What Startups Need to Know to Protect Their IPR in China

 (By You Yunting) I was once asked by a journalist what the foundation of intellectual property  courts and the ratification of the Opinions on Quicker Development of the Globally Influential Scientific and Technological Innovation Center matter to small and medium-sized startups, and replied the outcome of those two events were the same, both of which ultimately aimed to enhance the awareness of intellectual property throughout our society and guide small and medium-sized enterprises to establish a competition barrier and a management philosopher on how to avoid infringing others’ intellectual property rights. As governmental authorities define and set official instructions and policies, each startup should take full use of its intellectual property during daily operation, trying to become positioned to succeed, just like a well-known Chinese aphorism says that even the pig can fly when the typhoon comes. Combined with my experiences, this article mainly deals with the issue of how small and medium-sized startups seek intellectual property protection both internally and externally.

  1. How to file intellectual property application with external departments?

Intellectual property is essentially intangible assets. Specific actions should be taken to ensure your businesses have all rights to such intangible assets, in connection with filing patent and trademark applications and copyright registration. Types of intellectual property different startups apply for varying, and so do the types of key intellectual property owned by different businesses, including R&D enterprises, production-oriented enterprises, sales-based corporation and service-oriented enterprises. Business owners should first consider what core competitive advantages of your businesses are and then find effective ways to protect your key intellectual property.

Patents and trademarks are more important than other kinds of intellectual property to startups in the manufacturing sector. Any original technology should be included in a patent application. Ownership of a patent grants such patent owner a competition barrier preventing other competitors from counterfeiting patented technology. Likewise, trademarks are very important to manufacturing businesses, especially those lacking technological barriers and dealing in products substantially similar to those of their competitors. Trademarks are used for protection of brands which make products recognizable among consumers, enabling them to identify products of one enterprises from those of another one. Any use of something substantial in the same or similar form of a registered trademark without due authorization may be deemed as an infringement on rights to such registered trademark, or even worse, a crime.

Necessary copyright registration to affirm could be conducive to protect. For creative work production enterprises and traditional software enterprises, according to my practical experience, copyrights obviously matter more. Copyrights are aimed to protect the contents of works. Products or services- provided by service-oriented enterprises and traditional software enterprises are, for example, films, music, software and literature works, which contain copyrights. What these products or services matter are the content. In the era of the internet, it is technically much easier for one person to copy the contents of others’ works, to the extent that any copyrighted work can be easily transmitted via the internet by anyone clicking on a computer to copy and paste the contents of such works. For content production enterprises, how to prevent the contents of their works from being transmitted and/or copied without due authorization is a matter of life and death. Before taking legal actions against infringement on the contents of works, one should procure the copyright to such contents. In accordance with the Copyright Law, the copyright of a work shall be subsisting on the date when such work is created. Notwithstanding the foregoing, necessary copyright registration to affirm the ownership of their works will be conducive to protect their rights and interests. Therefore, copyright registration will also be important for creative work enterprises and traditional software enterprises.

  1. What should be done internally for intellectual property protection?

Despite the importance of filing intellectual property applications with external departments, the focus of this article will be on what to be done internally by a startups in respect of its intellectual property protection, which as an IP attorney, I believe, is a critical issue most startups have ignored. In brief, any enterprises should, as soon as practicable, obtain all rights to its intellectual property originating in the ordinary course of daily business operation. For such purpose, it is highly recommended that such enterprise executes three following agreements with each employee concerned and establishes relevant policies.

(1) Works Made for Hire Ownership Agreement

In this agreement, it should be mutually agreed that ownership of a work created by an employee as a part of his or her job shall belong to his or her employer together with the right to file patent, copyright or trademark application for such work, as the case may be. A big problem facing startups is that they are very likely to employee turnover. The incidence is high of employees leaving their employers with works achieved as a part of their jobs and turning into competitors of their former employers. Under such circumstances, if they have duly executed works made for hire ownership agreements, employers will find it easier to protect their legal rights from being infringed.

(2) Non-Disclosure Agreement

Startups definitely have trump cards in establishing a firm foothold s in the fiercely competitive market. Familiarity with trump cards of an enterprise by its competitors would result in impairment or deprivation of its competitive advantages. Trump cards of an enterprise are often considered as business secrets. The purpose of entering into a non-disclosure agreement with an employee is for the restriction of his or her rights to disclose business secrets of his or her employer. Assuming that there is an enterprise producing and selling delicious biscuits domestically and abroad via various online and offline distributors, what business secrets does such enterprise have? They include name lists of suppliers for raw materials purchased in the course of production, formula and techniques in respect of production of delicious biscuits, information and contacts of and prices offered to all distributors and agents, monthly production volumes in both high and low seasons, online and offline sales, marketing and pricing strategies, channel management methods.

Business secrets owned by Internet businesses are more difficult to be identified than those of traditional businesses above-mentioned. Game programs created by a cyber-game provider can be divided into programs operating through end users’ terminals and programs operating through servers. End users can get target programs for end users, but have no access to programs on servers, nor do they have access to source codes of any program. All source codes and programs can be copyrighted, of which all source codes and programs on servers are treated as business secrets. For a cyber-game provider, data of game players, including their registered information and information about their roles, equipment, etc. in games, which are not original, cannot be copyrighted, but can be treated as business secrets. If an employee enters into a non-disclosure agreement with his or her employer, disclosure of the employer’s confidential information by such employee may result in serious legal consequences, or if otherwise, the employer will find it hard to pursue responsibilities of such employee for his or her disclosure of the employer’s confidential information.

Non-disclosure agreements are also very helpful to prevent business partners from stealing business secrets of startups. Without duly executed non-disclosure agreement, data obtained by and business patterns of a startups could be impersonated easily. As a result of such impersonation by large enterprises, it might cause such startups lose all of its market shares. A non-disclosure agreement duly executed prior to cooperation can, to some extent, deter your business partner from abusing your business secrets disclosed in the course of jointly conducting businesses.

(3) Non-Compete Agreement

The promulgation of the Labor Contract Law in 2008 represented the initial incorporation of non-compete policies into laws, according to which an company may require any employee who has left it not to engage in any work involving competition against such company within a specific period, provided that a compensation for fulfillment of non-compete obligations has been duly paid to such employee. Many people believe, however, that only persons of good character actually comply with such policies while petty persons actually do not comply with such policies. To evade non-compete obligations, a person, if treated by an enterprise as a key and highly desired employee, may choose to work at home or in an entirely separate office with permission by such enterprise, in which case the former employer of such person is difficult to get evidence for his or her breach of non-compete provisions. Due to this case, some companies may have doubts about whether a non-compete agreement be executed. However, taking overall operational and management status into account, non-compete agreements executed by large companies, especially public companies, have powerful binding effect.

Public companies have strict compliance and management policies. If a public company gets involved in an unfair competition or intellectual property infringement lawsuit arising out of hiring a person on whom a non-compete agreement is binding, reputation damages incurred by such lawsuit will outweigh benefits from hiring such person. In addition, leasing separate offices to avoid breaching non-compete clauses may lead to additional problems facing a company’s management team and greatly affect its existing management mechanism. To a large company, costs and risks of hiring a person on whom a non-compete agreement is binding far outweigh benefits such person may bring. Small enterprises face aforesaid problems as well although the costs and risks they bear are not as many as those of large enterprises. For these reasons, non-compete agreements actually work since it costs breaching parties much.

  1. What measures are taken by startups to evade common intellectual property the risks?

Lack of experience in intellectual property protection, startups may take the following measures to evade risks.

(1) Conduct freedom to operate (FTO) search to identify potential infringement of intellectual property rights

Founders of startups are generally familiar with themselves products. If you reckon that products of your enterprises may infringe others’ intellectual property rights, you can conduct an FTO search on intellectual property, which helps you know more details of information about your products to be sold. The scope of an FTO search on patents covers technologies dominating a given industry and technology applications filed by competitors. By conducting an FTO search, you can at least know whether your products infringe intellectual property rights or other rights of someone else. Similarly, an FTO search on trademarks helps you know whether your brands infringe brand rights of the others, and an FTO search on copyrights helps you know whether your products infringe others’ copyrights. Problems are often detected through FTO search. After conduction of FTO search, products in question should be thoroughly examined and the management team of the company dealing in such products should at least acquire a general knowledge of the extent of potential risks in its intellectual property.

(2) Use licensed office software

Presently operating system, office software and design software of many kinds are paid software. Although licensed software is recommended, companies do not have to pay for it since there are various kinds of free software, which can be used as substitutes for paid ones. Actions should be taken to control and restrict unauthorized installment of software on office computers. Many paid software providers are members of the Business Software Alliance, which is well-known for its persistence in auditing enterprises and claiming rights against infringement of software produced by its members. Failure to properly control the employees’ use of office computers may easily cause the employer to be accused of infringing others’ intellectual property rights by the Business Software Alliance.

(3) Review the contents of promotion materials

Image rights are another type of intellectual property rights, which are the subject matters of many infringement claims. There are many enterprises uploading pictures onto their official microblogs without due authorization, infringing others’ copyrighted works and incurring thousands of damages for each picture in question from time to time. In the age of the internet, advertisements are diverse and flexible. If enterprises pay less attention on copyrights of those pictures, enterprises may be accused of astronomical damages.

Lawyer Contacts

You Yunting86-21-52134918  youyunting@debund.com/yytbest@gmail.com

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