC Inv. Nos. 731-TA-1063-1068 (Preliminary), Pub. No. 3672 (2004).

38. Certain Structural Steel Beams from China, Germany, Luxembourg, Russia, South Africa, Spain, and Taiwan, Inv. Nos. 731-TA-935-936, 938-942 (Final), USITC Pub. 3522 (2002).

39. Melamine Institutional Dinnerware from China, Indonesia, and Taiwan, Inv. Nos. 731-TA-741-743 (Final), USITC Pub. 3016 (1997).

40. Nitromethane from the People's Republic of China, Inv. No. 731-TA-650 (Preliminary), USITC Pub. 2661 (1993).

41. Certain Tissue Paper Products and Crepe Paper Products from China, USITC Inv. No. 731-TA-1070 (Preliminary), Pub. No. 3682 (2004) ("[T]he United States International Trade Commission (Commission) determines, pursuant to section 733(a) of the Tariff Act of 1930 (19 U.S.C. § 1673b(a)) (the Act), that there is a reasonable indication that an industry in the United States is materially injured by reason of imports from China of certain tissue paper products and that an industry in the United States is materially injured by reason of imports from China of crepe paper products that are alleged to be sold in the United States at less than fair value (LTFV).")

42. Synthetic Indigo from China, Inv. No. 731-TA-851 (Preliminary), USITC Pub. 3222 (1999).

43. Certain Preserved Mushrooms from Chile, China, India, and Indonesia, Inv. Nos. 731-TA-776-779 (Preliminary), USITC Pub. 3086.

44. Foundry Coke from China, Inv. No. 731-TA-891 (Final), USITC Pub. 3449 (2001).

45. Magnesium from China and Russia, USITC Inv. Nos. 731-TA-1071-1072 (Preliminary) (2004).

46. Magnesium from China and Russia, USITC Inv. Nos. 731-TA-1071-1072 (Preliminary) (2004).

47. Pure Magnesium in Granular Form from the People's Republic of China, 66 FR 57936 (Nov. 19, 2001); Final Determination of Sales at Less Than Fair Value: Pure Magnesium in Granular Form From the People's Republic of China, 66 FR 49345 (September 27, 2001).

48. See § III-C, Contractual Identification of All Trade Secrets.

49. Gary M. Hnath & James M. Gould, Litigating Trade Secrets Cases at the International Trade Commission, 19 AIPLA Q.J. 87, 88 (1991)(" While the majority of Section 337 investigations involve allegations of patent infringement, trade secret misappropriation has been, and continues to be, a frequently alleged unfair act in Section 337 investigations. In fact, since 1974 [up until 1991], 26 cases instituted by the Commission have involved claims of trade secret misappropriation[.]")(footnotes omitted).

50. Gary M. Hnath & James M. Gould, Litigating Trade Secrets Cases at the International Trade Commission, 19 AIPLA Q.J. 87, 88-89 (1991)(footnote omitted).

51. Jeffrey J. Blatt, Considerations In Representing Western Companies In Technology Transfers To East Asia, 19 Hastings Int'l & Comp. L. Rev. 667, 668 (1999)

52. See Timothy J. Sheehan & Susan M. C. Kovarovics, Hidden Costs of Outsourcing: Implications of Import/Export Compliance, The Web Conference Series for Corporate Counsel (June 17, 2004).

53. Jeffrey J. Blatt, Considerations In Representing Western Companies In Technology Transfers To East Asia, 19 Hastings Int'l & Comp. L. Rev. 667, 669 (1999)("If all that is required to practice the invention is contained in the foreign patent [properly filed through previous grant of a foreign filing license under 35 USC § 184], it may not be necessary to transfer any additional technology from the United States. As the export control laws do not apply to public information, the technology disclosed in the patent publication will fall outside the scope of U.S. export regulations. Similarly, public information previously disclosed in papers, or at conferences and trade shows, is also generally not affected by the export control laws. However, in most cases, additional technology in the form of trade secrets, drawings, data, and know-how must be transferred to provide sufficient information for commercial use of the technology. This confidential information would be subject to U.S. export control regulations.").

54. Miyata et al., A Study on Risk Management for Technology Licensing in China, 29 AIPPI Journal [Japan] No. 23, pp. 190-209 (May 2004).

55 Jeffrey J. Blatt, Considerations In Representing Western Companies In Technology Transfers To East Asia, 19 Hastings Int'l & Comp. L. Rev. 667, 671-72 (1999)("[S]ection 482 of the Internal Revenue Code requires that consideration for intangible property transferred in a controlled transaction be commensurate with the income attributable to the intangible. Section 482 applies to intercompany transfers between two or more organizations (whether or not incorporated or organized in the United States) owned or controlled directly or indirectly by the same interests. Issues relating to foreign tax credits also arise, as does the application of any bilateral tax treaties between the United States and the host country. Thus, there may be tax implications for a U.S. technology transferor, depending on the nature of its ownership interest in the foreign company, subsidiary, or joint venture receiving the technology, as well as the tax relationship between the United States and the foreign country. In addition, many countries of East Asia have withholding tax requirements for local companies acquiring intellectual property rights, paying royalties for intellectual property licenses, or acquiring technical or legal services from foreign companies.")(footnote omitted).

56. Jeffrey J. Blatt, Considerations In Representing Western Companies In Technology Transfers To East Asia, 19 Hastings Int'l & Comp. L. Rev. 667, 672-73 (1999)(quoting 15 U.S.C. § 78dd-1(f)(2)(B) (1994)) ("[T]he FCPA prohibits the furnishing of a thing of value to a third party for the purpose of influencing him to do or not to do an act in violation of his lawful duty. A person is deemed to ‘know’ that the thing of value will be given to a foreign official if the person is ‘aware of a high probability . . . that the funds will be so used.’")(footnotes omitted in part).

57. Id. at 673.

58. Id. The commentator adds that "[p]ublishing a company policy regarding the giving and acceptance of gifts will assist employees of the U.S. company in avoiding transactions that may give rise to a violation of the FCPA. In the event of an alleged violation by an officer or employee, a written policy is also useful as evidence of an intent to comply with the FCPA by the corporate entity." Id.

59. This topic is outside the scope of the present paper. Anat Hakim, a partner at Foley & Lardner, has provided the writer with significant insights in this area within her expertise. 

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