Investing in Your Business to Steal your IP

Our international lawyers have over the last few months have been getting way more emails and phone calls than usual from foreign companies (U.S. and European) and people telling us they’ve been scammed or seeking our assistance in determining whether they are about to get scammed. By far the most common scam we are seeing (and usually the saddest) is the “butchering the pig scam.” We are getting 4-7 requests a week for help regarding that scam!

One of the more sophisticated and costly scams we see is what we call the “investing in your business to steal your IP scam.” We see this scam maybe 4-5 times a year, mostly before they happen and mostly before the company  realizes a scam is about to take place.

In this scam, a Chinese company claims to be interested in investing in or buying a foreign company, but is actually interested in that company only so far as it can use it to steal its IP. The Chinese company usually starts out by claiming a strong interest in sending over a lot of money in return for a small ownership interest in your company. Many times, the Chinese company will talk about how its investment is not for short term profits, but to help you do an IPO from which everyone will get rich. Most of the time, the company seeking to pull this scam is a legitimate and good-sized Chinese company, often with strong government connections. With the claim of interest from the Chinese company usually comes something like the following:

Our company will become one of the owners of your U.S. entity. And since we will be co-owners of the technology underlying your product, there is no reason for you to protect the technology from us. There is no reason to enter into any sort of confidentiality agreement (like an NDA or an NNN Agreement). We do not want legal or financial hurdles to get in the way of the IPO that will make us all wealthy.

So the foreign company provides its technical information to the Chinese company it now sees as its partner and benefactor. In return, the Chinese company starts using the foreign company’s IP and never funds its alleged investment. And for good measure (and to set itself up for a force majeure defense), the Chinese company will often then blame the Chinese government for its inability to get money out of China to fund the investment.

By using this “fake investment” technique, the Chinese company has legally or quasi-legally acquired your technology while paying you little or nothing for it, and leaving you with little or nothing you can do. And it is true that foreign investment from Chinese companies must be approved by the Chinese government. So what is there to say?

On the software side, we usually see the the Chinese company offer to invest a large sum in the foreign company and propose to set up a company in China that will eventually be owned by the foreign company that is about to get scammed. It will then arrange for the software technology to be released to the Chinese entity without restriction. Why should the foreign company spend time and money licensing its software to this Chinese company that it will eventually own a large part of in any event? Oh, and this Chinese company will surely be doing an IPO very soon anyway and you will get rich from that too.

In this scheme, there are various delays in getting approval for both the investment in the foreign company and in providing for foreign ownership in the Chinese entity. After two or three years of delay, and after the Chinese company has extracted all of the technology/information it requires, it apologizes for being unable to secure Chinese government approval to invest in your company and for not being able to give you any ownership in the Chinese entity because foreign investment in Chinese domestic companies is pretty much prohibited. See China Stock Option Scam.

The end result is the Chinese company acquired foreign technology virtually free of cost and there is usually nothing the foreign company can do about that.

The best way to prevent this scam is to — if at all possible — not reveal any of your IP unless and until you have been paid enough to warrant your doing so. On top of this, whether paid or not, get a full-fledged and enforceable NNN Agreement in place with the Chinese company before any reveal.