In one of the most surreal business rulings in recent memory, a Chinese court ruled last month that Apple – the world’s most valuable company – did not have exclusive rights to the name of its best-selling product, iPhone. A local company that makes leather products registered the name, and is legally printing them on handbags.
Electric car maker Tesla had to settle a similar dispute, and French winery Castel had to completely rebrand after losing its own suit.
“One of the things you have to do is register your brand and translate it to Chinese,” said Edward Chatterton, a partner at DLA Piper, a law firm that deals with international intellectual property. “They became known under a Chinese language mark, but didn’t register it.”
For Israeli companies exploring the exciting new business prospects of working with China, the world’s second-largest economy and most populous country, the differences between the Chinese and Western legal systems can be intimidating, and potentially hazardous.
“Broadly speaking, I would say it is a fair legal system,” said Chatterton. “But international businesses will assume that the rules in China are the same as everywhere else in the world, but that’s not the case. You need to adapt your strategy for the Chinese market.”
To navigate those differences, Israeli companies are relying on intermediaries to help them avoid legal pitfalls that could make or break their attempts to break into the Chinese market.
“Israelis know how to work in America, how to work in Europe, but China and Israel still don’t understand each other,” said Edwards You Lyu, whose company VADI acts as a matchmaker and intermediary between Israeli and Chinese companies looking to do business together.
According to Lyu, the opportunities are vast. Where Israel is on the cutting edge of technology in fields such as clean energy, medical devices, pharmaceuticals and IT technology, Chinese companies are looking to adopt that technology as they expand.
In March, Israel and China embarked on free trade negotiations, which could double trade between the two nations, and eased visa restrictions to promote business.
“The amazing thing about what’s going on in China is that they have industries that have not been disrupted yet, and there’s a lot of technology on machine learning and sensors that is a perfect opportunity for Israeli companies,” said Eden Shochat, an equal partner at Aleph VC.
Not only that, but Israeli are increasingly looking to China as a source of investment, says Kobi Simana, CEO of IVC Research Center, which tracks investments in Israel.
“We can say that in 2015, approximately 50 Israeli high-tech fundraising rounds – worth about half a billion dollars – included Chinese investors,” Simana said. That figure, though significant, is still relatively small; it represents any rounds with at least one Chinese investor, and even so is only a small part of the 700 total fundraising rounds that raised $4.4 billion for Israeli companies that year.
“It’s a match made in heaven, because we have very good cutting edge tech with a competitive advantage, but we don’t have a local market, and it’s very hard for Israel to tap into a new market with real revenues and clients,” Simana said.
So what should Israeli companies do to ensure that their developed Intellectual Property isn’t simply plucked out of their hands? Yoav Sade, head of the China desk at the Meitar law firm in Ramat Gan, says there are several steps companies should take.
“One of the most important issues is doing due diligence of the people you work with,” he said. “The most widely seen reason for IP leakage in China is staff turnover.” In China, the turnover rate is 20 percent, next to just 12% in Israel, and employees on their way out may take valuable IP with them.
Similarly, Sade said, businesses that are building manufacturing operations in China would be well-advised to split their process between several players.
“Many foreign companies break the chain of manufacturers so that no single subcontractor will have knowledge of their entire process,” he explained.
As Apple, Tesla and Castel learned, trademark registration has to be done early, correctly, and in both English and Chinese.
Scott Thiel, also of DLA Piper, added that partnering with a local entity may help companies overcome many legal and licensing barriers.
But Lyu warns that even all the right protection can only go so far if that partner has it in for you.
“Even if you have legal protection, if you’re working with bad people, they’ll find a way,” Lyu said. “That’s why we want to make sure to vet the business people we bring to Israel.”