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China: Evaluating investment opportunities and practical strategies for protecting intellectual property

Amy L. Sommers October 2012

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Topics:

1. Overview of key drivers affecting investment environment

2. Intellectual Property: practical strategies for protecting your key assets

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1980: Economic reforms start

A shifting China: ’08-09

Economic Crisis

Manufacturing Economy Consumption Economy

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China = Capitalism + policy planning

Conventional wisdom is that China’s economy is market-ized and market forces now drive economic activity

Party and government forces continue to exert strong influence on direction of the economy.

See: Richard McGregor’s “The Party: The Secret World of China’s Communist Rulers”

The Five-Year Plan is the blueprint for what will be emphasized/encouraged (and by implication, discouraged)

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China’s 12th Five-Year Plan

Proposed by the Chinese Communist Party’s Central Committee in 10/10, adopted by National People’s Congress in 3/11 7 “Strategic Emerging Industries” have been identified and are focused on health care, energy, technology sectors Themes: focus is on ‘inclusive growth’ of the economy, which will take the form of social benefits (health care), improved living standards (environmental concerns such as clean energy), and value-added industries (growth in R&D facilities)

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China’s Healthcare Aims - an example of how policy can drive development…

Improvement of services at grass-roots level: including support for the development of 2000 county-level hospitals; construction or expansion of 3700 urban community health care centers and 11,000 community heath care stations within three years.

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Red China …or Grey? “ China’s demographic challenges are captured neatly in the popular saying that the country “will grow old before it grows rich.” China will start going grey some time this decade, and the process will accelerate after 2020. “ By 2030, China is projected to have more than 300 million citizens beyond retirement age. This will present what the Chinese call a “4-2-1” problem: a single child with two parents and four grandparents to care for. “Given the significant burdens this will impose, the government is already looking at ways to better fund healthcare. Beijing allocated $124 billion [in 2010] for healthcare reform, aiming for basic universal health coverage in the coming years.” Source: http://docs.eurasiagroup.net/chinaoutlook.pdf

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China 2025: by some estimates...

350 million Number of people added to China’s urban population – more than in the entire US

5 billion SQM Area of roads that will be paved

170 Number of mass-transit systems that could be build

40 billion SQM Amount of floor space that will be built

50,000

Number of these buildings that could be skyscrapers – akin to building 10 cities the size of New York City

Recommend: McKinsey Global Institute “Preparing for China’s Urban Billion”, 2009

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12th FYP and Urbanization: Opportunities

Implementation of the aims articulated in the 12th FYP will involve development of China’s built environment, e.g.:

construction of hospital facilities Water treatment facilities, power transmission

systems, development of energy-efficient buildings

R&D activities in IT and other areas will require suitable facilities and these users will require housing/amenities for associated workers

Source: http://apcoworldwideinc.com/Content/PDFs/Chinas_12th_Five-Year_Plan.pdf

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Opportunities & Pressures

What about pressures?

Power generation: 700 - 900 gigawatts of new coal-fired power capacity will be constructed from 2005-2025

Arable land supply is diminishing – worst case, 20% decline Inadequate supplies of potable water – today, 59% of

China’s river water is below international standards for potability

Consider whether your projects/services will

(a) help address or redress these pressures or (b) to achieve FYP goals?

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Conducting analysis and diligence:

Before pursuing investment in China or with Chinese companies: Engage in thorough analysis of the macro environment: what policy aims support (or discourage) success of your project? Involve participants with first-hand knowledge of the market to support your efforts – expertise is needed Once you are looking at specific opportunities/ partners/projects, focus on due diligence, due diligence, due diligence (business, tax/accounting, legal) – it’s almost impossible to do too much DD

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Intellectual Property: Practical strategies for protecting

your key assets

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How can foreign-invested companies protect their IP? To the extent IP is registrable, register IP

To the extent IP are proprietary trade secrets, take measure to keep confidential – more about this below…

Enforce registered IP and trade secret info

Prevent IP from being stolen by employees and business partners…how?

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Against employees and business partners

Conventional legal tools:

Registrations

Contractual protection

Business-focused tools:

Technical controls and access

Monitoring use and misuse of IP

“Too often, IP is perceived as an issue ‘belonging’ to the lawyers …. In fact a

variety of stakeholders have a role”

Sean Major and Amy Sommers, ACC Docket

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Goal: weave together contractual and practical strategies Both conventional contractual approaches and self-help or practical strategies are important and relevant For reasons I will explain, you want to think through how to incorporate both, as a preventative measure and to position you most strongly should you have to consider exercising legal remedies in the future.

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Examples of contractual provisions:

•Control packaging and labels •Require that rejects be destroyed •Prohibit diverted product and over production from getting in the marketplace •Prohibit or limit subcontracting •Address post-termination treatment of technology •Allow for IP and technology audits •Limit access to technology •Bind employees with access •Prohibit Chinese party from registering their IP rights

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Business-focused approach: technical access and controls •Carefully select business partners and employees (diligence!) •Disclose only necessary information in technical specifications and manuals

•Limit access to technology on need-to-know basis

•Don’t put all your eggs in one basket, e.g.,: Compile source code in U.S. Keep design, manufacturing, supply, repair and

maintenance of key components in U.S.

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Implications:

At front-end you want to ensure your company is taking these steps so that at the back-end one can prove the information IS proprietary and entitled to legal protection. To do this, must look functionally at where risk arises and then address those risks:

R&D? Production/quality control? Distribution? IT system architecture? HR/employees?

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Moving forward:

Identify where are the ‘leakage points’ in your China business Communicate across functional areas to identify ways to block/lessen/mitigate these risks Determine actions needed to implement the new approaches identified, e.g.,:

Adopt new policies and train around them Change IT system architecture Introduce or amplify functions (e.g., IT

monitoring)

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Thank you!

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Amy L. Sommers’ strong skills in corporate structuring, governance and operations issues in China make her a valued resource to the clients she counsels. A former Chair of the China Committee of the American Bar Association’s Section of International Law, Ms. Sommers is a frequent speaker and commentator on China issues. Her involvement in China goes back over 25 years, when she first started studying Mandarin at the Jackson School of International Studies at the University of Washington, later developing deep appreciation of China’s history, politics, culture and legal system. Her clients benefit from her ability to bring these insights to bear on their strategic China projects. Ms. Sommers is the recipient of the 2007 award for Professional Excellence from the Expatriate Professional Women’s Society of Shanghai.

Copyright: K&L Gates 2012. The information in this presentation is not intended as legal advice; please consult your legal counsel for guidance.