By Jerome A. Cohen
Here are some thoughts inspired by one American investor’s experience in China as related in Steve Saleen’s Wall Street Journal article.
Today it is commonplace to read about alleged PRC theft of intellectual property. Often, however, it is unclear what this phrase means. Sometimes it merely refers to PRC insistence that would-be foreign investors transfer valuable IP to their investments in China, whether a joint venture of some type or a wholly foreign-owned enterprise. Sometimes it merely means that a would-be licensor of technology transfers its best IP at a favorable price in return for access to the China market. Such market access in return for technology deals are part of the ordinary commercial bargaining process, and theft seems a misnomer in those circumstances.
At the other end of the spectrum is genuine outright theft via various means including cybertheft. In between, there are many variants, one type of which the sad Saleen story recounts. My three decades of practical experience dealing with PRC business as both a lawyer and an arbitrator, as well as an academic, ended around 2010 and included many situations that qualify for the appellation “theft”. One standard pattern was for one or more local employees of a Chinese-foreign joint venture to secretly abscond with IP, including trade secrets, contributed by the foreign investor in order to quietly set up a competing venture. Another technique was for the local joint venture (JV) partner or licensee to secretly register the foreigner’s IP in its own name. This was easily done for trademarks as well as patents. A third common technique was for the local licensee to refuse to pay license fees and claim that the foreigner’s licensed technology failed to meet the contract’s prescribed standards, even while the licensee secretly was successfully using it in production and sales. A fourth technique was for the local JV partner simply to take advantage of the foreigner’s helplessness in a remote area where the local authorities were cooperating with the local venture and would permit the local partner, often a government agency itself, to squeeze the foreigner out of control. Sometimes the local police would detain one or more foreign owners or employees and “renegotiate” the relevant contracts in the detention house of the Public Security Bureau! Yet another technique, where the foreign investor or licensor unwisely decided not to keep one of its employees on the ground in China – a basic error, was for the local employees of the JV to keep two sets of books so that local interests could secretly pocket some of the JV profits.
Sometimes the foreign company could obtain legal relief at considerable cost. But local courts are, of course, under local Party control, and reliable, independent local lawyers may be hard to find. Local protectionism is strong, and corruption rife. Beijing’s central agencies may have limited influence and interest in far-off disputes, and I have been an arbitrator in Chinese arbitrations, even in Beijing, that were plainly stacked against the foreign company that sought relief.
So “theft of intellectual property” requires some details.