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Stop Your Proprietary Information from “Leaking” All Over China
This is the first in a series of posts I will be writing on why foreign companies doing business in China so often lose their proprietary information (intellectual property) to their competitors in China. This first post focuses on how so many of these losses arise from what we call leakage — the situation where the foreign company has a contract preventing its Chinese counter-party (usually the manufacturer) from using the foreign company’s proprietary information, but fails to prevent that information from leaking to third parties that are not bound by such a contract.
When our China lawyers draft a manufacturing contract with a Chinese factory one of the main things we engage in is “contract plumbing.” That involves us working to make sure the contract is thoroughly sealed so as to prevent leakage of proprietary information to third parties outside of the contract.
What do we mean by leakage? Most foreign buyers are concerned about the owner of the Chinese factory appropriating their product design and making that product for his own use. Since most Chinese contract manufacturers are direct competitors of the foreign buyer, this is a realistic concern. So we naturally draft the manufacturing contract to prevent this sort of direct appropriation of the product design.
However, experience in China shows that just preventing direct appropriation by the contract manufacturing company is not nearly enough. If you block just the Chinese factory owner from appropriating proprietary information, they will almost inevitably find ways to provide your propriety information to other parties who will make use of the information. Since the factory owner did not commit the deed directly, it will then claim that it is off the hook and simply “not responsible for any misappropriation that may have occurred.”
Sometimes the Chinese factory owner sincerely seeks to maintain control over the product design because its contract with its foreign buyer is valuable and it makes better economic sense for it to maintain good relations with its foreign buyer than to go to the trouble and expense of marketing the appropriated product in the United States and in Europe. In this case, however, there are still other parties involved in the manufacturing process that will benefit from stealing the design from both the foreign buyer and from the Chinese factory owner. In this sort of situation, proprietary product information “leaked” away from the Chinese factory to a third party benefits the third party, not the factory owner.
No matter the cause of the leakage though, the effect is the same. The foreign buyer has lost its proprietary information to a Chinese company. In our experience, the losses from this sort of third party leakage far exceed the losses from direct appropriation by Chinese factory owners. For this reason, we focus on preventing such leakage in any contract manufacturing arrangement, even when our clients insist that their relationship with the Chinese factory owner is so good that “there is no way this factory owner would ever take our proprietary information.”
In tomorrow’s post, I will highlight where and how the leakage typically occurs and set out the best ways to plug these leaks.
We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.
Source: http://www.chinalawblog.com/2016/08/stop-your-proprietary-information-from-leaking-all-over-china.html
