By Fredrik Grönkvist
Intellectual Property (IP) theft is a main concern for Startups and Small businesses importing from China, and other Asian countries.
We all know that manufacturers in the region have a reputation. However, what’s the real chance that your supplier will flood your market and make millions – using your IP?
In this article, we explain what every Startup and Small business must know about managing Intellectual Property risks when importing from Asia.
Keep reading, and learn more about how you can protect your IP and why most importers overestimate the risk of IP theft. You will also learn why the real risk might not be a supplier stealing your IP – but you (unknowingly) infringing on the IP of another company.
What is Intellectual Property?
Intellectual Property provides protection to the intangible creations of a person or company. This may, for example, include patents, trademarks or business secrets.
It also includes the article you’re now reading. I wrote it. Hence, I hold the copyright.
So, what are we referring to in the context of ‘importing products from Asia’?
Essentially, anything that is included in your product specification:
• Product design drawings
• Logos and brand names
• Functional descriptions
• Circuit drawings
• Packaging design
Sharing and protecting your IP with Chinese suppliers
Sharing your product specifications with your suppliers is not a matter of choice. For obvious reasons, a supplier cannot calculate a price – much less produce a product sample – if they don’t have your product information.
Below follows an introduction to 3 common methods for Intellectual Property protection:
1. Sign a Non-Disclosure Agreements (NDA) with your suppliers before sharing your Intellectual Property
An NDA is a confidentiality agreement that (depending on how it’s outlined) ‘prohibits’ the supplier from manufacturing replicas of your product, using your trademark and/or sharing your product information with other buyers.
A supplier can’t quote a price, and much less make a prototype, before they have access to your product specification.
Hence, the NDA must be signed by the supplier before you share any product information.
Assuming you are sourcing manufacturers of a certain product, and is still in a price research phase, that means you need to get a lot of NDAs signed before you can even get a quote.
If you are a Startup or Small business, you might need to work hard to convince you supplier to sign an NDA, only for the chance of providing you with a quotation.
In short, requiring all suppliers to sign NDAs can greatly slow down the process and make a few of them drop out.
That is, of course, much less of a problem if you are a funded tech company – but this article is written for the up and coming Amazon seller – not Tim Cook.
But that’s not the only problem you’ll face.
At best, the NDA will make the supplier think twice about using your designs or brands. If they really want to replicate your product and/or brand, they can.
First, they know you don’t have the financial muscles and time to pursue them in court.
Second, they can sidestep by the NDA by having your goods manufactured by another company. One that is not covered by the signed NDA.
Thus, you must first prove that they leaked your IP… and collect compensation on top of that.
Again… this article is not written for MNCs with an army of lawyers..
So, is it worth it to sign an NDA?
It depends, as always.
If you are a Tech startup with sensitive IP, then yes.
If you are a new Wristwatch or Private Label brand.. Then not so much. But then again, the NDA can actually help in the sense that it makes the supplier think twice about stealing your IP, if a clear penalty (an amount in dollars) is specified.
2. Design Patent and Trademark Registration
The NDA is appealing, because it appears to be an easy and cheap solution to a complex problem. As explained, it is neither.
There are, however, remedies that are more efficient. And, costly.
By protecting your IP in your target markets, for example the United States or the European Union, you solve the main problem: The risk of your supplier using your IP to compete with you on your home turf.
Trademark registration is the most basic form of IP protection. This prohibits other companies from using your brand name – in the market where it’s registered. For a more complete protection, you must therefore register your trademark in all major markets.
This may also include China, if only for the sake of preventing trademark squatters.
If your product has a unique function or design, you may also apply for a design or functional patent. This must, again, be done in all major markets.
Notice that a patent application is far more costly and time consuming than a trademark application.
3. Split Up Assembly Among Several Manufacturers
A century ago, when the British developed the world’s first military tanks the workers were mislead to believe they manufactured water tanks.
While you may not need the MI6 on your side to protect your IP, you are at least making it harder for your suppliers to steal your IP if you contract components and sub-assemblies to different factories.
These components may then be assembled by another third party that you are more willing to trust.
Startups tend to overestimate the risk (and negative impact) of IP theft in China
The honest truth is that most importers I’ve spoken are far too concerned with Intellectual Property theft than they need to be.
Yes, we all know that Chinese suppliers have a reputation… but they care much less for your new T-shirt brand or Private label product than you might think.
In fact, I wouldn’t even put IP theft in the ‘top 10’ of risks you are facing when importing from China. Well, at least not for our audience.
Product safety, quality issues, payment frauds and transportation damages. These are the things that should keep you sleepless at night.
Just for the sake of it. Let’s take this one step further. So what if a replica of your product ends up on a street market in Shenzhen? Would that really hurt your bottom line?
Your private label product may infringe the IP of another company
This is one thing you might want to worry about.
What if the product you are importing is the Intellectual Property (in full, in part) of another company? Say, another company in the US or Europe.
The importer is legally responsible the imported products. Hence, you may be sued for IP infringement – even if you never did so knowingly.
We often get asked whether there’s a simple method to determine whether a Private label product, or certain technology, is the IP of another company.
Unfortunately, there is no quick fix to this problem. A while back, we asked that question to Rachel Greer of Cascadia Solutions. This is what she had to say about this issue:
Intellectual property is another issue that especially Private labellers must deal with. How do you go about to avoid selling a patented product on Amazon?
Typically, we recommend checking if the product you’re trying to sell is the only version of that product on the website, and if so, it’s probably patented.
As an example, there’s a car seat that uses heavy duty suction cups to hang in a window. The suction cups are patented, and so no one else can copy that exact design – only Amazon and the original seller are listing that product for sale.
Sometimes you can also see when something is truly innovative that it is likely patented. There are many traditionally used products, or variations on the theme, that new Amazon sellers can use to build their brands, it’s not necessary to copy someone else’s brand or designs.
That being said, patent infringement is quite hard to prove on Amazon, and typically Amazon will require some sort of proof of successful legal proceeding. Where we see sellers get into trouble far more often is trademark and copyright infringement.
Sometimes, they’re using someone else’s name brand in their product description (never use the name Dr. Oz to promote your supplements!), or using someone else’s photo. Always try to have unique offerings and photos.
We also see a lot of our sellers targeted by nefarious sellers trying to take their market share by copying or hijacking their listings. We support our clients by doing test buys, reporting to Amazon, and filing detailed complaints of anti-competitive behavior like fake reviews.
Intellectual Property is a major concern for companies importing from China, and other Asian countries.
However, for most businesses, they’re far more serious risks to tackle.
That said, I understand where this concern comes from – and at least, any self respecting business owner should start out with a trademark application.
However, don’t let your worries slow you down. Most likely, you care far more for your own brand than your Asian suppliers ever will.
Fredrik Grönkvist is the co-founder of ScandinAsian Enterprise in Shanghai. Since 2010, he and his team have helped hundreds of companies worldwide, primarily in the EU and US, to develop and manufacture products in China. He is also the main contributor on www.chinaimportal.com, a leading knowledge base for small- to medium-sized enterprises importing from Asia. For further questions, you can contact him on www.chinaimportal.com/contact-us/.