A mutually lucrative scenario is developing between San Diego’s dynamic life sciences and high-tech industries and China, while San Diego attorneys are running interference in what is still a new , and risky , frontier.
Risky because intellectual property , the inventions and discoveries developed by the biotech, high-tech and pharmaceutical industries , is a primary concern among those entrepreneurs thinking about doing business in China.
“U.S. companies that want to do business in China are scared to death that their intellectual property will be stolen, copied or otherwise ripped off,” said Steve Korniczky, a partner in the San Diego office of the international law firm Paul, Hastings, Janofsky & Walker, and an IP specialist who regularly does business in China.
But it can work both ways.
“The U.S. tech market is very litigious, and people will fight to protect their core technologies,” he said. “Likewise, Chinese companies that want to take advantage of U.S. markets are trying to educate themselves on what they need to do to protect themselves in the U.S.”
It seems to be a radical change in attitude from previous years.
“In the early days, we said, ‘Do we really need this China practice?’ ” said Jake Reinbolt, a partner and team leader of the San Diego-based Procopio, Cory, Hargreaves & Savitch LLP’s intellectual property practice. “It was an opportunity back then. Now it’s a necessity.”
Korniczky agreed, saying that in the past, opening a law office in China opened a black hole for expenses.
“Now, what you see is a bigger legal market, a bigger game, and more U.S. and international companies locating to China,” he said. “San Diego is getting a big chunk of this action. If you look at the fact that San Diego has a huge cluster of biotech, semiconductor, telecom and software companies, these are the same industries that Chinese companies are focusing on. It’s a good match.”
China’s reputation as a purveyor of cheap low-tech goods is rapidly fading, generating a desire to build alliances with U.S. scientists, engineers, and entrepreneurs, especially in such high-tech/biotech hubs as San Diego, said S. Elizabeth Foster, a partner in the San Diego office of Luce Forward.
“China has been known as a manufacturing destination for a long time, the place to go for low-tech products, low-cost labor,” said Foster, a member of the San Diego World Trade Center board of directors. “China now has taken the next step up. The Chinese government, both at the national and provincial level, and its universities, are focused on high-tech and biotech. San Diego is a hotbed for biotech and telecom. It’s good for both of them.”
Ever since the People’s Republic of China was admitted to the World Trade Organization in 2001 after 15 years of negotiations, trust building has been a slow but steady process , especially regarding the protection of intellectual property, San Diego attorneys say.
Counterfeiting continues to be a problem in China, according to Korniczky.
“A lot of U.S. companies doing business in China want to know that their IP rights will be respected,” he said. “So China is in the process of improving its IP enforcement system. It’s fair to say they’ll have to track U.S. IP laws fairly closely. Certain regions have substantially developed an IP enforcement record, because they are trying to attract this foreign investment.”
But it’s hard to get a handle on, said Kathleen Pasulka, an IP specialist at Procopio, who just returned from China.
“When I was in China, I saw Disney characters on detergent; everything had Disney on it,” she said. “At some point, you can’t control it. There is a lot of pressure from the World Trade Organization, but recognition that many of the people are very poor and they don’t have the understanding and wherewithal to do the right thing. They see it as a necessity for their survival. I think things are changing and, once they build up their economy and have their own brands, they will recognize the importance of IP.”
While there is risk doing business with China, there also are a lot of opportunities to make big bucks, Pasulka said.
“The losses nationwide because of counterfeiting have been substantial, but a lot of money has been made,” she said. “Most clients are willing to put up with counterfeiting issues, just because there are such great opportunities.”
“These issues aren’t going to be solved overnight, so the question becomes whether or not San Diego businesses are willing to get involved early with hopes that these issues will be resolved sometime in the future. The trick is to not lose your shirt in the meantime. It’s a gamble and a lot of money is involved. Businesses are making educated gambles, because it just makes sense to be in China.”
For China, there is a learning curve based on separate cultures and laws, said Peng Chen, a partner in the San Diego office of Morrison & Foerster, and an IP lawyer who represents clients in China.
“You solve one problem, and a new problem pops up,” Chen said. “There are many similarities, but many differences. One difference is that in the U.S., the standard is to have a first-to-invent system. It’s not about who is first to file in the patent office. But outside the U.S., it’s the first-to-file system.”
This can lead to problems if inventors aren’t up to speed on international law.
“It’s very important,” said Chen, whose firm first opened an office in Hong Kong two decades ago and has since branched out to Beijing and Shanghai. “To be safe, you should file in the U.S. before you go public with your invention.”
Chen has clients who are successfully involved in cross-border collaborations, including the San Diego-based Aviva Biosciences Corp.; CapitalBio Corp. of Beijing, which was founded by a former scientist at San Diego-based Nanogen, Inc.; and Acon Laboratories, Inc. of San Diego, with a manufacturing partner, Acon Biotech Co., Ltd., in Hangzhou, China. The venture is billed as the first U.S. Food and Drug Administration-licensed manufacturer of rapid diagnostic products in China.
Tony Chen, once in practice in Paul Hastings’ San Diego office, now heads its IP group in China. He also is a senior consultant for the Shanghai government on the life sciences industry.
Born in China, he earned his law degree from Harvard Law School.
“The general impression in the U.S. is that China has very weak protection of IP property,” said Chen in a phone interview from his Shanghai office. “But we see on the ground here in Shanghai that companies that take a proactive attitude in registering their IP, monitoring any infringement activity and taking the infringer to court or an administrative agency, they could achieve results.”
Chen is astonished by the kind of advice some companies receive about doing business in China.
“I have heard from San Diego biotech executives that their counsels are advising them not to bother with filing patent applications in China,” he said. “I was pretty amazed by this kind of attitude. They think, ‘There’s no enforcement there, so why bother?’ If you take that kind of attitude, it’s going to be difficult. Some companies can’t afford to file in every country because it’s very expensive. So they make a choice. But in China, you definitely should. The markets are already significant in a lot of areas, and, in markets that are still small, they are growing very rapidly.”
Larry Maxham, a San Diego patent and trademark attorney and president of the Maxham Firm, has been involved in world trade issues for years.
Of China, he observed, “There are 1.2 billion people and a half-billion of them are entrepreneurs. They don’t know anything about copyrights and trademarks. It’s a long uphill educational process. Here, we want everything done overnight. Be patient, but get your ducks in order now and establish your IP rights, or you might not be able to do it later.”
Some law firms, such as Paul Hastings, which has 150 attorneys throughout China, rely on native sons and daughters to run interference. According to Korniczky, it all comes down to “knowing the culture, understanding the local markets and the pressure points that exist in local markets.”
“When you look at the patent team we have put in China, they are all born in China, all have Ph.D.s or other advanced technical degrees, and they got their legal training out of San Diego or the Silicon Valley,” he said.
Korniczky said he can relate to the economic extremes in China that may produce the urge to counterfeit a popular product.
“You go into Shanghai, you don’t know if you’re going into the future or going back in time,” he said. “There’s a huge skyscraper, and, next door, a bunch of shanties. You’re in a limo and around you are bicyclists. It’s a remarkable environment.”
San Diego Spotlight
San Diego is seen as a model in China for developing thriving life sciences/biotech clusters.
“I don’t think it’s an accident that you see these Chinese delegations coming through San Diego,” Korniczky said. “They are looking to gather information on San Diego on how they were able to grow their tech clusters.”
Many Chinese companies already are making inroads, taking on outsourced work from San Diego and other life science hubs to make drug compounds at high speed, low cost, but still high quality, said Chen.
He said he hasn’t seen any indications of industrial espionage.
“We have helped San Diego companies set up this kind of relationship,” he said, “and the provisions in the contract protect our clients.”
Opportunities abound for a mutual alliance, he said, noting that the Shanghai BioForum, scheduled for April 27-28, will feature a presentation about business opportunities by Ian Wisenberg of Biocom, a life science industry association representing more than 450 companies in San Diego and Southern California.
“It’s not just Chinese companies making products and exporting them to the U.S.,” he said, “but U.S. companies can sell products and license technology in China. More U.S. companies are coming here for research and development, employing engineers for projects, but they can do more. San Diego is very well positioned to take advantage of China because it has the biggest mobile communications market in the world, and the life science area is growing faster than other major medical markets.”
“There are opportunities to go over there and partner with those who can produce a very high-quality level of technical components, but San Diego needs to be aware of what’s happening,” he said. “They are competing head to head with some of the most advanced companies in town. Some people are shocked when they hear that. With nanotech, China has been focused on this since the early ’90s, and robotics. Most people don’t associate this with China, but it’s really busting at the seams.”
When contacted April 18, Foster was in Honolulu attending a conference of the Pacific Rim Advisory Council, an invitation-only network of 30 prominent law firms around the globe.
Foster also is a member of the San Diego Telecom Council’s international strategic initiative committee, formed to get the word out abroad about the business and investment opportunities in San Diego.
“San Diego has positioned itself, through service providers and industry organizations, getting the word out that San Diego is a great place to come if you want to do business and have access to U.S. markets and Latin America,” she said. “We’re perched on the edge, so they can serve both markets from here.”
China is getting the message, creating incentives to encourage U.S.-based companies to take their business there.
“They’re building top-grade facilities in China,” said Eddie Wang Rodriguez, who was born into extreme poverty in Hong Kong and now heads Fish & Richardson’s corporate and securities group in San Diego. He also writes about legal issues involving China, a country that can take some finessing, he said.
“Doing business in China still involves old-school politics,” Rodriguez said. “You still want to be very well connected in China. The companies that go to China and do R & D; and manufacturing have an advantage, because they are exporting work to China. As appreciation, the government will reciprocate and make introductions.”
Another mutually beneficial trend: The Chinese government, he said, also is encouraging Chinese nationals studying in the United States to return to China and form companies there, get funding by the government that would be hard to come by stateside. After they finish their early-stage work , whether in biotech, high-tech or drug development, they then return to the United States and “a lot of risk is taken off the table, and it’s more attractive to U.S. investors,” he said.
“The Chinese government will retain certain rights. It’s a great way for everyone to benefit,” Rodriguez said.