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Prevent IP Risks When Terminating Suppliers during U.S.-China Trade War

Intellectual Property Alert Lori S. Meddings, Li Zhu

Yesterday the U.S. Government issued the final list of products coming into the U.S. from China on which the U.S. is going to impose significant tariffs. Many U.S. businesses will likely be affected. If and when terminating business relationships with suppliers in China is the final decision of your business, it is advisable to take the following precautionary steps for preventing potential risks to your intellectual property rights:

Re-think Termination Process: A complete assessment and audit of IP assets and ownership of U.S. business and suppliers is prudent before dissolving business partnership with a long-term supplier. The audit should not be limited only in China, but in all key and emerging markets. It is more common than you would expect that companies would allow suppliers to hold trademark, patent, blueprints and tools for convenience. Arrangement of transfer of IP rights should be finalized before initiating the termination process. It is also advisable to enter into an agreement preventing suppliers from applying and registering U.S. business's IP rights, and imposing contractual liabilities on any exploitation of know-how and process of production. Note that once suppliers manage to become right holders, real IP right owners are subject to infringement liabilities. Moreover, it would be an uphill struggle to take back the rights and to obtain any support from China's legal system. Look-alike products from previous suppliers will flood the market and directly compete with actual IP right owners.

Secure Trademark Rights in China: Unlike the U.S., China and many other countries are first-to-file countries for trademark rights. The first-to-file system does not take into account who is the most senior user of a trademark. It creates legal loopholes for suppliers to file preemptive trademark applications. Moreover, the threshold of use and costs to maintain a trademark registration are minimal. In contrast, the efforts and costs to remove a pirate registration could be astronomical. China may not be a source of supply but could be a market in the near future or long term. For companies which have not yet entered the Chinese market but have been using Chinese suppliers, it is a strategic move to secure trademark rights for the return to achieve a different business goal.

Install Surveillance: The earlier counterfeits and infringement are discovered, the more legal means there are available. Setting up global surveillance of trademark filings and domain registrations, and monitoring online marketplaces in China could prevent problems with infringement and counterfeits. These programs are cost-effective and efficient. No matter how the Trade War will profoundly impact the two largest economies in the world, taking a proactive approach to anti-counterfeiting and IP protection will ensure your most valuable IP assets are protected.

Seek Allies: It is necessary to re-evaluate and manage your expectations regarding the support U.S. brand owners can expect to receive from the Chinese government's law enforcement bodies when pursuing enforcement actions. Other multinational companies' successful experience may not automatically apply. If circumstances permit, conducting joint actions with local business partners other than suppliers, such as distributors and joint ventures, can be a valuable strategic position In the battlefield of fighting against inferior products and defending brand integrity, competitors in the same industry also become natural allies.

Change Battlefields: Even at its best, China Customs has the capacity to inspect no more than 30 percent of all exports. Local customs agencies in important markets play a vital role in any counterfeit enforcement strategy. Some countries have long-standing business relationships with the U.S. and well-trained officers. More importantly, major distributors in these markets that purchase large quantities of counterfeit goods can be stopped, bringing the U.S. back to a supply and demand scenario. An independent and impartial analysis of producers, exporters, distributors, and retailers of counterfeits or infringing products across countries or even continents can allow for selection of the best jurisdictions for enforcement actions, rather than playing an expensive "whack-a-mole" game with thousands, if not hundreds of thousands, of small factories in remote rural areas of China.

For additional information on how these new tariffs will impact your intellectual property, please contact Lori S. Meddings at (608) 283-2653 / [email protected], Li Zhu at (414) 277-5143 / [email protected] or your local Quarles & Brady attorney.