Today’s counterfeit products are so well copied that many can easily pass for the real thing. And there’s good reason for that. Sometimes they are the result of intellectual property theft of original designs and sometimes they are simply made by those who are great at copying.

But even the best copies can conceal inferior materials, workmanship and design flaws. Even worse, some can be dangerous, such as pharmaceuticals that contain random ingredients or no active ingredients at all. And intellectual property theft hurts legitimate businesses. It steals profits and jobs from those who have worked hard to achieve them.

Learn more. Watch the free webinar: Recognize and Protect Your Intellectual Property.

One of the biggest players in the counterfeit goods market is China, and this is partly due to the country’s long tradition of copying, says Peter Humphrey, CFE, Managing Director of ChinaWhys, a business risk advisory firm focused on China. Add to that a regulatory regime that doesn’t put a high priority on cooperation with foreign companies complaining of patent infringement or intellectual property theft and you’ve got a difficult situation to resolve.

Intellectual Property Theft

One of the ways Chinese companies get their hands on foreign designs is through plain old intellectual property theft, says Humphrey. An employee working for a company walks away with the blueprints or recipes and sells them to a Chinese company for a large profit.

“So that’s sheer theft, and there are a lot of cases like that,” says Humphrey.  “That’s working its way up the value chain to much higher value theft, into the life sciences companies. Let’s imagine you’ve got a PhD scientist working in the research and development department of a big American chemical company and he downloads the entire R&D registry just before he leaves the company. And then he goes to China and tries to sell this and build a business around it. There’ have been many cases like that in recent years.”

Investigations

Unfortunately, these cases are difficult to investigate. “First of all, the Chinese authorities are not entirely cooperative when a foreign company has complained,” says Humphrey. “It’s hard to get support.” And investigations in China live in what Humphrey describes as a “grey area”, in which there is no licensing or regulation, but exists under the guise of consulting, market research or patent and trademark attorneys.

“Evidence gathered by investigators can be treated in a very arbitrary way by the courts in China,” says Humphrey. And if you get to the courts stage, you also run into problems with bribery and corruption in the judiciary, he explains.

First to File

Under Chinese law there exists a “first to file” rule, which allows that the person or company that is first to file a patent, trademark or copyright in China has the rights to it, even if it has been previously filed elsewhere in the world. This causes major headaches for global manufacturers that don’t file in China.

“There are a lot of Chinese people specializing in technology who go around the world looking for patents that are interesting. And then they check whether it’s been filed in China and, if not, they go and file it as their own,” says Humphrey.

China has, by far, the largest number of published trademarks every year. According to a Thompson Reuters study, China had 879,324 published trademarks in 2012. The US was second with 313,532 and France third at 254,662.

The Filing Dilemma

So it makes sense for companies to file patents and trademarks in China early, even before their products are on the market. But there are two sides to this coin, explains Humphrey.

“In order to protect yourself in the Chinese jurisdiction legally, you have to file this intellectual property. That’s not so bad literally, but… if you’re talking about patents, and you go and file and register a patent in China, then the cat’s out of the bag… and people just don’t respect it,” he says.

“So you’re going to find, for example, a big American pharmaceutical company files a patent on a drug that hasn’t yet gone to market. Within a year or two there’s a Chinese generic version of this drug because someone in the patent office has done some funny business with a Chinese pharmaceutical firm.”

But regardless of this negative side of filing patents, Humphrey says it’s a necessary step. “If you don’t file, then you’ve not got a leg to stand on in a Chinese court,” he says.

Market Monitoring

Another important step companies should take to protect their IP is to continually monitor the market. This should include both an in-house resource and a third party, providing a continuous flow of information about what intellectual property is in the marketplace, Humphrey advises.

Is there a counterfeit product being sold alongside yours? Are there versions of your product being sold that are half the price they should be? Constant monitoring will ensure that the alarm bells ring at the appropriate time, he says.