by by Dan Harris in 'China Law Blog'

We have been handling way more than the usual number of disputes between our clients and Chinese companies. In a number of these cases, our clients paid money to Chinese factories with whom they had been doing business for years and the Chinese factories simply refused to send over any product.

These Chinese companies claimed that our clients owed money for previous deliveries (in which the costs supposedly went up) or for Chinese taxes/duties for which our client is supposedly responsible. These cases (and others like it) are no doubt due to the increasing number of Chinese factories facing economic difficulties. In none of these cases did our client have a good OEM Agreement in place, which gave the Chinese companies at least some basis for their claims.

Be that as it may, the Chinese companies (pretty much without exception) threatened to sue our clients and one of them threatened to freeze our client's China trademarks, copyrights and/or patents and then take that IP once they prevail. In the case with the IP threat, our client's only China asset was its registered intellectual property so the risk was very real.

A recent Chinese case allowed a Chinese plaintiff to "freeze" a Chinese trademark belonging to a foreign company, Castel. The Re:Marks on Copyright and Trademark Blog wrote of this case in a post entitled, "French CASTEL (卡斯代尔) Company Frozen out of China?" and noted the following risk stemming from this case:

[T]he decision is of particular note for foreign entities who do not have significant assets in China.  Typically, such entities may have considered themselves insulated from the risk of litigation in China due to a lack of assets in China.  However, even foreign entities without significant assets in China very often have trademarks in China.  Those trademarks are now in the firing line if the foreign entity ever gets sued, whether for trademark infringement or for other causes of action, particularly where the foreign entity has limited assets in China.  Of course, this equally applies to foreign plaintiffs who seek to recover damages against Chinese defendants.

How can you prevent your Chinese IP from being taken from you? Probably the best way is not to put your China IP in the name of a company that does business in or with China. Instead, you should think about creating a new company (it can be based in the United States or anywhere else) to own "your" IP in China. In turn, that new special purpose company can then license its China IP to your company that does business in or with China. That way, one of your companies will still own the IP in China, but if your company that does business in or with China encounters legal problems with a Chinese company, the Chinese company will not be able to just seize that company's China-based IP.

If your IP is already in the name of a company that does business in or with China, you should consider assigning that IP to another company and then licensing it back. Doing this is not going to be without its complications and costs, but it beats losing your China IP.

What do you think?

Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes ChinaLawBlog.com as a source of China legal and business information.