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Description
A TECHNOLOGY-BASED STRATEGY FOR MANUFACTURE OF GOODS FOR THE D0MESTIC AND GLOBAL MARKETS*
I. OVERVIEW
Outsourcing the manufacture of products to China is an idea that is currently in operation or one that is being considered for virtually every labor-intensive product by virtually every western company. This paper looks at the technology-driven intellectual property aspects of outsourcing both in terms of how to maintain protection of trade secrets and other proprietary rights as well as to permit a business evaluation of the costs and demerits of outsourcing. Thus, while the traditional methods of border enforcement and trademark infringement actions can certainly be used in some situations where technology has been pirated, often stolen technology will be embodied in different clothing that the original manufacturer's garb so that such traditional modes of enforcement will be difficult. Or, where the exact product is knocked off, then both sets of weapons may be utilized.
No American target is too big to take on; for some of the most spectacular and highly visible American product launches in China like a brand new automobile model, the counterfeit article may appear on the Chinese market even before the launch of the genuine article: A new Chevrolet in counterfeit form recently predated the official GM launch of the genuine article; even worse, it was produced by a concern that was a Chinese business partner of GM itself.1
This paper commences with an analysis of the changing intellectual property situation in China. Many situations require outsourcing to China whilst in a few cutting edge technology areas one will turn to the Japanese solution of "blackboxing" - simply bearing the additional costs of local manufacture to protect trade secret jewels. See s. II, A Price-driven Manufacturing Landscape.
Before considering enforcement of patents or other intellectual property rights there must be a portfolio of such rights. See s. III, An Intellectual Property "Fingerprint". To protect the Chinese production line it is necessary to totally rethink the manner of enforcement. A marketing budget for public relations and enforcement must be built into the business equation where the goal of litigation is not damages but rather to stop infringement. See s. IV, Chinese Enforcement: A Different Calculus.
American enforcement remains the gold standard for protection of the American home market. See s. V, Parallel American Enforcement. For all but a few industries, intellectual property issues, of course, are only the tail that should not wag the manufacturing do. See s. VI, Issues Beyond Intellectual Property. As one of the integers to be considered is the creation of a better-controlled local Chinese arm for manufacturing. See s. VII, The Woofie as the Next Step.
While the focus of this paper is on patents and trade secrets, trademark protection against counterfeiters is, of course, of extreme importance; copyrights, too, may be important. These more highly developed bodies of law and practice are outside the scope of the present paper. See s. VIII, Trademark and Copyright Protection.2
Chinese business strategy is become increasingly complex as sophistication amongst the Chinese business and law community leadership grows. Piracy in its present form will surely be giving way toward a more complex competition structure. See s. IX, An Increasingly Sophisticated China.
II. A PRICE-DRIVEN MANUFACTURING LANDSCAPE
Classically, American manufacturers of the highest quality goods have relied upon a domestic production with highly skilled workers with countless man years of proprietary know how and trade secret skills - all locked behind factory gates often at a location just behind the executive suite. Maximum attention to secrecy coupled with workers steeped in a history of honoring trade secrets coupled with a strong local court system have together made the system work quite well.
Today, every manufacturer is either actually outsourcing production of at least some goods to China - or elsewhere in Asia - or is contemplating such a move, spurred by the competitive pricing push of those concerns who have already or are just now commencing Chinese outsourcing. The game in China is entirely different: The concept of intellectual property rights protection is not yet even out of the first generation, and court enforcement of even patent rights is out of the question in terms of monetary recoupment of damages: An excellent system of specialized patent courts in Shanghai, Beijing and several other provinces does exist, but a low statutory cap on damages makes use of the courts for anything other than injunctive relief a practical impossibility; trade secret enforcement is problematic.
Even a couple of years ago, the answer to many American concerns to outsourcing manufacture to China was a resounding "no". Today, a black and white "no" is not an acceptable answer for most technologies. To be sure, the Japanese electronics industry - which once was a leader in outsourcing manufacturing - is now taking a cautious look at its technological crown jewels. The president of a leading electronics manufacturer speaks of "blackboxing" his intellectual property rights: He maintains domestic manufacturing facilities to avoid loss of its trade secrets.3
Yet, for all but the highest level of technology that is incapable of reverse engineering from the identity of the product, the trend continues to outsource manufacturing to China.
III. AN INTELLECTUAL PROPERTY "FINGERPRINT"
"We don't have Chinese patents!"
What can we possibly do? We're outsourcing details of a process we've practiced in Kenosha for five years under trade secrecy. Is there anything we can do?
Yes.
A lot!
Americans must rethink their traditional attitude toward process patents.4 Executives who cut their teeth on patent law more than a generation ago are generally hostile to process patents because they learned as part of their patent upbringing that a process patent was generally worthless against imported goods: There historically was no way to enforce a process patent against an importer, certainly not under a patent infringement remedy in the District Court - although enforcement at the International Trade Commission was an option. Furthermore, a process patent that was "obvious", given the identity of the final product, was of dubious validity or even patentability.
What happened over the past twenty some years?
First, since early 1989 it has become an act of U.S. patent infringement for domestic sale of goods produced offshore via a U.S. process patent. The law was amended to provide that "[w]hoever without authority imports into the United States or offers to sell, sells, or uses within the United States a product which is made by a process patented in the United States shall be liable as an infringer[.]"5
Second, it is now clear that if the features of a process are dictated by an unexpected product design, then the process, per se, may be patentable. Additionally, there has been a stronger appreciation by the judiciary of the importance of patents in the United States and, particularly, the key role that patents play as a force to maintain intellectual property-based prosperity in this country.
A. Fingerprinting the Production Line
A primary goal of process patenting for outsourcing is to "fingerprint" the assembly line production with several key process patents that relate to process steps that are necessary to carry out the production as set up by the company. It is not necessary that every last detail be patented, but only that some of the steps are patented - those which cannot be readily avoided without great expense, if at all.
B. New Trade Secrets and Prompt or Delayed Patenting
Where there is an about-to-be commercialized trade secret, there are several considerations that go into the decision as to when to file a patent application.
1. Trade Secrets Obvious from the Identity of the Product
If the process becomes obvious promptly upon release of the identity of the product, then by all means the patent application should be filed before any release of the product or other public disclosure of the product. Thus, once the product is known to the public for... |
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