Jacob Schindler

Over at the China Law Blog, Dan Harris reminds readers that while macroeconomic indicators point toward slowing growth in China, some sectors continue to boom. One is technology licensing. Here’s how Harris describes the flow of work:

The Chinese government is actively encouraging Chinese companies to do more licensing of foreign technology and Chinese companies with money are doing exactly that. What started as a trickle years ago has grown into a flood. Chinese companies are seeking good technologies and good patents and they are prepared to pay what it takes to get those, and in all the hot industries, like batteries and chips and 3D printing and medical devices and artificial intelligence and IoT, just to name a few.

This is consistent with what I have also heard from foreign corporates and NPEs alike. And note that the key word is technology – not patent. If you look at China as a market for pure patent licensing deals, the level of activity is low. Almost everything that is getting done involves some sort of broader technology or know-how transfer. This phenomenon is not unique to China – in my understanding it’s the trend just about everywhere. But there are a couple of factors that may make it even more pronounced here.

One is the relative lack of assertive licensing litigation. There are plenty of Chinese companies involved in global patent disputes, but generally we are not seeing licensors come to China and hit local players with high-profile lawsuits in Beijing or Shanghai. For operating companies, that strategy entails too much risk to their core non-licensing businesses in this important market; while NPEs are understandably wary of how the government would react to aggressive licensing campaigns against China’s ‘national champions’.

But using litigation to drive a deal may not really be necessary in the first place. As Harris notes, both companies and authorities are keen to bring more foreign technology into China. That means knowledge transfers, technology licenses, source codes and joint development agreements are incentives that – in tandem with patent rights – can result in deals that create revenue for the foreign party while enhancing the Chinese company’s R&D efforts. It is also worth noting that many Chinese companies do not have mature IP functions and appreciation for patent value at the board level – including a more tangible technological element to the deal makes it much easier to get a yes from top executives.

These factors make China an especially tough market for foreign NPEs, but it is also a place for them to try out more collaborative models that are becoming more important anyway as the scale tips away from plaintiffs in US patent litigation. NPEs need to convince Chinese companies that licensing deals and tech transfers with them can boost their R&D capabilities, just like joint projects with operating companies can. Guy Proulx of Transpacific IP told me that in China: “All of the major discussions we’re in over eight or nine-figure deals involve not only significant patent portfolios, but tech transfers and applications to products.”

Some NPEs are using their IP expertise itself as an incentive they can offer Chinese tech companies that are increasingly interested in patent monetisation. Lewis Ho, a Dechert partner who represents numerous NPEs in China has observed that “some of the NPE clients are not just licensing or selling patents to the Chinese companies; they are also coaching them on how those assets can be used to maximise their valuation, such as by counselling them on how to negotiate with their competitors”.

No one is under the illusion that concluding licensing deals of any kind is anything but difficult in China. But given the growth of the tech sector, the potential is too great to ignore and that is resulting in some creative approaches. For much more on China’s patent licensing environment, look out for the article “Back in business” in the issue of IAM that hits shelves this week.