By Anthony Lin
IP Law & Business/April 2008

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When Su Xiaoxi joined the fledgling QingÂdao Refrigerator Co. fresh out of university in 1988, the enterprise was only four years into its attempt to transform a dilapidated state-run factory famous for shoddy workmanship into China's leading maker of quality home appliances. China's economy was in the early stages of opening to the West, so Qingdao's managers looked abroad for help. A few years earlier the company had signed a technology licensing agreement with Germany's Liebherr Group, a major European appliance maker better known in the United States for its line of cranes and other heavy construction equipment.

But the deal required something of an intellectual great leap, Su recalls.

"When we introduced the technologies from the German company, we had to pay it royalties," Su says. "At the time, most Chinese companies couldn't imagine paying money for something you could not see, that was invisible. But even then, we had this awareness of the value of intellectual property rights."

That awareness has stayed with the company, now known as Haier (pronounced "higher") Group. While many other Chinese companies have prospered as low-cost manufacturing contractors to multinational corporations that own both the patents and brands of the finished products, Haier has chosen to compete head-to-head with multinationals on both fronts. Its magenta-and-white logo is already ubiquitous in China and increasingly common in the U.S., where Haier has a factory in South Carolina and where its refrigerators, washing machines, and air conditioners are sold at Wal-Mart, Best Buy, Target, and other leading retailers. Though the image of Chinese-made products has taken a beating in the last year, due to several safety recalls, international marketing experts polled by Interbrand, a consulting firm, still expect a handful of Chinese firms to emerge as top global brands in the next five to ten years. Technology consultant Gartner Group highlights Haier among an elite group of Indian and Chinese companies that are stepping up investment in new product research and aggressively pushing into the global market as low-cost players.

Haier banners line the road to the company's campus-like headquarters on the outskirts of Qingdao, a coastal city 500 miles east of Beijing. (Qingdao will host sailing events for the 2008 Olympics.) Meeting with a reporter in the main office building of the sprawling complex, Su, the company's vice president and general manager of the legal affairs department, explains through an interpreter that Haier, already the fourth-largest maker of major appliances in the world, with over $14 billion in sales, aims to become as well-known and respected a brand as Samsung or General Electric.

As Haier's top lawyer, Su, 41, will play a key role in those ambitions. But he is not your typical general counsel. Indeed, though he has headed Haier's legal department since 1998, he was not even a lawyer until quite recently, having earned his undergraduate degree in Chinese language and literature. He finally acquired a law degree in 2005 from Xi'an Jiaotong University after studying evenings for three years, working full-time during the day as Haier's effective GC.

Peter Wang, a partner in the Shanghai office of Jones Day, says many Chinese companies, even some very large enterprises, still have no GC at all, placing all responsibility for legal matters in the hands of nonlawyers and outside counsel. He says the relative newness of most Chinese corporate laws means that in-house lawyers' roles are not as established as in, say, the U.S.

"In America, the general counsel can become the CEO," notes Wang. "It will be a long time before that happens in China."

But he says things are changing at two kinds of Chinese companies. On the one hand, he says, there are the "Westernized" technology and Internet companies typically headed by returnees who spent years abroad. Such CEOs, he says, self-consciously act like their U.S. counterparts and hire GCs from leading Silicon Valley or Wall Street law firms, often with an eye on a Nasdaq listing. On the other hand, there are large Chinese industrial companies that have accumulated experience as they have gradually expanded into the overseas markets. "Some companies do so much trading outside of China that they are actually very sophisticated in their in-house legal departments," says Wang, citing Haier and Shenzhen-based Huawei Technologies Co. in particular. "They've been developing for years."

Heinz Goddar, a partner at German IP boutique Boehmert & Boehmert who has represented Haier, Huawei, and Lenovo Group, says those three companies are probably China's leaders in terms of having large and sophisticated in-house legal departments, though they got there in different ways. Lenovo, for example, gained a mostly American management team after its 2005 acquisition of IBM's personal computer business, and last year named former Howrey partner Michael O'Neill its general counsel.

Haier's growing legal sophistication has developed more organically. Su first joined Haier as a research staffer in the office of Zhang Ruimin, the company's then president and current CEO. At that time, Su recalls, the company felt that it faced few pressing legal issues. Its technology came from its rock-solid licensing agreement with Liebherr, and it had straightforward and favorable arrangements with both retailers, who paid in advance for merchandise, and suppliers, who were paid only after delivering their goods to Haier.

That all changed in the 1990s, when the deal with Liebherr expired and CEO Zhang decided to forge ahead with his vision of turning Haier into a global brand. The company began to do its own research and development, and its chain of suppliers and retailers, previously entirely domestic, began to include a large number of foreign companies.

To meet the new legal needs, Su decided he had to study law himself. He was interested in the subject, but finding time to hit the books proved a struggle. Along with his full-time job, Su had a wife and young daughter by the time he began course work at Xi'an Jiaotong's Qingdao graduate school. "It was a very hard time," he recalls. "Every day I would leave the office at around 7:30, start studying at 8, and keep going until after midnight." Law is usually an undergraduate course of study in China, but, rather than take a second bachelor's degree, Su decided to study for a specialized L.L.M. in economic laws that required him to write a dissertation. Su's was entitled "Research on the Legal Liabilities of the Managers of the Subsidiaries of Enterprise Groups." In preparing his thesis, Su says he took into account actual problems that came up at Haier.

Even with his degree, Su could not handle all of Haier's new legal needs. Haier's legal department has grown from a staff of just four people in 1998 to over 40 lawyers and patent agents today. The department is notably young, with many staffers recruited directly out of university.

IP concerns occupy much of the legal department's time. The company continues to license foreign technologies from companies like Cisco Systems, Inc., Intel Corporation and Samsung Group for many products, especially new offerings like televisions, laptops, and mobile phones, but it also now operates nine research and development facilities around the world and holds 8,100 patents. The proportion of those patents that relate to invention rather than design or utility, a lower category of patent requiring few submissions in China, has grown over the years, says Su, and these invention patents now account for half of new patents each year. The company's Qingdao-based lawyers have also filed hundreds of patents in the U.S., European Union, Japan, and South Korea.

Though Haier has subsidiaries in most of those regions, IP is the responsibility of the Chinese lawyers. Audrey Rohan, general counsel for Haier America and a former corporate partner at New York's Loeb & Loeb, says the U.S. arm is an import operation that holds no patents or trademarks itself.

Su says he has pushed Haier's in-house lawyers to move from a reactive mode, in which they dealt with situations as they arose, to a more proactive stance. For instance, he says the legal department has transformed its approach to the patent procurement process. Previously, the lawyers only became involved in the patent process after the request of the R&D department. But now the company's lawyers are involved from the very beginning of the product development cycle.

"Before the development of a product, we do a very thorough search on patent infringement," he says. "During the process of development, we trace the progress, and, before the product goes to market, we do another search to make sure no IPR is infringed." Su says the legal and R&D departments now cross-train to make sure the process runs smoothly. He credits the increase in the number of invention patents in large part to these improvements.

Owing to this care, says Su, the company has yet to face a major patent infringement challenge, though smaller cases have arisen in the U.S. and Europe, as well as in China. Haier's lawyers are equally vigilant protecting their own IP. In one instance, says Su, they found that a U.S. company had contracted a Chinese firm to produce infringing copies of a wine storage unit patented by Haier. The offending companies agreed to stop before Haier brought a patent infringement suit.

Given Haier's focus on branding, trademark protection is key. The company has registered its trademark in China in 45 product categories. It is also registered in 16 product categories in 183 other countries, including the U.S.

As its brand has grown in popularity, Haier has had the rare distinction of being one of the few domestic companies targeted by China's notorious counterfeiters. Su notes that U.S. customs agents recently seized a shipment of fake Haier DVD players. The company has encountered products bearing names like "New Haier" and "Shandong Haier."

Su says Haier combats counterfeiters by training both its own staff and sales agents to spot and report fakes. The company keeps a close eye on its distribution channels, says Su, ensuring that its products are only available in China through its network of authorized retailers. As a result, counterfeiting is primarily a concern in rural areas, where that network is sparser. Haier also says the government, specifically the State Administration on Industry and Commerce, has taken strong action on Haier's behalf.

The company describes itself as a "cooperative," but it has also previously acknowledged that it remains, at least in part, a state-owned enterprise. (Subsidiaries are listed on the Shanghai and Hong Kong stock exchanges.) The Chinese government's backing of Haier was a factor in U.S. public opposition to the company's $1.2 billion attempt to acquire Maytag Corp. in 2005. Haier abandoned its bid after Whirlpool Corp. offered to pay slightly more, but Su says that Haier has not ruled out possible future U.S. acquisitions.

The company's growth overseas has brought Su into contact with many of his peers at multinationals, including the GCs at Hewlett-Packard Company, IBM Corp., Cisco, and Sanyo Electric Co. He says he often seizes the opportunity during business dealings to chat with his foreign counterparts and learn more about how they run their legal departments.

"Each company is different, and each lawyer faces different problems," he says. "But the main topic is generally how to be a good general counsel."