Update: Chinese Knock-offs

In a recent blog post, Chinese Knock-offs Move Beyond Gucci Bags, I described how some high-end Italian machinery makers are seeing copies of their equipment pop up in China. They’re fighting back through technical innovation, lower-cost manufacturing, service, and quality.

But it made me wonder what sort of legal recourse they have, if any?

I asked Thomas Babel, an attorney specializing in litigation and intellectual property with the law firm Ward and Smith P.A. He says that it is difficult to prove that an innovation was stolen by a Chinese company.

“In China, it’s fairly easy for an interloper to file for and be granted a patent on an innovation, even if it is patented elsewhere,” says Babel. He learned first-hand how the Chinese patent system works while employed at a U.S. consumer products company. The problems began when the company started working with new suppliers in China after ending a long-term relationship with a Taiwanese supplier.

“The Taiwanese supplier was obviously upset and went and filed lawsuits in China against our new suppliers, contending that it owned the intellectual property related to our products being manufactured,” he says. “Unbeknownst to us, the Taiwanese supplier had periodically filed patents for our products in China under its own name during the duration of our relationship.”

The supplier was able to do that, Babel explains, because China, unlike the U.S., has a first-to-file system, which means that the first company to file for a utility or design patent on an innovation will be granted the patent. In addition, the Chinese State Intellectual Property Office does not conduct an investigation into a party’s patent claims, like the USPTO does here in the U.S. . “The Chinese company can then use that patent to prevent others, including the original inventor, from producing products in China that incorporate that innovation,” he says.

Babel believes that the limited pre-issuance investigation conducted by the Chinese SIPO gives an unfair advantage to copiers, since once the patent is issued, the burden of proof is on the rightful owner to prove that it actually is the rightful owner of the innovation. Compounding the problem is the Chinese court system, which does not follow the western rules of evidence, often allowing only original documents as evidence.

Babel’s company hired counsel in China and countersued. “Being a lawyer, I believed that we had ample evidence to show our designs had been stolen,” he says. “I was told that despite the fact that the evidence we had supporting our position would be sufficient to prove a case in the U.S., that evidence would not be sufficient for a case in China. And that’s pretty much what happened.” Despite the difficulties in China, the company ultimately was able to reach a beneficial resolution of the dispute by filing a breach of contract suit against the Taiwanese supplier–here in the U.S.

Whether companies should do a preemptive strike and file for patents in China themselves even if they don’t currently do business there (as was the case with one of the Italian companies), attorney Babel says companies should do a risk assessment, weighing the costs versus the benefits. He is also a big proponent of contracts when doing business with suppliers in China, an area of the law he says the courts in China recognize.