When East Meets West on Intellectual Property (IP) Rights

When Chinese President Hu Jintao met with President Bush in April, he assured Bush that China, long known as a nation that does not respect intellectual property rights, was taking steps to protect the IP of U.S. companies. But the reality is that not much may happen for years due to the fragmented Chinese business culture.

“We talk of China as though it is one monolithic entity,” says Steven Henry, a lawyer at Wolf Greenfield and Sacks. “It may be centrally governed, but when it comes to IP enforcement, it is not one country.”

China’s government, companies and citizens all benefit from an economy that ignores intellectual property rights. Small businesses that specialize in counterfeit goods operate in the open. The Beijing government could shut them down, but it doesn’t because the black market creates jobs and allows people to buy products such as movies that they otherwise could not afford.

Meanwhile, many Chinese companies ignore IP to avoid paying hefty royalties to Western companies, says Henry. In response, the Beijing government is encouraging development of domestic standards, such as TD-SCDMA, a wireless standard, and AVS, a video-compression rival to .mpeg. Gao Wen, chairman of the audio-video coding standard working group in China, says that China will charge companies that use its standards up to 20 times less than what IP owners in the West charge.

Henry says that it may take a generation or more before China abides by Western IP rules because that’s how long it will take Chinese companies to develop a critical mass of IP of their own so that protecting it will be in their financial interest. If your company cannot wait that long to jump into the Chinese market, but you still are concerned about how your company might protect its IP, you may want to emulate what Warner Brothers did. Last fall, the media company created a partnership with the state-owned China Film Group and the privately run Hengdian Group to develop Chinese-language films. According to some Beijing DVD shoppers, it is now harder to find movies produced by Warner Brothers on the black market.

Henry says this example illustrates the importance of building relationships with Chinese partners and understanding “what their motives are and what their ethics are.” For now, he concludes, “the relationship may be more important than the law.”