IP climate change in Asia
Over recent years, many Asian countries have moved from developing status to become large-world economies. This has had a significant impact on the way that IP is viewed and used in the region
During the latter part of the 20th century, few Asian nations had robust laws, regulations and court systems in place to encourage the promotion and protection of IP rights. As these economies sought to develop their socioeconomic infrastructures, increase their global competitiveness and elevate the wellbeing of their people, intellectual property took a back seat, as did its currency value.
As living standards improved and various government and non-government organisations (eg, the Office of the US Trade Representative, through its annual Special 301 Report on IP issues) sought to educate those countries as to the importance of intellectual property for economic development, local businesses and entrepreneurs began to drive the value of intellectual property. Consequently, the perceived economic importance of intellectual property increased and local innovation became more central to these countries’ economies during the early 2000s. As a result, these economies are becoming more competitive with Western nations and with Japan when it comes to IP creation and protection. Subsequently, the number of IP transactions has increased and the currency value of intellectual property has grown. The IP climate in Asia is indeed heating up.
The snapshot of today’s IP climate in Asia is illustrated by the heatmap in Table 1. The areas marked hot (ie, red) indicate the prominence of a particular factor, while cold (ie, blue) areas indicate that there is still progress to be made. We used the US IP climate in the first row as a reference and selected several representative countries for the heatmap and for this discussion. Other countries – in particular, Indonesia, Malaysia and Vietnam – are steadily increasing their presence on the Asia IP climate map, but their temperature is still lower than that of the countries selected.
Table 1. Asia IP heatmap 2016
As we updated the heatmap for publication in this article, we realised that the temperature of some areas needed to be increased – the IP climate in Asia is warming up at a faster pace than anticipated. However, these changes are not occurring at the same speed in all Asian countries. We attempt to explain the reasons behind these differences and predict how the heat map will change in the next few years.
Quality of intellectual property by country
The volume of patents produced by countries in Asia, in particular China, has soared in recent years. A closer look at patent application filing trends (Figure 1) reveals that Chinese patent filings have been rising, representing the bulk of Asian IP growth. At the same time, Japanese filings have fallen over the past 10 years. South Korea, Taiwan and Singapore filings remain steady. Although India, Vietnam and Malaysia have demonstrated growth, this has come mainly from increased filings by foreign entities.
However, there are issues with patent quality in these countries and questions over whether patents produced in Asia could reach similar IP currency value as US patents. This in turn poses the question of whether Asian patents could ever generate similar royalty revenues to US assets or achieve comparable damages in litigation proceedings.
The Chinese government is encouraging increased innovation and the filing of more patents, which has led to an exponential increase in filings in China. However, as Dick Thurston – former senior vice president and general counsel at Taiwan Semiconductor – points out, until IP courts in China are prepared to award damages at a higher level than is currently the case and eventually at levels comparable to those in the United States or Germany, the economic importance of Chinese patents will remain relatively low.
However, the Chinese government has been revising its IP strategy in recent years. It has invested huge sums in patent portfolio development – although it is no longer willing or able to continue such investments due to deteriorating economic conditions. Chinese government agencies are reportedly requesting businesses and academics to monetise their portfolios. This strategy shift will likely improve the quality of intellectual property and its valuation for indigenous patent holders.
Foreign holders of Chinese patents may still be disappointed in the lower IP valuations, since China’s courts and administrative agencies will continue to operate under different legal and administrative standards for some time. The resulting environment for asserting economic valuation will prove difficult compared to the valuations available in Western courts. Similarly, local businesses will earn little profit from their infringing actions, so the courts and agencies will likely be keen to take that into consideration.
Figure 1A. Trends in patent applications filed in the top 3 countries in Asia
Figure 1B. Trends in patent applications filed in selected other countries in Asia
In South Korea, Dongsuk Bae – executive director at Intellectual Discovery – suggests that the majority of patents filed have been generated by large international corporations, such as Samsung, LGE, Hyundai and SK hynix. Because a significant share of corporate revenue comes from sales in the United States, Europe and China, these large corporations must protect their business by obtaining quality patents granted in these countries. Large corporations involved in litigation outside Korea (primarily in the United States and Europe) must develop quality patents filed in these regions. At times, these large Korean corporations must purchase quality patents for the purpose of making counterclaims in litigation.
Small and medium-sized enterprises (SMEs) which file in South Korea do not have the same incentives as international corporations to develop quality patents, as there is so little litigation between domestic companies. However, local companies are increasingly becoming targets of litigation by foreign entities. Patent aggregation funds (eg, Intellectual Discovery and Korean Development Bank Infra IP Capital) purchase patents in order to protect Korean SMEs and to participate in the patent monetisation market.
On other hand, government-funded Korean R&D centres and universities – including the Electronics Technology Research Institute and the Korean Institute Science Technology – which have filed mostly in the United States, the European Union and China have tried to monetise their portfolios and will likely continue to do so in the future. Similarly, in Taiwan, Industrial Technology Research Institute has been selling its patents and portfolios for some time and has initiated contingency litigation in the United States against possible US infringers.
Large Japanese companies are still active in filing patents around the world. However, Hideyuki Ogata – executive vice president and chief IP officer at IP Bridge – points out that the countries in which they file are gradually changing. While much of their filing activity was previously centred in Japan, over the past five to eight years Japanese companies have shifted their filings to other countries. Germany, China and developing countries have become areas of increased focus in Japanese companies’ IP filings, while filings in the United States remain at the same level. This filing attitude is economically reasonable, considering the importance of patents in each of these countries. Consequently, Japanese companies have amassed a considerable patent stock. Although the quality of Japanese inventions is high and consistently improving, the prosecution quality of Japanese patents outside of Japan frequently is not. As a result, the quality of Japanese patents granted in other Asian countries may not be on par with that of patents granted in Japan or in the United States.
Japanese SMEs, universities and public R&D institutions file many patents in Japan, but not in other countries – usually due to budgetary constraints. IP Bridge tries to support these entities in commercialising their technologies (Figure 2).
Figure 2. Business model of IP Bridge Inc
Entity |
IP Bridge, Inc and Godo Kaisha IP Bridge1 |
Business |
Innovation (create and develop new business), licensing and defence |
Capital/fund |
|
*INCJ: Capitalised by the Japanese government and 26 Japanese private corporations
Corporate readiness to buy and sell
The climate appears to be better for most Asian corporations to sell rather than to buy IP assets, but the reasons for this preference vary between countries.
Japanese corporations have been generating an extremely high number of inventions – although until recently they have been considered only for defensive purposes. Japanese semiconductor companies have been relying on these patents in cross-licence negotiations with foreign international corporations. In the mid-2000s, a downturn in the semiconductor industry and the emergence of competitors in many high-tech industries from other Asian countries forced Japanese companies to look at patents for monetisation as a means to increase the profitability of their R&D operations. One of the most active Japanese companies to sell patents was Panasonic, which sold more than 4,000 patents to various buyers between 2011 and 2015, as explained by Hideyuki Ogata. Despite the number of valuable portfolios which have been monetised by Japanese corporations in the last five years, many high-value assets are still ripe for monetisation.
Many Japanese companies are still reluctant to make deals with foreign non-practising entities (NPEs) for fear that their assets might be used against other Japanese companies or clients. However, as US-based IP licensing companies’ business models evolve into partnership-based engagements, more Japanese companies are willing to make deals with IP licensing companies. The first Japanese IP aggregation fund, IP Bridge, was established in July 2013 to provide an alternative monetisation channel for Japanese companies and at the same time to provide a defensive capability for other entities.
While economic pressure has been a primary reason for Japanese companies to sell their patents, large South Korean corporations in the information communications technology sector – in particular Samsung and LGE – have become licensees and targets of litigation since the early 2000s, when their share of the global mobile communications market grew. This international economic success created an urgent need to develop and acquire quality patents in order to strengthen Korean companies’ defensive positions in the United States and other markets.
As Bae observes, although the momentum for the purchase of large quantities of patents by large corporations in South Korea is losing steam, there are still opportunities for significant IP transactions. Many government-funded R&D centres and private universities are embracing the idea of selling their patents and transferring their technologies. Access to funding in the IP space is also developing rapidly. One of the most prominent firms in South Korea for buying and selling patents is Intellectual Discovery, which was established in September 2010. The firm anticipates allocating $500 million in funding across the IP space for the next five years in order to purchase more than 1,000 US patents and to invest in Korean SMEs and venture companies (Figure 3).
“Although the momentum for the purchase of large quantities of patents by large corporations in South Korea is losing steam, there are still opportunities for significant IP transactions”
Figure 3. Business model of Intellectual Discovery Group
Taiwanese and Chinese corporations are both actively buying and selling patent portfolios. Board members and senior executives – as well as government officials – are applying increased pressure on portfolio owners to show an increased revenue stream from their IP investments. Additionally, companies that have suffered repeated litigation challenges from Western and Japanese competitors are targeting patents which might help to plug holes in their portfolios and be used to counter infringement threats from competitors. The most active buyers are firms that look for US and European patents to strengthen their offensive and defensive positions as they enter these markets.
Subsequently, the role of patent brokers and intermediaries in these transactions is growing. Although many Asian companies initially sought to make such acquisitions directly, today – for many reasons, including anonymity – they are seeking third-party assistance in making strategic acquisitions.
Licensing and litigation
In Asia, more than in other regions, it is important to distinguish between licensing or litigation involving domestic companies and that involving foreign companies. Cultural conventions, national protectionism and the strong role of government are the main underlying reasons for these differences.
The IP court system in Japan is not set up to deal with litigation between domestic companies. This results in a small number of patent infringement cases in Japan – around 200 a year. IP licensing transactions between Japanese companies do exist, but most are cross-licence arrangements designed to protect their business.
In South Korea, while SMEs are willing to take each other to court for patent infringement, large domestic companies with an international market share avoid suing each other for patent infringement. To date, a district court decision to award about $10 million in a dispute involving the two largest players in the water purification manufacturing industry is the highest damages award issued in litigation between domestic companies.
In Taiwan, the climate for domestic and foreign licensing and litigation is very different. Domestic infringement litigation has been on the rise over the past decade. Since the Taiwan Special IP Court was established on July 1 2008, it has maintained a heavy caseload. IP litigation has increased not just for patent infringement, but more frequently (and importantly) for trade secret misappropriation as laws and court policy have changed dramatically.
For now, the number of cases involving foreign plaintiffs or defendants in China is still relatively low and damages awards granted by Chinese courts are also low compared to US standards. Protectionism may benefit the Chinese IP industry for the time being; but as competition between domestic and foreign companies intensifies, the quality of domestic intellectual property will inevitably rise and the litigation playing field for both Chinese and foreign companies will have to level.
Enablers and barriers to IP growth and deal making in Asia
Judicial systems
The judicial system plays a key role in either enabling or impeding IP transactions, as has been from the US experience – in particular, the introduction of the America Invents Act reforms.
Asian countries have revamped their judicial systems over the last 10 years. The aforementioned Special IP Court in Taiwan was established to handle first and second-instance actions for the protection of IP rights and interests under Taiwan’s patent, trademark, copyright, optical disk and trade secret laws and regulations. The court has maintained a consistently heavy caseload since then, averaging over 500 new cases a year for first-instance actions and 200 new cases for second-instance actions. In China, three specialised patent courts were instituted in 2014.
Ogata agrees that the Japanese judicial system lags behind those of the United States and Germany, and the Japanese courts are still quite conservative with respect to IP transactions, licensing and litigations. Damages awarded for patent infringement are low compared to those in the United States. In addition, it is difficult for patentees to collect evidence proving infringement and damages.
In 2015 the Japanese government established special committees to revamp the judicial system and educate management in Japanese enterprises, especially SMEs. However, significant obstacles are in the way of a complete system overhaul and it will take time for the changes in the Japanese judicial system to take effect. In particular, many large Japanese companies are reluctant to embrace new pro-patent policies for fear that these might open the door to NPEs which could establish themselves in Japan.
Government incentives
Governments play a significant role in some Asian countries by protecting domestic industries, providing incentives for building IP portfolios, contributing funding to some IP entities or creating IP-based financing schemes.
Singapore’s government, for example, provides tax incentives to encourage foreign companies to conduct IP transactions and establish R&D centres in the country. In early 2014 it launched an IP-based financing system that provides companies incorporated in Singapore with access to loans by using their granted patents as collateral. Businesses that apply for a loan must appoint an IP valuation expert to determine the value of their patents.
In Japan, the government contributes to the Innovation Network Corporation of Japan, together with 26 other Japanese private corporations which provide capital and funds to IP Bridge (Figure 2).
In South Korea, local companies can take advantage of government-backed IP sovereign funds such as Intellectual Discovery (Figure 3). Korean companies can buy a licence from Intellectual Discovery by paying a relatively low royalty in connection with each industry’s IP pool. If international disputes occur, the companies can lease the appropriate intellectual property from the IP pool by paying a reasonable usage fee.
Previously, the Chinese government provided significant incentives for domestic companies to grow their patent portfolios by:
- underwriting innovation and invention;
- subsidising patent prosecution fees and filing fees outside China; and
- underwriting some litigation expenses, including encouraging local lawyers to take cases on an alternate fee structure basis.
However, this environment has changed as the Chinese economy continues to falter. Now the Chinese government has limited its support for IP filing and instead refocused support on patent monetisation and funding defensive litigations.
Innovative IP business models
Asian non-practising entities (NPEs) have only recently emerged in Asia compared to the United States, starting in South Korea with Intellectual Discovery and IP Cube Partners in 2010. IP Bridge in Japan followed in 2013 and Zhigu in China in 2014. While these companies have adopted distinct business models which reflect the specific IP environment in each country, they all have some form of government backing and use a mix of government funding and investments from big corporations to acquire and monetise their intellectual property. The prime mission of these companies is to support domestic businesses by providing defence from foreign entities and to help commercialise their intellectual property.
Japan – IP Bridge Inc (Figure 2)
Established in July 2013, the company is funded by corporate investors such as Panasonic and Mitsui Corp, and by the Innovation Network Corporation of Japan – a partnership between the Japanese government and 26 major corporations. Returns are provided by the distribution of IP Bridge revenues, which come from three sources:
- service fees from consulting services to enterprises;
- capital gains from joint business development based on intellectual property; and
- licensing fees and/or damage awards from licensing and litigation.
IP Bridge uses these investments to purchase dormant and under-utilised high-quality intellectual property owned by enterprises, whether Japanese or non-Japanese, and licenses this to implementers around the world in order to ensure that it provides patent owners and investors with sufficient returns. In addition to this straight licensing business, there is a defensive business: if it finds some intellectual property which adversely affects operating companies, IP Bridge organises a syndicate with these companies to purchase the intellectual property in question. This is then licensed at a reasonable royalty rate not only to syndicate member companies, but also to non-syndicated member companies, giving operating companies a valuable defensive tool. After this licensing action, IP Bridge resells the intellectual property on the secondary market.
IP Bridge charges no membership fees, making its defensive business quite different from patent aggregators such as RPX (which charges membership fees and does not resell the purchased intellectual property) and AST (which also charges membership fees and does not proactively license the purchased intellectual property).
South Korea – Intellectual Discovery Group (Figure 3)
Established in September 2010, the company consists of two subsidiary companies:
- Idea Bridge – the Korean first IP asset management company; and
- ID Ventures – the first IP-based venture capital.
While Intellectual Discovery typically sells and buys patents in the global market, the two financial arms invest their funds in Korean SMEs and venture companies. One of the distinguishable financial products works on a sale and licence-back model. The IP fund purchases patents from SME companies and licenses them to companies at the running royalty arrangement for a certain period – typically between three and five years. Companies then have the option to buy back the patents, with some premium.
Taiwan and China – MiiCs & Partners
MiiCs & Partners was originally formed in Spring 2013 as an IP consulting firm to offer a broad range of IP management and monetisation services, with its original mandate to monetise patents from Hon Hai Precision companies (commonly known as Foxconn) and also to support other companies in Taiwan and China.
MiiCs recognised that Asian companies trying to operate in a global economy would also need to participate in the IP world, but lacked the necessary experience, skills and resources.
While many Asian companies have patent filing programmes and handle occasional licence demands from third parties, they tend to focus on the situation in their own countries. Budgets, staff and knowledge tend to be based in their own countries, with foreign patent applications filed on an ad hoc basis and relying on priority filing specifications – which are frequently inadequate for proper foreign recognition. As such, companies frequently do not know how to evaluate their strengths or weaknesses – do they need to buy or sell patents and if so, which ones, for how much and from whom? Added to this is the fact that while many companies are unclear as to whether and whom they should engage for these activities, the services offered by many IP consulting companies are frequently too narrow in scope, focusing, for example, on patent monetisation, but lacking the skills and tools to evaluate and address a company’s overall IP health and needs.
Identifying this dilemma, MiiCs was formed to evaluate and perform all functions in the IP value chain. Whereas many companies broker patents or portfolios, and some even aggregate patents into ad hoc patent pools – all providing value, professionalism and expertise to their clientele – MiiCs has broadened its scope to offer a one-stop shop to teach companies how to set up and perform these activities for themselves. MiiCs could be viewed as the ultimate IP consultancy, which offers business strategy support, funding for IP development and acquisition, monetisation and litigation support under one roof.
Access to IP investment funds
Asia is at the forefront of one major area of activity in the IP market: government support for the creation of IP investment funds. Intellectual Discovery (South Korea), IP Bridge (Japan) and Zhigu’s Ruichuan IP Rights Fund (China) are prominent examples of government-backed investment funds. Other important initiatives include the work undertaken by the Singaporean government over the last few years to transform the country into a regional IP hub. Similarly, the efforts of the central, regional and local governments in China to increase IP activity far exceed anything seen in other parts of the world. Outside Asia, only France – with France Brevets – has developed anything as direct as the above-mentioned examples of government-backed IP funds in Asia.
The South Korean government’s commitment to the formation of an IP ecosystem has stimulated a number of financial institutions to become active in IP investments. In 2013 the country’s Financial Services Commission announced the formation of an IP investment fund for patent acquisition and monetisation. IP investment models include the sale and lease-back model adopted by Intellectual Discovery (Figure 3). The Korea Development Bank has also set up an IP investment fund specifically for SMEs; while the Industrial Bank of Korea has announced plans to establish an IP investment fund for investing in a wide range of intellectual property, as well as more tentative plans to collaborate with global investment banks. In addition to public IP funds, many private sector investors – such as venture capital and private equity firms – have entered the IP investment fund market.
Zarif Imam, a partner at Siskin Capital, explains that while these initiatives represent a huge step forward, the world of IP investment is still at a nascent stage across the rest of Asia, where there is no direct intervention or government support. In the United States and Europe, private and institutional investors are willing to invest in IP financing; in addition, there is an ecosystem for patent protection through litigation financing, as well as a sophisticated judiciary which understands and is willing to enforce punitive judgments. Non-government investors in Asia are still very limited in comparison. In China, the investment community finds it difficult to contemplate sinking money into intellectual property. The stock market and property have always been the top investment choices for institutional and private investors, especially in the past 20 years – an unprecedented period of economic growth. Until quite recently, even medium-sized corporations did not consider acquiring patents – they are often seen as an expense with no immediate financial benefit.
However, Imam points out that the support for and creation of these IP funds is evolving. The Chinese government has made significant changes to its IP policy. Previously, it had actively encouraged the filing of patents through cash subsidies, which led to the filing of numerous low-quality patents. Now the government has limited the support of payments to companies for IP filing and is actively funding potential litigation by companies that wish to defend their market position and assert their patents against infringers.
Chinese companies may now follow a process of applying for funds when such assertive action is necessary. The corollary of this is likely to be a rise in the number of Chinese NPEs and increased litigation in China between Chinese companies and infringers. As patent enforcement between Chinese companies increases, and as non-Chinese companies start taking a significant share of the market, patent enforcement may be seen as a barrier to entry. Consequently, companies will need to improve the quality of their intellectual property and the climate for non-government backed IP financing will likely heat up.
Future view
Ten years ago, the Asian IP heatmap would have been mostly blue in colour, with the exception of a couple hotspots, such as Japanese patent filings, Singapore’s government IP incentives and signs of warming for Chinese and Korean patent creation. Given how quickly the IP climate is heating up, we expect that countries in Asia will move further into advanced IP markets in the next three to five years.
We predict that the rate of patent filings in some countries will slow down as the focus of government support has already begun to shift towards improving IP quality and boosting the competitiveness of local companies in domestic and global markets. In Japan, we have already seen a slowdown in patent filings, although their quality and commercial value will likely increase. Notwithstanding many obstacles, it is universally recognised in Japan that a good legal system is necessary to foster innovation. While the Japanese legal regime is unlikely to change drastically, it will gradually evolve towards a more open pro-patent system.
The anticipated slowdown of Chinese economic growth and expected refocusing towards the production of goods for local consumers will force domestic companies to increase innovation. They face competition from foreign companies which currently sell high-quality differentiated products to Chinese consumers. This will likely lead to an increase in the number of licensing or litigation cases involving foreign entities – and likely an increase in the amount of damages being awarded. Government initiatives have already shifted from providing incentives for patent production to funding defensive litigations and this trend is expected to continue. The production volume of Chinese patents will in turn slow down, but the quality and commercial value will likely improve.
In South Korea, the infrastructure for IP creation and protection began to form several years ago through the introduction of institutional strategies, government initiatives and financial support. However, the growth of IP utilisation market has been relatively slow, especially where this involves licensing and litigation. This is already changing, as exemplified by recent IP disputes between the largest domestic water purification manufacturers and social media companies. Korean IP funds which were initially established to invest in domestic SMEs through IP transactions and IP aggregation are expected to invest more in IP licensing and enforcement in the near future.
SMEs, universities and research institutions are being recognised as key contributors to IP creation in Asia and receive government support towards IP creation, protection and monetisation. These entities will likely become sources of valuable intellectual property and will likely play a more significant role in IP monetisation.
Today, the majority of IP funding available to local companies is government backed and geared towards defending local companies against foreign assertions. Domestic patent aggregation companies which manage these funds have already been active. Private and institutional IP funds will eventually become more available and the new breed of Asian IP licensing companies will emerge. These local NPEs will be well positioned to raise capital in domestic financial markets and take advantage of the government incentives available predominantly to domestic companies.
The enhanced quality of IP assets in Asian countries – along with revamped legal systems and improved access to capital – will increase the value of Asian IP currency in the global IP markets. These changes will occur in each country at its own pace and will depend heavily on cultural, political and economic conditions. Asian countries are watching developments in the US and European IP landscapes and will be able to adopt good practices and learn from mistakes made elsewhere.
Action plan
Several common themes characterise the IP climate change in Asian countries:
- a slowdown in the rate of patent filing in some countries and an increase in patent quality across the board;
- the transition of the government’s role from protecting domestic businesses to enhancing global IP competitiveness; and
- a reduction in protectionism in the patent courts.
However, any entity planning to do IP business in Asia should be aware of specific cultural, economic and political conditions which will affect the rate of IP climate change in each country. The Asian IP market will remain diversified and any foreign entity will have to tailor its strategy to a specific country’s IP environment. Building an effective relationship with local companies will remain extremely important, as will the need for a local presence to keep a close temperature check on the IP climate.
International operating companies doing business in Asia should expect heightened competition from domestic and foreign companies as litigation involving foreign companies continues to increase. Operating companies should ensure that their IP assets in these countries provide adequate protection in terms of quality and product coverage.
International IP licensing companies will face competition from their Asian counterparts, which will have the advantage of access to local capital – initially government-backed and then increasingly private and institutional funds. Access to IP capital today is limited and restricted to domestic companies. This may change as more non-government IP funds become available and local financial institutions forge partnerships with foreign counterparts.
New innovative business models must be adopted by both domestic and foreign IP licensing and monetisation companies. Today, domestic patent aggregators focus on creating IP defence shields for domestic companies – in the future they may have to focus more on monetisation and assertion.