It may come as no surprise to hear that a recent report from the American Chamber of Commerce concluded that there is plenty of optimism amongst U.S. investors in China, thanks to the strong economy and favourable business environment. But, as the participants of LexisNexis Martindale-Hubbell's Counsel to Counsel forum in Shanghai in November 2006 heard, behind the headlines there are concerns about four key issues:
Poor intellectual property rights protection
Low transparency of laws and regulations
High corruption levels
Weak regulatory system
Intellectual Property
In Shanghai, the consensus identified internal management of IP a major concern, with the involvement of multiple business units a critical issue. The brand management and marketing people are involved in trademarks, the product development people involved on the copyright and patent sideÉ. What is needed is a cohesive business strategy with the in-house counsel taking a leading role. A senior IP partner attending the session summed up the size of the challenge: "I think the big issue in China is there's not as much of a culture in any organisation of protecting IP or just identifying IP because it's only become important in the last few years."
The multinational companies represented at the forum benefit from strong leadership in brand strategy by their head offices, which makes protecting the brand in China that much easier. But for many Chinese companies, where it is often common for local subsidiaries to licence trademarks to third parties, the job presents challenges. Assessing whether such transactions are legal or business issues, the delegates raised differing views. Whilst one Legal Counsel, giving as an example the organisation's plan to license another business to sell an SMS text banking service, felt that it was not his role to choose a third party and it was not a legal issue, on the other hand a senior external lawyer in attendance warned that it was in fact a very important legal issue, since the more people you give the right to use your name, the more dangerous it becomes. This shouldn't be solely driven by Legal, the business has an important role to play as well in setting a brand strategy from which all licensing decisions could be driven.
One of the biggest issues facing foreign companies in China is the legal system's reliance purely on documentary evidence - as opposed to oral and other types of evidence in civil cases. Add to this the fact that trade secret laws are very weak and it becomes even more important to use the patent system wherever possible.
For companies with limited resources, trade and professional organisations can be an important tool here, according to the forum. Cross-industry approaches to IP protection make for a more powerful weapon.
The group delved into the poor state of the patent registration system in China. With more companies thinking about IP, the rush to file patents has overwhelmed the patent office, leading to painfully long delays. For companies using fast-moving new technology this is a particular issue. The situation with trademark registration is even worse, with 40,000 trademark opposition cases pending, which will take up to five years to be decided. By contrast, in the UK a company can register a trademark in six months, with 60% of oppositions dealt with in three months.
Corporate Governance
Intermediaries, often closely connected to local or regional government, are quite common in China. In certain cases, such as with a wholly foreign owned company setting up business in China, intermediaries must be used. This can cause general counsel, particularly those from the U.S., concerns as they may find themselves negotiating fees with people who can assist with regulatory issues who, it turns out also share an office with the very regulators with whom the company is negotiating.
In China, corporate compliance, in the form of employee buy-in and support, can be particularly difficult, due to the legacy of the Cultural Revolution which has left many people reticent about sharing information that could be used against their colleagues. Some practical solutions shared by the Forum included sending a copy of the compliance policy not just to employees, but also to suppliers, customers and agents, with the clear message that any violations could be raised, anonymously if necessary, with the chairman.
An anonymous whistle-blowing route also can play an important role, especially for more junior employees worried that management further up the chain could be implicated. Unlike in other countries where culturally this has been difficult, in China hotlines and anonymous email systems are well used.
Many more companies are now using self-assessment to monitor compliance adherence. Business people have a chance to judge themselves before an audit, which also encourages them to take ownership. As another compliance monitoring option, consider an on-the-road legal workshop, where members of the legal department and external lawyers visit different offices and invite the local business people to come in and talk about any legal issues they have. The investment by private foreign banks in state-owned banks in China, for example, is an opportunity for them to cultivate higher levels of corporate governance.
As more Chinese companies list on overseas stock markets, a new wave of positive change has washed through the country.
Published February 1, 2006.