Patent Pitfalls on China’s Road of Clones

SHENZHEN, China Andy Chen's dancing Christmas tree may not have been the most crucial invention since the days of his hero Thomas Edison. But Chen, an inventor from Taiwan, said he thought his tree would at least win him a slice of China's $10-billion-a-year toy and game exports business.

With the press of a button, as he demonstrated in his small workshop here, his plastic and metal creation gyrates and shakes to a frenetic rendition of "Jingle Bells." As his U.S. patent puts it, Chen's invention is a "dynamic, collapsible, rotating toy that is full of fun and amusement, that can be extended or retracted, rotate, play music and flash lights."

Chen, who has lived in Shenzhen in southern China for nearly a decade, said he thought he had a hit for the Christmas market and had done everything right to ensure a profit on the $40,000 and five years that he invested in his invention. He courted customers in the United States and Europe and won patents in the United States, China and Taiwan in 2001 to protect his invention.

But just when he had secured an order from a U.S. buyer for as much as $20 million, Chen recounted, he ran into a problem that many businesses in China face: clones of his product suddenly appeared at Chinese markets and trade fairs, and a shipping container filled with them turned up in Los Angeles.

His U.S. company dropped the deal, fearing the product would lose its novelty before the genuine shipment arrived. Since then, years of litigation against rival factories have brought Chen no compensation.

"I didn't make any money from it," Chen said in an interview. "A lot of patents don't make money. It's the copiers who make money because they don't have any research and development costs."

In 2004, counterfeit products accounted for almost 8 percent of China's economic activity, according to estimates cited in a report by the business consultancy A.T. Kearney.

The U.S. secretary of commerce, Carlos Gutierrez, has warned China to crack down on the counterfeiting of patents, copyrights and trademarks or face repercussions from Washington. U.S. and European trade groups have threatened to press for action over the issue before the World Trade Organization.

Experts differ over the direction in which China's protection of patents is heading. But there is little disagreement that, while China remains a powerful magnet for international investment, imitation and outright copying are unlikely to disappear soon.

"China's IPR is improving in terms of China's objectives, but that improvement may not be in the interest of global IP owners," said Ken Dewoskin, who advises companies investing in China for PricewaterhouseCoopers in Beijing, using the abbreviation for intellectual property rights.

"Improvement in this case doesn't mean China's going to become like North America or Europe," Dewoskin said.

China has more than 10,000 toy manufacturers and makes 75 percent of the world's toys, including 60 percent of those sold in the United States, according to statistics provided by the China Toy Association.

Chen, who has worked as a television editor, packaging maker and Internet entrepreneur, thought he saw an opportunity in combining Taiwan's expertise in mechanical engineering with the mainland's low-cost manufacturing. He set up a company, Uni-Pro Creative Product Developing, to make moving toys. Several years ago, he said, he had an idea: what about creating a Christmas tree that moved and played carols?

Chen eventually developed a version of his tree that could be made for $4. He said he had always been aware of the threat of counterfeiters, so he closely guarded his prototypes and applied for patents in China and the United States.

Other entrepreneurs, Chinese and foreign, have done the same. In the face of complaints about China's lack of respect for intellectual property, the government has encouraged businesses here to take out patents. The number of invention patents approved in China grew from 54,000 in 2001 to 70,000 in 2004, and last year local applicants surpassed foreign ones for the first time.

Shenzhen has been making a special effort to encourage businesses to register and protect their patents, said Lan Hanling, chief of the law department of the city's Patent Administration Office.

China previously treated inventions as common property, she said, citing a saying: "When one household makes an invention, a hundred more can benefit from it." But the Shenzhen government, she said, now wants to encourage innovation by protecting inventors' rights.

But even here, Chen found that having a patent was not enough. The loosely worded description of his invention meant competitors could copy the tree without directly infringing on the patent, Chen said. Gordon Gao, a patent lawyer at Paul, Hastings, Janofsky & Walker who advised Chen, said, "Everyone else in southern China saw the patent." Soon they were devising ways to copy it without attracting lawsuits.

Chen sued a local company, Win Hing, that produced a tree similar to his, but a local court rejected his case, finding that the other tree did not infringe on Chen's patent. Litigation against a toy company in Hong Kong, Kiuhung, over control of Chen's patent also fizzled. Win Hing has been dissolved, and representatives of Kiuhung declined to comment on the dispute with Chen.

While China has been developing rules and laws to protect copyrights and patents, many businesses - even large multinational companies - fail to protect themselves by applying for rigorous patents and copyrights and then pressing their complaints through courts and intellectual property offices, Gao said.

"If you do have a strong patent, you will always get an injunction," he said of China's courts. "I have yet to find a case where a patent was effective but failed."

Others are less optimistic. China's patent and copyright rules are becoming more sophisticated, but the changes are tilted toward entrenching the advantages of Chinese companies, especially state-owned corporations in high-value industries like computers and software, medicine and telecommunications, said Dewoskin, the adviser with PricewaterhouseCoopers.

He objected to the idea that China was evolving, however fitfully, toward the type of patent protection that companies have in the United States. "That's just not happening," he said. "They're heading in a completely different direction."

Even Chinese officials involved in intellectual property issues say China should not "bow to" Western demands to overhaul its rules.

"The U.S. government's abuse of the intellectual property rights system isn't just seriously damaging the interests of Chinese businesses and the public," Wei Yanliang, a researcher in the State Intellectual Property Office, wrote in a recent issue of the Chinese-language magazine Business Watch. "It's seriously impeding China's progress toward rule of law."

He said China's expansion of a crackdown on counterfeiting suggested Beijing had "totally bowed to American intellectual property hegemony."

Even more than legal differences, investors and experts said, China's role in the global process of rapid, made-to-order manufacturing is putting profound pressure on traditional notions of copyright protection. The pressure to introduce products quickly into ferociously competitive markets tends to make patent approvals an afterthought.

Novelty items depend on rushing products to market to meet fickle tastes. This often requires sharing technology with factories and clients before patents are approved, 12 to 18 months after an application is made, Chen said. "If you wait that long," he said, "you're dead in the marketplace."

Chen said he had not been totally discouraged by his experience. "It's still the factory of the world," he said of China. "Next time I'll do more preparation and be more detailed about the patent - and hope."