Intellectual Property In China: Opportunities And Risks

Wednesday, December 1, 2004 - 00:00

Editor: Would you tell our readers something about your professional background and experience?

Lupo: I began my career at the Patent and Trademark Office, and while I was there I received an LL.M from Georgetown in International Intellectual Property Law. In 1995 I decided to leave the government, and I applied for several positions that would allow me to assist countries in rewriting their laws to meet WTO and GATT requirements. I ended up accepting a position with Arent Fox, and soon thereafter, when one of the international opportunities came to fruition, the firm afforded me the chance to assist the Indonesian government in developing appropriate trademark and copyright laws that complied with the WTO and GATT.

Arent Fox is unique because it offers more than just the opportunity to practice trademark law or the prosecution of trademarks. The firm has a reputation for providing practical business law advice, for acting as a businessman's law firm, and under its auspices I have become a lawyer who is a business confidant in addition to being an expert in my legal field.

Editor: You combine a very busy practice with a parallel career in speaking, writing and teaching. Would you tell us how this connects with your practice?

Lupo: I obtained the LL.M primarily because at some point in my career I would like to move into the academic world. I believe that most lawyers in my area of practice have something of an academic side. In addition, I get a great deal of pleasure out of working with different countries in revising their IP laws. I believe that what I am doing is of immense value to them and a real contribution to their development. It is my view that the first step in a country's successful development is the creation of a regime that effectively protects intellectual property. Artists, entrepreneurs and inventors are not going to work in these countries if the things they develop are going to be stolen with impunity. Indeed, where such a regime is lacking, these people - who are needed desperately in the developing world - leave for Europe and the U.S., where their work is appreciated, paid for, and protected. Brazil is a good example of a country that has adapted to this trend. At one point, Brazil did not protect pharmaceutical patents. As a consequence, there was virtually nothing by way of incoming investment in this sector of the Brazilian economy. Once they adopted appropriate legislation and began to enforce it effectively, there was an immediate and extensive inflow of research and development investment.

Editor: How do you manage all of this with your practice?

Lupo: I confess, it is not easy. I do a great deal of traveling. Just last week I was in Singapore, Hong Kong and the People's Republic of China. Soon I will be in Rio de Janeiro and Buenos Aires, and the week after that I will be in Europe. About 60% of my international work is in China. These are the places where my clients are, and it is important that I am with them as much as possible.

Editor: And your work in advising different governments on IP issues?

Lupo: I have done quite a bit of work advising governments on IP issues. In the case of Saudi Arabia, a lawyer who was the primary contact in the Saudi government's efforts to join the WTO retained me to help on the IP piece. I was in Indonesia for a considerable amount of time working on a similar project. And I went on to Vietnam to help with the country's bilateral treaty on copyright law. At the moment, it appears that I will be helping the Egyptian government with respect to their copyright laws in the near future. I have already had some exposure with the Egyptians on trademarks. The current focus on IP is, I think, a kind of acknowledgement of the worldwide standards that are coming to prevail in the global marketplace.

Editor: Since China's accession to the World Trade Organization, the Chinese economy has boomed, and the country appears to be taking a major role in the global economy. How has this affected your practice?

Lupo: It has had a very significant impact on my practice. I have seen China turn around in this area in just a few years. There was a time when I used to advise clients that if they brought their IP to China it would be immediately replicated without recourse. That is simply not the case today. I would not bring the crown jewels to China - I think there is still a need to be careful - but second generation technology, things that are produced, can be outsourced to China with manageable risk. And , the Chinese can handle the production for some types of items for around eight cents on the dollar, so the return on investment is extraordinary.

Editor: And the situation prevailing today concerning Western IP in China?

Lupo: The situation is vastly different from what it was, say, 10 or 15 years ago. There is still a lot of room for improvement, particularly in remote areas of the country, but the situation in Shanghai is very encouraging. Both the court system and the governmental agencies that oversee IP are trying to show foreign corporations interested in doing business in China that they take IP protection seriously. This means that if I have IP in China that is infringed, and I take the matter into the Shanghai court system, I have a reasonable chance of prevailing. In the automotive industry, for instance, I work with foreign parts manufacturers in an attempt to put a stop to counterfeit parts and other gray market activities. Since this is a sector where the foreign enterprise is able to establish a local concern and own it outright, effective protection of IP is potentially available. I also work with foreign media companies, where it is not possible to own the local entity. In that instance, protection of IP is much more difficult.

Editor: How have the authorities have gone about enforcing the laws on the books? Have they been effective?

Lupo: These things are all relative. IP laws are not effectively enforced in most developed countries, so in that regard I think China - which is extremely focused on the issue right now - is actually ahead of the game. There are real problems in China, and depending on the product, the level of infringement can be astonishing. Just recently General Motors was negotiating with the Chinese government to crack down on the copying of an entire automobile. It is important for a corporation to have a clear idea of the IP it has to bring to the country, and to what extent it can live with the risk of infringement. My advice is that they take the fight to China. A corporation that is distributing in China cannot give the counterfeiters an opportunity to replicate the product and develop the ability to export it. Those who consider China a profit center, and not just a place from which to export goods manufactured there, are much more aggressive in defending their IP rights. That appears to be one of the keys to success in China.

Editor: The Chinese, both individuals and corporations, have begun to develop and export IP to other countries. Do they face retaliation if China does not adequately protect the IP of foreigners within its borders?

Lupo: The system does not really work that way. In the U.S. protection is extended to IP on a nondiscriminatory basis, and everyone is treated the same. There are ways to get the attention of a country that does not adequately protect the IP of others, however. When Brazil failed to protect the patents of foreign pharmaceutical houses, for instance, there was no retaliation directed against the Brazilian pharmaceutical companies by our government. But, the U.S. did indicate that it proposed to place a large tariff on the importation of Brazilian shoes, and that prompted the Brazilian shoe industry to pressure their government on pharmaceutical patents. It is an interesting technique, but one that I do not see being applied in its entirety in connection with the protection of IP in China. There, I think the government understands what is at stake and is committed to taking the appropriate steps. However, I do not think the government will be use the aggression necessary to implement change, since there is much to lose. That's not to say we will not take some action in retaliation. It is going to take time, but a start, and a significant one, has been made.

Editor: How do you advise clients on resolving IP disputes in China? Do you have recourse to the courts? To ADR?

Lupo: We have had a lot of success with litigation in the courts of Shanghai. There are a number of rules of the road that would help a foreign corporation avoid appearing in court, however. The first is to never permit a local distributor to register the corporation's trademarks under its own name. Everything must be registered under the parent name. In addition, it is essential to maintain control over the license and the right to distribute. If someone else has the right to control distribution, every attempt to regain control, to say nothing of terminating the license, opens the door to further negotiation. Another problem concerns the identity of the infringer. Resolution from the courts may not mean much if all of the products have been moved to another company and the entity against which the judgment stands is simply a shell. It is important, accordingly, for the foreign corporation to attempt to compel the authorities to seize the counterfeit merchandise.

I also usually try to have arbitration language in the contract as a form of insurance, but that does not prevent these problems from arising.

Editor: What about the future? As China's economy matures are these issues fading?

Lupo: These issues are beginning to fade, but they are not going to disappear any time soon. In order for them to disappear, China must become much more developed. That development will require a great deal of internal IP in need of protection and, along with it, a sophisticated judicial system fully equipped to vindicate IP rights with full governmental backing. I believe the country is heading in this direction, including an Internet-driven loosening of controls over the media. Full democracy may not be in the wings, but something approaching the Japanese model may be coming.

Editor: And where will Arent Fox be in that evolution?

Lupo: Arent Fox handles a great deal of international trade and I expect the firm to be right in the thick of things on trade issues. I also anticipate expansion in three other areas: real estate, where the firm has great expertise and the Chinese are beginning to liberalize the rules of ownership; life sciences, where we have a considerable background in medical devices, genetically engineered crops, vaccines, pharmaceuticals, and so on; and, of course, intellectual property. Arent Fox will be heard from in all three of these areas.

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