Foreign Companies Pursuing Business in China: Proceed with Caution

May 3, 2018 Alerts and Newsletters

The trade relationship between the United States and China is top of mind for many business owners, especially within the technology sector. Recently, Chinese President Xi Jinping denied the U.S. Government's request to end subsidies for key industries identified by the "Made in China 2025 Initiative," including new advanced information technology, aviation, rail, new energy vehicles, agricultural machinery, new materials and biopharma. The request was made due to the central role that the Chinese government has played in allegations of forced technology transfer to China and trade secret theft in these key industries. In rebuffing the U.S. insistence to stop this practice, the Chinese government has officially extended the program that supports forced technology transfer for another seven years.

This comes on the heels of the criminal conviction of Chinese manufacturer and exporter, Sinovel Wind Group (Sinovel), for the theft of trade secrets from the U.S. based company, American Superconductor Corporation ("AMSC"), in federal court in the Western District of Wisconsin. The theft, caused AMSC severe financial hardship, including more than $1 billion in lost shareholder equity, and resulted in the elimination of 700 jobs, over half its global workforce.

Prior to reentering private practice in 2013, as VP and General Counsel of AMSC, I led a process of asserting AMSC's intellectual property rights on an international basis against Sinovel for the theft of AMSC's critical wind turbine software, which it obtained by conspiring with an ex-employee of AMSC. The process resulted in the conviction and imprisonment of the former employee in Austria, and a collaboration with the U.S. Department of Justice, which this year ended in Sinovel's conviction. This case serves as an example of the real and very significant intellectual property risks already at play in working with Chinese companies.

In addition to extending its program that supports forced technology transfer, the Chinese government has relaxed patentability standards for software and business method patents, which will allow companies to more easily obtain IP protection in China for technological developments. China is already ranked number one in the world in new patent filings, as compared to the U.S. which is ranked 12th, and this change will surely result in an increased rate of new filings. President Xi has expressed that intellectual property infringers should receive harsher punishments, which, if implemented, would be a shift from the current practice of a relatively ineffective legal system when it comes to stopping IP infringement. The key takeaway for U.S. companies is that, although it will be easier to get and enforce patents in China, these changes will likely favor Chinese companies.

Companies must be more vigilant now than ever in protecting their technologies as they enter the Chinese market, both from a security perspective and a legal perspective. Companies should take steps to make it more difficult for "would-be technology mis-appropriators" to access their technologies, and they should file more aggressively for their own patent protection in China. Chinese companies will now also have their own patent rights to assert. With these new challenges, U.S. companies may not only be faced with the theft of their IP, but also the threat of patent infringement claims against them by Chinese companies. Having Chinese patent rights to assert in defense of such claims may be a critical aspect of a business strategy for companies pursuing the Chinese market.

If you have any questions regarding how these changes may impact your intellectual property strategy, please contact me at [email protected].

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This communication is intended for general information purposes and as a service to clients and friends of Verrill Dana, LLP. This publication, which may be considered advertising under the ethical rules of certain jurisdictions, should not be construed as legal advice or a legal opinion on any specific facts or circumstances, nor does it create attorney-client privilege.

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