Prevention and control of IP risks by SMEs

By Frank Liu, Shanghai Pacific Legal
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For a small or medium-sized enterprise (SME) to gain a foothold in a highly competitive market, innovation is pretty much indispensable. But as regulators are growing more stringent in their compliance reviews of market entities, SMEs in particular will need to address pressing compliance risks, including the prevention and control of IP risks – an area of particular concern to smaller companies.

Unlike large enterprises, SMEs need to establish a relatively practicable IP compliance system based on the characteristics of their industries and their own business models, and in line with their human and material resource constraints.

High-risk areas

An SME first needs to focus on those IP areas most prone to risk, particularly that of criminal IP violation.

Trademarks remain the principal subject of infringement in criminal IP cases, according to 2020 reports by the Supreme People’s Procuratorate and Supreme People’s Court. The rise in the number of copyright and trade secret infringement cases is also noteworthy, in particular the phenomenon of former employees leading or participating in the infringement of company trade secrets. Although patents have yet to become a high incidence area for criminal IP cases, they are bound to be a key concern for SMEs that mainly rely on patented technologies.

Compliance mechanism

Prevention and control of IP risks by SMEs Frank Liu
Frank Liu
Shanghai Pacific Legal

When striving for market opportunities through innovation in a highly competitive environment, there is a risk of intentional or unintentional IP infringement. Intentional infringement often occurs when there is an intent to free-ride on the back of the goodwill of another, which ends up constituting trademark infringement or unfair competition. Unintentional infringement often occurs where a character identifier or image is used without first ascertaining the IP rights, ultimately infringing on another’s trademark or copyright. An SME has to guard against infringing another’s IP and at the same time take the measures to protect its own IP.

With limited resources to establish a comprehensive and complete protection system, how can SMEs form an effective IP compliance mechanism to prevent and control risks? Although circumstances vary with each enterprise, simply by carrying out the basic IP compliance arrangements, such risks can be reduced. For trademarks, the most prominent risk, the following basic precautions should be considered:

Prior enterprise name and trademark search. Regardless of whether an SME is foreign-invested or wholly Chinese-owned, the quality of its products or services and the goodwill behind them are ultimately reflected to a large extent in its enterprise name and trademark. A degree of planning is needed for the enterprise name and trademark at the time of establishment. With trademark applications increasing year by year – 9 million in 2020 alone – it is no easy matter to select a name and trademark suitable for the enterprise and that does not conflict with the rights of others. For relevant considerations, reference may be made to the author’s prior article “Strategies with Marks and Names for Foreign Enterprises Entering China” .

By doing a prior trademark search and enterprise name search, it is possible to prevent or reduce the risk of one’s trademark or enterprise name infringing the IP of another. The process also helps create trademark and enterprise names that are more unique, in itself conducive to the protection of brand building in the long run. If, for immediate benefit, an enterprise decides to free-ride on the reputation of another’s brand, not only will it face the risk of infringement or trademark invalidation or cancellation but, in the long run, it will also be detrimental to its own brand building.

Attention to compliant use of trademarks. In addition to the risk of infringement by rashly using a trademark without registering it, other common IP compliance risks exist in trademark use. One easily overlooked is the cross-class use of a trademark, i.e., use of a trademark for goods or services in categories other than those for which it was registered. In such a circumstance, if a third party has a corresponding identical or similar trademark registered in these related classes, the risk of infringement increases.

It is relatively common for enterprises to themselves modify their registered trademark representations for aesthetic reasons or in response to economic developments and then proceed to use the same. This may result in administrative penalties. It also increases the risk of cancellation of the registered trademark due to an inability to prove its use when responding to legal action by a competitor requesting cancellation because the trademark has not been used for the past three years.

Concerns of pre-emptive registration and infringement. Needless to say, in building the reputation of one’s brand, appropriate attention needs to be paid to pirate registration of one’s trademark by others and infringement of the enterprise name. The classes in which one’s trademark is registered also need to be revised as the stature of the brand grows and an appropriate trademark defence system needs to be gradually built up. It is only by continuously protecting the initial brand reputation can one avoid any free riding or even pirating.

In addition to trademarks and enterprise names, enterprises in the Internet, film, television and cultural sectors need to pay attention to compliance risks relating to copyrights. In light of the growing cases of trade secret infringement by employees, high-tech and other enterprises with core technology competitiveness need to promptly establish a trade secrets protection system while also strengthening their R&D capabilities, so as to ensure that their hard-earned technology cannot be easily stolen.

In short, preventing and controlling IP risks requires SMEs to first enhance their IP protection awareness and grasp the key areas and, secondly, to commit their limited resources to the most pressing IP compliance items, while taking into consideration their own particular circumstances, and then promptly make the appropriate adjustments as the enterprise develops.

Frank Liu is a partner at Shanghai Pacific Legal

Room 2709, 27/F, Plaza 66 II
1266 Nanjing Road West, Shanghai 200040, China
Tel: +86 21 6086 0199
Fax: +86 21 6086 0111

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