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IPR: IPR Strategy for Clean Tech SMEs: A Case Study
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altWith a large potential cleantech market, and government support for the development and adoption of new clean technologies, China is quickly becoming a leader in cleantech.  This presents great opportunities for European cleantech SMEs. However, cleantech businesses that choose to start working with China need to understand that while good execution, effective management, and access to financing is critical to maintaining a competitive advantage, protecting good technology is also equally critical. Although technology transfer can be structured in a way that minimises IP risk, additional preparation and measures directed towards the IP environment in China need to be considered by cleantech businesses. As the market becomes increasingly competitive, strategically managing, protecting, and leveraging IP becomes even more essential.   Understanding how IP fits into the overall strategy of your business in China can lead to more opportunities and conserve competitiveness.  This case study showcases the IP experiences of one small European  company entering China.

Case study: Perpetual Motion intelligent drives

Background: Investors of Perpetual Motion, a small German company specialising in the manufacture of intelligent drives that reduce energy usage of industrial machinery by more than 80%, are pushing to have the company enter the Chinese market. Perpetual Motion owns several patents covering drive designs in China, but most of the precise engineering processes needed to manufacture the drives at a commercially acceptable cost are in the form of know-how. In addition, Perpetual Motion uses special software to control and improve the efficiency of these drives.alt
Looking to quickly obtain cash flow to cover upcoming financing needs, Perpetual Motion chooses to explore licensing the technology to industrial machinery manufacturers in China. After meeting with several manufacturers, Guangdong Green Machinery Co., Ltd. (GGM) expresses interest in obtaining an exclusive license. Perpetual Motion agrees and the parties sign a Non-Disclosure Agreement (NDA). As part of the arrangement, Perpetual Motion proposes to grant an exclusive license to GGM for Perpetual Motion's patents and know-how in China. During negotiations, GGM conducts due diligence on Perpetual Motion's patents. However, negotiations stall when the parties cannot agree on royalties.
Actions taken: Undeterred, Perpetual Motion then decides to seek a Chinese partner to sell its products in China. They find Mr. Liang, who owns Zhejiang Components Co., Ltd. (ZCC), a small components manufacturing company. Mr. Liang used to be an engineer and has an overseas education, and ZCC owns some patents for certain manufacturing processes. Perpetual Motion and ZCC enter into a Non-Disclosure Agreement (NDA) and a manufacturing services agreement. Mr. Liang agrees to manufacture the intelligent drives to customer specifications. Perpetual Motion decides to keep design-to-fit work in Germany, and Mr. Liang agrees to set up a secure area in his factory. As part of the arrangement, Perpetual Motion sets up secure file servers from which Mr. Liang can access sensitive documents related to the precise engineering processes needed to manufacture the intelligent drives. Perpetual Motion also seconds several technical managers to the factory to train authorised employees on the manufacturing processes. Each of the employees also signs a confidentiality agreement and an agreement not to compete. Employees are provided with know-how training only on specific processes they will work on.
Later, after six successful months, Mr. Liang informs Perpetual Motion that GGM is offering similar lower priced intelligent drives but which do not achieve the same energy savings as Perpetual Motion's intelligent drives. After further investigation, Perpetual Motion suspects GGM is infringing its drive design patents. Although Perpetual Motion has the resources to engage in litigation, Perpetual Motion decides not to sue GGM and risk having its patents invalidated. Perpetual Motion instead uses the resources which would have been used in the litigation to reinvest in research and development. Six months later, Perpetual Motion develops a new manufacturing process that further reduces the cost of manufacturing the intelligent drives and new software which further improves the efficiency of the intelligent drives.
altLessons learnt:
√ Develop an IP strategy for the medium to long-term, and determine how IP will fit into the overall business strategy in China.
√ Obtain registered IP rights (patents, copyrights, trademarks, etc.) in China prior to transfer.
√ It can be difficult to secure a license and royalties from a potential licensee unless it can be clearly demonstrated that non-patented know-how is essential to making the product commercially viable.
√ Compartmentalise or ‘black box’ the technology and establish control points to ensure that no single party can practice the complete technology and keep critical, core technology, or components separate.
√ The decision to sue and enforce IP, involves considering the strength of the patents, the resources necessary to pursue litigation through to its conclusion, and the ability to defend likely invalidation actions against the patents, as well as protecting the core aspects of the business' competitive advantage.
√ Use non-disclosure agreements (NDAs) with third parties, affiliates, and employees.
√ Document and use specific policies and procedures when disclosing sensitive proprietary information.
√ Look for good partners that do not have direct conflicting interests and who are likely to respect IP.  

The China IPR SME Helpdesk is a European Commission funded project that provides free, practical, business advice relating to China IPR to European SMEs. To learn about any aspect of intellectual property rights in China, visit our online portal at www.china-iprhelpdesk.eu. For free expert advice on China IPR for your business, e-mail your questions to:   This e-mail address is being protected from spambots. You need JavaScript enabled to view it . You will receive a reply from one of the Helpdesk experts within seven working days. The China IPR SME Helpdesk is jointly implemented by DEVELOPMENT Solutions and the European Union Chamber of Commerce in China.
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