Friday, October 07, 2005

Intellectual Property Protection in China (or the Lack of)

Daily Pundit had an interesting link about China's announcement to do their own High-Definition DVD format. I commented:

More likely (the Chinese standard) is a way to avoid paying royalties to Intel, MS, et al. They have every right to do this, but I'll bet you anything that whatever "standard" they cook up blatantly violates someone's patents. But since (the disks will be) created in China and meant only for China consumption, however, (there will be) no way for a U.S. court to stop the violation.

Most Chinese production today is exported to world markets. If there is a patent or licensing problem, an easy solution is to have a court stop the sale of the products in the U.S., in which case the China factory quickly resolves the problem. But when China production turns towards internal demand, guess what? U.S. companies will have to go to a China court to file their grievance. And what do you think Chinese courts are going to rule? (there is no concern in China about justices ruling against the wishes of the executive branch).

Even if the factory is a U.S. "joint venture" there will be a problem because of a little known issue outside of business legal circles: China requires all foreign Joint Ventures to be covered under China law. Period. So companies that do JVs in China are pretty much handing over the keys to their IP unless they make some other moves to prevent this from happening.

As I said in my previous post on China, I do think there are opportunities to make money there, but businesses have to be careful about what they do and how they do it. China sees itself as the "world's factory floor" today, but wants to move up the value chain into intellectual property. And the fastest way to catch up to the U.S. - which is the undisputed leader in IP creation - is to steal it. And they are setting up their legal structure and courts to support this goal.

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