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IPR: IP Strategies for EU ‘Clean Tech’ Businesses in China
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altWith immense growth, the Chinese clean technology market is an attractive prospect for European companies. To realise the potential and operate competitively however, clean tech enterprises need to protect their intellectual property (IP) rights. This concluding article of a two-part series outlines important considerations – such as licensing of IP – for conducting business in and with China. For strategies to assess and manage your IP, read part I in last month’s edition of Business Tianjin.
Agreements, dealing with partners and preparing technology for transfer
Protecting IP whilst having to deal with contractors, partners, regulatory authorities and a host of other parties is a constant challenge for clean tech businesses. In addition to patents, the source of many clean tech businesses' competitive advantage often is in the form of know-how, trade secrets, and confidential information which need to be protected contractually. Non-Disclosure Agreements (NDAs) are widely recognised by Chinese courts and should be used in every business dealing with a third party, no matter how big or small, including in contract manufacturing arrangements. Thorough documentation and requiring strict procedures when disclosing and receiving confidential information are equally important because they will be essential when seeking to enforce the NDA in case something goes wrong.
Clean tech and high-technology businesses in China use a variety of strategies to protect their IP when transferring it to China, including ‘black box’, compartmentalisation, custom-fit components, role-segregation, and diversified sourcing strategies. Further information on IP protection in technology transfers and on protecting trade secrets can be found in other China IPR SME Helpdesk materials.
Trademarks and branding
Trademarks are important in the clean tech space because of the unique role public perception plays in the adoption of new technologies and the direction of government policy. A strong brand can be instrumental in winning government procurement contracts and government approvals. Like in Europe, China is a first-to-file trademark jurisdiction, which means that the business or individual who files to register a trademark is first granted an exclusive right to use it, unless a special case applies such as if the trademark is already well known. It is important to consider that Chinese consumers often find a Chinese name of a foreign trademark much easier to pronounce and remember. A Chinese version of a foreign mark can be a transliteration or a translation, or the company can develop a distinctive Chinese mark. In addition, IP hijacking extends to Chinese language versions of foreign brand names. It is therefore highly recommended that companies register a Chinese version of their foreign language marks. Further information on trademark filing and enforcement strategies can be found in other China IPR SME Helpdesk materials.
altLicensing and sale of IP
Licensing and sale of IP can be a potentially lucrative source of cash flow for clean tech businesses with high-value IP. Many small and medium-sized clean tech businesses are interested in licensing technology within their own industry. However, the decision to monetise IP through licensing or sale is one that must be taken only after careful consideration of a number of important factors. Patent licensing broadly falls into two categories – ‘carrot’ and ‘stick’ licensing, explained below.
This refers to a license taken on voluntarily by the target licensee without the need for the patent owner to sue. Clean tech businesses with good technology that meets pressing needs will be able to find local partners and licensees because they provide solutions in niche areas which Chinese companies cannot deliver by themselves. A large part of getting potential licensees to the negotiating table is to be able to demonstrate strong rights to a credible technology that requires specific know-how to fully realise. A clean tech business can be successful with this approach when a patent license is coupled with a license to the clean tech business’ know-how related to implementing or practicing the technology.
Another way to initiate a licensing negotiation is to hold an auction. This can be done by sending a letter to a number of potential target licensee's simultaneously or to the target licensee's competitor. The letter should be carefully crafted by a lawyer in order to avoid exposure to a lawsuit for declaratory judgment, which is a lawsuit brought by the letter recipient asking a court to declare that the recipient is not using and infringing rights to the relevant technology. Licensing negotiations should be conducted under a Non-Disclosure Agreement (NDA) that contains a promise by the target licensee not to file for a declaratory judgment during the negotiations.
‘Stick’-licensing is not the preferred option for licensors but may sometimes be necessary, and comes about when a third party is already using a technology without a license from the owner of the IP, thereby infringing the owner’s rights. Businesses pursue litigation to compel the payment of royalties from the third party by demonstrating that the technology is covered by their own IP, that the IP is valid, and that the business is willing to sue and enforce its IP rights. Often target licensees will not seriously consider paying royalties until this can be demonstrated; in short, very often one must sue or threaten to sue. However, putting IP to the test in litigation can be risky. In all cases, the validity of the IP will be challenged, and if lost and invalidated, the business may never be able to recoup its investment and may lose a key piece of its competitiveness. For this reason, many businesses do not choose to license their core IP unless they are confident in the strength of their IP or have other means of ensuring their continued competitiveness. Businesses seeking to license should also have a sufficient budget to engage in litigation and licensing negotiations if necessary.
The end-game of pursuing a patent litigation is almost always a license. Often a business may succeed in getting a target licensee's attention simply by filing a complaint and then reaching a settlement through negotiations without having to go through the expense and burden of a trial. Patent litigation can be expensive, but litigation in China is much faster and significantly less expensive than litigation in Western jurisdictions. Despite this, these cost-savings are still limited in China, because most of the expense in patent litigation (>50%) in China is incurred before the filing of the complaint. Even though a business should expect to go the distance if it intends to file a lawsuit, keeping in communication with the potential target licensee early and frequently can be a good way to increase the chances of a settlement.
Sale of IP
A clean tech business will often develop IP that may eventually fall outside its core operations but that other businesses may be interested in acquiring. When IP is no longer attached to a product or a core aspect of the business, it may be worthwhile to sell the IP through an assignment to avoid the carrying costs associated with keeping the IP in the portfolio. One benefit of a sale versus a license is that in a sale, a business can obtain immediate cash flow, whereas in a license, royalties typically take at least 2-3 years to materialise when the product hits the market.
When trying to decide whether to sell IP, it is important to recognise that a potential purchaser may see different value in the IP than the seller, simply because it has a different business focus. Because of this, it can be a good idea to engage an outside consultant to determine the value of the IP before the decision is made to sell. One way to hedge against the possibility of ‘seller's remorse’ (i.e. later regretting having made the sale) is to couple a sale with a grant-back license. In this arrangement, the buying party grants a license to the selling party to use the technology. In this way, the selling party has the right to continue to use the technology after the sale. However, it is best to try to negotiate the right to sub-license as part of the grant-back, in order to keep as many options available as possible. Further information on IP protection in technology transfers can be found in other China IPR SME Helpdesk materials.
Take-Away Messages:
European clean tech SMEs need to be proactive in understanding and taking measures to minimise IP risk when doing business in China. Often SMEs get caught up in fast-moving deal opportunities and do not adequately address critical IP issues. SMEs can avoid incremental losses to competitiveness through IP loss by thinking strategically about IP, and should follow these guidelines:
• Carefully consider how licensing fits within the overall business strategy and direct sufficient resources towards obtaining strong IP rights to support licensing initiatives.
• Consider how IP generated by your business could potentially be used in other sectors and therefore be monetised.
• Always use non-disclosure agreements (NDAs) with third parties, affiliates, and employees.
• Obtain registered IP rights (patents, copyrights, trademarks, etc.) in China prior to transfer.

by Philippe Healey 

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