Protecting IP while Transferring Technology to Southeast Asia

In recent years, European small and medium-sized enterprises (SMEs) have started to look to the Association of Southeast Asian Nations (ASEAN) as a key player in the investment and development of several different types of technologies across a multitude of industries. Relatively low labor costs, high skill levels, and applicability of a range of technologies owing to the diversity in the level of development makes the region an attractive destination for  European SMEs.

While accessing the lucrative Southeast Asian markets, European SMEs are often willing to transfer some of their technologies and designs to local subsidiaries of European firms, joint venture partners, or local manufacturing and service companies. One of the challenges facing European companies entering Southeast Asia is devising creative solutions to minimize the risk to their intellectual property (IP) associated with technology transfers. A technology transfer can happen in a number of different ways. European companies most commonly transfer their technology by licensing their patents, designs, software, trade secrets, and know-how. A common misconception is that a technology transfer is limited to transfers of high technology. However, many European companies using contract manufacturing to manufacture low technology, consumer, or industrial products, such as those based on product designs, must deal with the same risks to their IP as their high technology counterparts.

It is not uncommon for some unscrupulous companies in Southeast Asian countries seeking to acquire foreign technology to obtain it either through inadvertent leakage of IP, or in breach of agreements or law. Therefore, European SMEs planning to transfer technology to Southeast Asia should have robust IP strategies in place to protect their business.

First step – Secure your IP through registration

Aside from copyright, IP is administered territorially and therefore must be registered. There is no centralized system, like in Europe, through which SMEs can protect their IP regionally across ASEAN. Therefore, it is necessary to file for patents, designs, and trademarks in each individual country where the SME plans to conduct business. SMEs should also keep in mind that goods move relatively freely across borders in Southeast Asia. This could mean that a European SME might potentially discover infringements of its IP to have occurred in Laos, for instance, when in fact it only sells its products in Thailand, or has a manufacturing base in Malaysia. Given this, if budget allows, it may be sensible for the SMEs to file patents, trademarks, and designs in as many countries in the region as possible. It is also possible to register copyright in most Southeast Asian countries for additional protection, except in Singapore, Myanmar, and Brunei. 

Most Southeast Asian countries operate under the first-to-file system, meaning that the first person to file for a patent, trademark, or design will become the owner of the IP of that patent, design or trademark, irrespective of the first use. Therefore, European SMEs should register their IP as soon as possible. Having the filing (even the mere application) in place before initiating talks with a partner strengthens the SME’s position and reduces the risk that a failed discussion with a potential partner could end up with the theft of IP.

Finding your Partner – the importance of non-disclosure agreements and contracts

SMEs may not be familiar with using formal Non-Disclosure Agreements (NDA), but it is worthwhile to consider using such documents prior to entering into talks with a partner, particularly where an SME can identify specific IP or confidential information that will be disclosed during the course of discussions. Such agreements are concise, clear, and generally of standard form and easy to draft. Furthermore, business partners in Southeast Asia are becoming more familiar with agreeing to such terms. In Southeast Asia, with each country having different laws and legal systems, SMEs should seek to obtain a different NDA for each relevant country. Obtaining an NDA by no means provides a watertight case, but it certainly assists in protecting intangible assets, in particular those that cannot be registered or easily protected under local IP legislation (e.g. trade secrets such as certain technologies, formulas, production methods, etc.).

A written contract is strongly preferable to a casual arrangement or an oral agreement. Local legal advice is recommended to ensure that a strong network of agreements is put into place. It is also highly important to ensure that the translation of the contract into the local language of the jurisdiction is accurate, as many courts will use this rather than an English or other European language contract when considering evidence.

After a suitable partner has been found, the second important step is to ensure that the agreement will be enforceable in the country where the contract will be executed. Having the ability to obtain direct relief (including preliminary injunctive relief) in a local court should be a clause that is built into all licenses. This can sit alongside an arbitration clause, but in instances of trade secret theft by an employee or third party, one will want to have direct recourse to the local courts to obtain an emergency injunction, or to carry out search and seize or asset freezing orders.

Internal IP strategy and practical considerations

SMEs, as owners of IP, will no doubt be concerned about how their partners in Southeast Asia use their IP. Therefore, it is important to have one’s own internal IP management strategy in place. The following are examples of best practices to consider:

• SMEs need to ensure their partner undertakes to use confidentiality agreements/clauses in its contracts with third parties and their employees. Non-solicit and non-compete clauses in employment contracts should also be considered. Regarding employees, it is important to ensure that copyright created by the employee is assigned to the employer, since most Southeast Asian countries have laws providing for employees to own the copyright of their work.
• To spread the risk, an SME may wish to consider having certain components of their product manufactured/assembled in different countries or by different parties to help reduce the risk of IP being misappropriated.
• SMEs should have formal training documentation protected through NDA/confidentiality agreements and where necessary ensure that their partner uses NDA/confidentiality agreements.
• Valuing IP can be difficult in licensing situations. SMEs should consider minimum royalty payment clauses to protect their IP from undervaluing.
• IP owners should also ensure that they are entitled to physically visit the partner’s premises, witness their activities, and perform quality control. This will assist the SMEs in their review of the IP and improvements.
• SMEs are advised to take legal action against infringements and breaches of contract. This will ensure that the SME maximizes the monopoly rights of its IP and increases its license value.

Checklist for a Successful Business Endeavor in Southeast Asia

• Register your IP first.
• Conduct due diligence on your business partner.
• Ensure manufacturing/licensing/distribution/franchising agreement complies with the laws of the country in which you are operating; includes the terms to ensure proper use of IP, monitoring process, and quality control; includes the terms to ensure IP is registered and owned by rights holder and not by a third party (or their employees); includes terms to get out safely and ensure that the IP is not used beyond the contract term (this happens frequently with Original Equipment Manufacturer (OEM); and includes terms to ensure continuation of business after ending of the agreement. Note that in some countries licensing agreements must be recorded with the local IP office to be valid.
• Auditing of partner (by you or your authorized representative) to ensure no unauthorized use is being made.
• Watch for infringements of third parties and have a framework in agreement for the licensee’s cooperation and assistance.
• Ensure that the contract allows for local enforcement to stop the source of the IP violation, rather than first reverting to EU laws or arbitration. Also, note that Singapore is a major transshipment (unloading/reloading) point for the whole of Asia, and containers can be stopped.
• Consider arbitration (e.g. in Singapore) as a secondary means of resolving issues. Singapore has a World Intellectual Property Organization (WIPO) dispute resolution office that is ready to deal with such issues.

Key takeaways

Given Southeast Asia’s rapidly evolving economic environment that features varying levels and rates of development, it is important to have tailored strategies when it comes to technology transfer. While the region is increasingly being viewed as a single area in which to trade, it should be borne in mind that each country has its own peculiarities in terms of procedures and laws, and that each country presents its own set of risks and challenges. To ensure that SMEs are as prepared as possible, they should first conduct a review of their own IP. Subsequently, obtaining local legal advice is recommended, such as full due diligence and Southeast Asia-wide negotiations of a contract, or simply reviewing existing agreements to ensure local compliance. Finally, if there is one thing that must not be overlooked, it is the registration of IP. If an SME does not have a written contract or if it uses several partners in one jurisdiction, the fall back and underlying principles on which to enforce the IP will be the SME’s collective IP registrations. Without such precautions, the value of European SMEs’ IP may be substantially reduced.

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