China Is the Market Rigged? The Implications for IP-based Transactions Bruce A. Lehman Chairman, International Intellectual Property Institute Senior Advisor, 1624 Capital LLC Former U.S. Undersecretary of Commerce for Intellectual Property ( )

“The United States and the Asia Pacific in 2012” Tom Donilon National Security Advisor to the President The Asia Society, New York, March 11, 2013 “Both countries face risks when it comes to protecting personal data and communications, financial transactions, critical infrastructure, or the intellectual property and trade secrets that are so vital to innovation and economic growth. It is in this last category that our concerns have moved to the forefront of our agenda… Increasingly businesses are speaking out about their serious concerns about sophisticated, targeted theft of confidential business information and proprietary technologies through sophisticated, targeted theft of confidential business information and proprietary technologies through cyber intrusions emanating from China on an unprecedented scale.”

2012 Special 301 Report A wide spectrum of U.S. rights holders reports serious obstacles to effective protection and enforcement of all forms of IPR in China… Compounding these obstacles is the troubling direction that China’s policies in the IPR area have taken recently. These policies include China’s efforts to link eligibility for government preferences to the national origin of the IPR in products. In addition, many companies are concerned that Chinese government agencies are inappropriately using market access and investment approvals as a means to compel foreign firms to license or sell their IPR to domestic Chinese entities… Many knowledge-based industries remain concerned that the Chinese government is using certain policies intended to promote “indigenous innovation” to disadvantage foreign enterprises through measures or actions that effectively coerce the transfer of IPR from foreign rights holders to domestic entities. A recent alarming increase in cases involving the theft of trade secrets in China, as well as cases of trade secret theft that occur outside China for the benefit of Chinese entities, also demonstrate that there is a systemic lack of effective protection and enforcement of IPR.

OP-ED GUEST COLUMNIST Stealing Books for the Poor YU HUA, Chinese Author March 13, 2013 BEIJING After China joined the World Trade Organization in 2001, it began to crack down on commercial presses that printed pirated books. But, the crackdown left an important loophole, as pirating simply gravitated to two locations particularly resistant to enforcement: prisons and former Communist base areas. Prisons, being under the control of the judiciary, are exempt from the oversight of the culture bureau’s inspectors. Even public security bureau’s inspectors cannot readily gain entrance. These presses, staffed by inmates who get only a small allowance for their labors, have become the most profitable in China.

Possible Strategies Be stingy with patented technology shared with Chinese partners. Consider “indirect ways” of participating in China’s infrastructure opportunities. Think about using Hong Kong as the venue for licensing agreements and other contracts if you can. Join the Party!

China has a growing internal market in patents In 2011, residents of China accounted for 79.9 % of the 526,417 patent applications filed at SIPO From 2009 through 2011, China accounted for 72.1 % of the growth in worldwide patent applications Source: WIPO World Intellectual Property Indicators 2012 China 72.1% United States 16.2% Republic of Korea 5.2% European Patent Office 2.8% India 2.7% Other 1.0% Contribution of offices to growth of Patent applications,

China Is the Market Rigged? The Implications for IP-based Transactions Bruce A. Lehman Chairman, International Intellectual Property Institute Senior Advisor, 1624 Capital LLC Former U.S. Undersecretary of Commerce for Intellectual Property ( )