Reducing the Risk of IP Rights Leakage - International Law Office

The cost of piracy in relation to IP rights has reached an estimated $200 billion a year worldwide. The recent World Trade Organization ruling criticizing China's customs law procedures and copyright protection highlights the continuing need for businesses operating in China to review their supply chain and distribution networks to reduce the possibility of IP rights leakage.

Theft of IP rights in China has developed from small-scale 'cottage industries' producing poor-quality counterfeit fashion goods and accessories to large-scale manufacturing plants that produce cheap copies of goods such as home entertainment products, electrical appliances, foodstuffs and medicines. Counterfeiters increasingly deploy advanced reverse-engineering techniques, file pre-emptive trademark applications and patent challenges, and find new ways to infiltrate legitimate distribution networks, both in China and abroad.

These threats remain despite many continuing efforts by central government, including the IP Rights Protection Action Plan, published in April 2009, which includes a commitment to carry out nine separate campaigns to boost IP rights enforcement. Among these, 'Project Thunderstorm' focuses on patent infringement and fraud, and 'Project Skynet' is aimed at online piracy (and other copyright infringement over IT networks) and improvements in software verification.

Businesses should take a holistic approach to developing an IP rights strategy that includes operational protocols and procedures, both internally and across the relevant supply chain and distribution network. Legal measures are a key element, but are not a complete answer to this business risk - it is essential to create as many disincentives as possible throughout the business to minimize the risk of IP rights leakage.

Businesses can take a range of measures to safeguard their IP assets and effectively manage infringement issues:

• Product protection measures - features embedded within a product's 'DNA' can make it harder to replicate, prevent a counterfeit item from achieving full functionality or make such an item incompatible with after-sales service.
• Packaging and labelling - advanced packaging and high-quality labelling of products incorporating manufacturer's details, safety guarantees and model numbers are too sophisticated for most infringers to copy.
• Process protection measures - producers can implement manufacturing methods which compartmentalize the production process by segregating information or completing key production steps off-site or offshore.
• Human resources measures - rights holders may wish to consider:
  • implementing an IP education programme for all employees, with managers raising awareness that employee innovation is rewarded;
  • using non-compete and non-disclosure obligations in employment contracts;
  • maintaining and enforcing employee confidentiality requirements; and
  • providing benefits (eg, training), other social support (eg, health insurance) and market or above-market remuneration for key employees on the ground.
• Supply chain management - this includes:
  • conducting comprehensive due diligence on suppliers and distributors;
  • identifying weak points in the supply chain through which counterfeit products could enter the market; and
  • selecting business partners with brand equity and goodwill of their own to protect.
• Legal measures - rights holders should ensure the appropriate registration of all registerable IP rights, including copyright, patents, design marks and trademarks, and the recording of registrations with administrative bodies, such as Customs, as well as drafting non-disclosure obligations and incorporating express employee assignment of IP rights into employment contracts.

For further information on this topic please contact Connie Carnabuci or Victoria White at Freshfields Bruckhaus Deringer's Hong Kong office by telephone (+852 2846 3400) or by fax (+852 2810 6192) or by email (connie.carnabuci@freshfields.com).