I did an audio interview the other day with GlobalAutoIndustry.com, a very international site dedicated to the auto industry. The topic was China IP Challenges for Automotive Suppliers, but it dealt mostly with automotive high-tech. I urge you to go here to listen to the entire interview as the below is just a hastily put together transcript of it and it does not include all of it.
For anyone who has been living in a cave, the auto industry has changed, is changing, and is very much on the cusp of more change, much of this stemming from cutting edge and rapidly advancing technologies. Or to borrow from a mega-famous car ad, this is not your father’s auto industry.
And with these technological advances comes massive IP needing protection. Our China lawyers have mostly represented American (and a smattering of European) auto tech companies that have been approached by Chinese companies interested in our client’s intellectual property. Just as is true of the United States, some of China’s largest tech companies are interested in developing and commercializing automobile technologies and they are searching the world to find such technologies. These massive Chinese companies (and some not so massive ones as well) are reaching out in droves to foreign companies to try to supplement their automobile technologies. Our job as their China IP attorneys is to help them protect their IP. My interview discusses some of the IP issues these foreign tech companies face and some of the things they can and should do to protect their IP. I urge you to give it a listen because it includes a few things not covered below (including church bells going off in Madrid — that’s a long story). Anyway, please enjoy.
What are the big issues you are seeing with China and the automotive world? The auto industry is changing and fast and a large part of the rapid changes are happening with technology. What we are seeing is Chinese companies wanting access to auto technology that is being developed outside China. Ten years ago, we were talking about things like transmission mechanics and technology, but today, we are seeing this in all sorts of cutting-edge technologies, like driverless cars, battery charging, sensors, always-on cameras, artificial intelligence, composite materials technology, adaptive headlights, Internet of Things (connectivity).
What sort of companies want these technologies and from whom? On the China side, it is mostly just the big and powerful Chinese auto and technology companies that are looking to get access to these new technologies. On the foreign side, all sorts of companies are being contacted for their technology, but mostly ranging from one product start-ups to mid-sized companies. What these foreign companies usually have in common is that they have no experience in dealing with China.
What sort of deals do the Chinese companies usually propose and what should the foreign companies do in response? The Chinese companies oftentimes do not propose anything at all; they simply tell the foreign company about the massive opportunities in China and ask to be able to test out the technology. Fortunately, at least some of these foreign companies reach out to lawyers experienced in dealing with China for help on what they should be doing at this point.
And what should they be doing at this point? Not just handing over their technology, that’s for sure. At this stage, we advocate our clients do two things right away. One, register whatever IP they have in China. This IP typically consists of patents and trademarks (and sometimes copyrights) and we explain how a US trademarks and patents do not provide protections in China and how it is necessary to register those in China to protect them in China from Chinese companies. Then we explain how they need an NDA Agreement for China that is very different from the NDA Agreements they use in the United States or in Europe – so different in fact that their home-country NDAs almost never provide any protection in China. They almost always need a China NNN (Non-Compete, Non-Disclosure, Non-Circumvent) Agreement in Chinese and drafted for China. Once they have done the IP filings and have an NNN in place, they are much safer in providing their technology to the Chinese auto or technology company.
Are the IP registrations in place and a signed NNN Agreement enough to make it safe to turn over the IP? Not exactly. The more companies to which any company turns over its IP, the greater the risk of losing the IP. So, we also always advocate for first making sure that the company to which our client is turning over its IP is a legitimate company and we usually determine that after some level of due diligence on that company. And, most importantly, we want there to be at least some chance of a deal happening before the technology is revealed. By this I mean that if the Chinese company wants to buy the technology for a million dollars and our client would never sell it for less than ten million dollars, than it might as well just walk away without ever revealing its technology. Maybe 25% of the time just a few forthright conversations reveal there will never be a deal and our client walks away without a deal, but also without having put its technology at any risk.
What usually happens once the parties start talking is that the Chinese company wants to form some sort of Joint Venture with our client in which our client puts its technology into a joint venture entity that will be formed in China and then if the joint venture entity does well, our client will supposedly do well. We as China lawyers do not usually like these sorts of arrangements because once IP/technology goes into a joint venture it virtually never comes back and it is the rare foreign company that takes home profits from a China joint venture.
What sort of deals do you prefer? I’m going to have to give you a lawyer’s answer here, and say that it depends, but usually something more along the lines of a straight licensing deal is safer for our clients. Something where our client keeps all its IP and simply licenses it out to the Chinese company for ten million dollars a year or $2 per widget into which its technology goes.
Do the Chinese companies go for these licensing deals? Yes, but usually only after our clients have held out long enough so that the Chinese company is convinced this will be the only way it will get access to the IP or the technology.
How do you ensure your client will get paid the ten million dollars? I’ve heard getting money from Chinese companies can be difficult? You have heard right and there are many reasons for this, ranging from Chinese government capital controls to Chinese companies wanting to get technology by paying as little as possible. There are all sorts of solutions that increase the likelihood of foreign companies getting paid, with the best being to require some or all payments be made before some or all the technology is revealed.
This article was written by Dan Harris and published on China Law Blog. Original Post: https://www.chinalawblog.com/2018/04/china-ip-challenges-for-automotive-suppliers.html