At a recent industry conference in the Middle East, chief executives from Western and Chinese chemical companies spoke in glowing terms about their operations in China. The country has become the world's largest chemical market, and foreign investment continues to flow into new projects supplying China's industrial base.
In private, however, the same executives fret about the misappropriation of intellectual property.
In the biotechnology and pharmaceutical sectors, and across the range of high-tech industries, business leaders are facing a similar dilemma; bypassing China is unthinkable, but the loss of proprietary technology to theft is an unacceptably steep price to pay for entering the market.
Companies that fall victim to IP theft and seek to assert their rights face numerous legal and regulatory challenges. They must negotiate their way through local court systems, adjust to labour laws which mainly protect employee rights and manoervue around entrenched state-owned enterprises.
IP theft has driven companies to develop proactive practices, such as conducting regular reviews of IP portfolios and training employees about IP protection. It is incumbent on companies to ensure that IP concerning their core business is duly registered and that their rights are enforceable on the mainland. Those ahead of the curve organize outreach programs to train Chinese enforcement officers about their brands and products.
Some foreign companies operating in China have not made the connection between IP protection and compliance. Yet, best practices in traditional compliance regimens can play a dual role in protecting IP. Compliance activities can and should be adapted in support of broader IP protection objectives.
Employee intel
Chinese employees use anonymous whistleblower hotlines to report instances of commercial kickbacks, conflicts of interest and workplace harassment. They should also be encouraged to use the reporting systems to identify cases of suspected IP infringement.
Acting on employee tip-offs, managers tasked with investigating cases of IP theft can track alleged offences in much the same way they monitor fraud cases, ensuring the cases receive an appropriate level of attention inside and outside China.
More often than not, individuals in an organization who cut corners on compliance are not averse to engaging in IP theft as well. Having a single IP risk-mitigation database allows managers to identify patterns of behavoir and pinpoint vulnerable areas and likely transgressors.
Ounce of prevention
Companies with valuable IP in China should consider adding an IP training component to their established compliance training sessions. Such programmes remove barriers between departments and facilitate company-wide conversations about the potential misuse of IP and practical steps to protect company property.
Compliance-focused due diligence ahead of merger and acquisitions should include thorough checks on a target company’s IP track record. Litigation searches can identify companies and individuals with histories steeped in IP disputes. By identifying IP risks at the outset of due diligence, companies can better protect their most valuable assets without a significant spike in costs.
Annual audits help identify dubious financial activity that often accompanies IP theft. Audits can also expose gaps in processes and procedures that erode IP security.
Recruitment practices should be subject to review. IP is often compromised when competitors target and headhunt personnel with proprietary knowledge. Out-going key employees should be reminded of confidentiality obligations and non-disclosure clauses written into their employment contracts. Companies with high-value IP are advised to generate duplicate hard drives and mirror other computer-based repositories of sensitive IP for use as evidence in the event of litigation.
Nicholas Blank is director of investigations with Blackpeak’s chemical sector practice. He specialises in complex due diligence, fraud and intellectual property investigations.
