Japan debates the way ahead for patents

In recent years, IAM has tracked a gradual change in the way that Japanese companies approach the business of patents. Although the country’s tech giants own some of the world’s largest IP portfolios, many still view patents merely as legal protection, used mostly for defensive purposes, rather than as commercial assets. However, this corporate culture – which has traditionally valued consensus and eschewed litigation – is now undergoing a sea change. Financial pressures have led a handful of big names in the tech world to explore monetising their patents, including by partnering with non-practising entities (NPEs) – a tactic which would have been unthinkable just a few years ago.

So what happens next?

Some suggest that the time is now ripe to reconsider changes to Japan’s patent system, which could potentially boost the value of grants from the Japan Patent Office (JPO). The former secretary general of the cabinet secretariat’s IP strategy headquarters, Hidehiro Yokoo, explains that this trend is rooted in an effort to build a patent system which can better help Japanese companies to compete globally. “Patent infringement has been highlighted as an important theme,” Yokoo says. “It’s not as if more is better; but we find the litigation numbers are very, very small. We could attribute this to the difficulty of actually using the system.”

The government proposals focus mainly on damages and discovery in Japanese patent suits. However, so far, Japanese industry appears sceptical. As the government prepares to launch a study of NPE activity in the country, there will be plenty of public discussion as to whether more pro-patentee laws could open the door to more assertion against Japanese companies. However, even if this round of reforms founders, the IP transformation of some corporates looks set to continue, which authorities say is crucial if they are to thrive in the information economy.

This article draws on conversations on and off the record with Japanese government officials, patent owners and lawyers. It also incorporates material from a special session at the IPBC Japan event hosted by IAM in Tokyo on September 8 2016, entitled “The way ahead for IP in Japan”.

Low domestic litigation levels

That Japanese companies are hesitant to initiate patent litigation – especially against Japanese competitors – is received wisdom among practitioners. “In general, litigation is looked down upon in Japanese society,” explains Naoki Yoshida, an IP litigator with Finnegan in Tokyo. The rare case that does pop up is often seen as the exception that proves the rule. This has been the view on the most recent: a conflict between Fujifilm and Sony over magnetic tape patents. The disagreement began with a patent infringement suit filed in Japan which later spread to the United States, with plaintiff Fujifilm seeking both an inter partes review and an International Trade Commission investigation. While neither party is a stranger to asserting patents, the fact that they are taking action against each other has raised eyebrows among observers in Japan.

Shoei Imai, head of Fujifilm’s IP division, credits the company’s management with enabling it to take a more aggressive approach – not only in pursuing new lines of business beyond its historical core imaging technologies, but also in how it enforces its IP rights. Describing top executive Shigetaka Komori, Imai says: “Our CEO likes to fight… He is aggressive and has been delivering results. Our management does understand the value of intellectual property, so it’s easier for us to do some things.”

Statistics suggest that, this dispute aside, the Japanese courts remain relatively quiet, despite the country’s significant market size and the large number of grants churned out by the JPO. In 2014, the civil courts heard just 552 IP cases at first instance, while in the United States 5,010 were filed on the basis of utility patents alone (see Figure 1). China has rapidly overtaken Japan in litigation volume, with over 9,000 cases in 2014 dealing with patents, utility models and designs, despite the fact that Japan consistently granted more patents than China every year up until 2013 (see Figure 2). As the world’s biggest consumer markets, the United States and China are bound to attract a great deal of litigation. Yet even compared with a similar-sized economy such as Germany – which heard about 1,400 patent cases in 2014 – litigation activity in Japan is muted.

Figure 1. Number of IP-related lawsuits in Japan, the United States and China (first civil instance)

Source: Kazuhiro Yamaguchi, AIPPI Journal, May 2016

Figure 2. District court judgments in patent infringement lawsuits

Source: Kazuhiro Yamaguchi, AIPPI Journal, May 2016

There are several explanations for this. A 2014 survey by the JPO flagged up five key concerns: validity, win rates, low damages, high costs and cultural factors. But it would appear that some of these concerns may now be diminishing. Kazuhiro Yamaguchi recently examined the reasons for the low litigation rate in the AIPPI Journal, pointing out that the JPO’s grant rate has spiked over the past four to five years and now stands at about 70% – after previously hovering around the 50% mark. The change, which is partly down to a series of court judgments, puts the JPO on a par with the US Patent and Trademark Office. In addition, it looks as though it is becoming more difficult to invalidate a Japanese patent – the success rate for such challenges fell from 44% to just 26% between 2010 and 2014.

The Japanese courts are also perceived as a challenging forum for plaintiffs. As Yoshida explains: “The win rate is low for patentees compared to a jurisdiction like the United States. Though it has got better in recent years, at one point it was less than 10% and even now it remains well below 50%.” However, in Yamaguchi’s view, several mitigating factors make it unreasonable to conclude that Japan is unfavourable for plaintiffs based on win rates alone. He notes that taking settlements into account improves the picture significantly for patent owners, and that large companies significantly outperform their small and medium-sized peers. The cost of litigation in Japan is estimated to be just around one-seventh or one-eighth of that in the United States; although with many large Japanese tech companies under financial strain, this remains an important factor in the calculations of many executives.

Shigeharu Yoshii
CEO, IP Bridge

That leaves the various cultural explanations (and damages). Summing these up, Yoshida states: “In Japanese society in general, litigation is frowned upon… It’s looked on as fighting, which is not a good thing… There is respect for companies that negotiate.” While this is doubtless still a factor, Yamaguchi thinks that today it is often overstated. Part of the reason that he has published statistical research on low litigation levels in Japan is “to break certain stereotypes about Japanese patent holders”.

Certainly there are issues in large, diversified Japanese companies which can make litigation difficult. IP Bridge CEO Shigeharu Yoshii explains it thus: “All kinds of executives have to sign off on a legal action. The head of intellectual property might propose litigation, but the head of sales, for example, might object if the defendant is a big customer. Also, even if one business unit feels its technology has been infringed, other business units might fear they could be affected by counterassertions.”

Another chance for patent reform

Most observers agree that the biggest issue at play is the relatively low damages awards available in Japan. Even taking into account significant differences between the two countries’ court systems, a comparison with the United States shows a big gap, says Yamaguchi, with the Japanese courts awarding between 33 and 34 times less than their US counterparts on average. On aggregate, Japanese courts award about 30% of the damages requested by plaintiffs (see Table 2). Many in the industry say that this significantly limits the value of patents, despite an otherwise world-class IP system. “We value patents way too low in Japan,” argues Masanobu Katoh, a former Fujitsu executive, now with invention-on-demand company Xinova. “The very basic damage provision is very, very difficult to prove. There must be some way of changing this”.

Policy makers appear to agree. In 2016 the IP Strategy Headquarters of Japan’s Cabinet Secretariat released a strategic plan aimed at enabling Japanese companies to compete effectively in what it calls the fourth Industrial Revolution – a global business environment characterised by rapid innovation in various fields, including the Internet of Things, big data and artificial intelligence. It includes a package of recommended reforms to the litigation system, highlighted by changes which would boost damages awards and make it easier for plaintiffs to collect evidence, helping them both to prove infringement and to make a case for financial damages. The plan – which is now being studied by the JPO – calls for the government to reach a definite conclusion on both issues by the end of 2016.

When it comes to gathering evidence to use in litigation, the plan states that “the current system is distinctly biased in favour of the alleged infringer”. Yoshida agrees, saying that one reason why it is difficult to assert patents is that “the current Japanese system has no effective means to find out how products are being made”. He argues that, if adopted, the proposed changes would be relatively modest, but would still make life easier for patent owners. The headquarters also notes that previous rounds of reform aimed to increase damages to the point where they no longer “inescapably incentivise infringement”, but they have “still not proven to be sufficient”. The document calls for standard royalty rates to be used as a minimum guaranteed level of damages and recommends making it easier for winning parties to claim legal fees from their opponents.

The ball is thus in the JPO’s court.

The commissionership tends to be one of the last steps on the career ladder for senior bureaucrats from the Ministry of Economy, Trade and Industry, who typically stay on for a year or so before retirement. This means that they seldom have an extensive background in intellectual property. However, the current commissioner, Yoshinori Komiya, is a little different. He was an executive with the Innovation Network Corporation of Japan when it set up IP Bridge – a sovereign patent fund operator which works with Japanese companies to monetise their under-utilised patent assets, including through licensing and litigation. IP Bridge’s founding CEO explains the key role played by Komiya in the company’s formation: “He was one of the Ministry of Economy, Trade and Industry officials who was very interested in intellectual property, and he worked very hard on the IP Bridge project. He negotiated with government officials who were against the idea of setting up IP Bridge and he worked to persuade them.”

If patent reform proposals are to be advanced during Komiya’s tenure as commissioner, it may require significant persuasion among the corporate community. In a conversation with IAM on the sidelines of IPBC Japan (see boxout), Komiya suggested that there are significant concerns about any changes to damages and discovery among the private sector: “To be frank, there are various views when it comes to litigation. There are objections by industry in Japan to certain proposals.” Those non-starters, Komiya notes, include mainstays of the US system such as treble damages, which some have called to be implemented in Japan. In terms of the proposals for increased damages and easier evidence collection, Komiya suggests that “the views on these topics are quite wide. Given that, the subcommittee’s role will be to capture all these views”.

Objections from industry

The big question is how Japan Inc will respond to these proposals. “There just wasn’t much support from the industry in Japan to carry out those reforms,” explains the IP manager of an electronics company, recalling a similar effort by the government about four years ago. “In Japan, the court can make the defence produce documents already and we think the Japanese courts can decide the proper amount of damages.” Yoshida points out that while the proposals are generating active discussion in Japan, “I don’t know whether they’re actually going to see the light of day; I’m a little sceptical”.

Indeed, the best tactic for discrediting the Cabinet Office’s proposed reforms would likely be to suggest that Japan’s patent system is moving closer to the US system. Although Japanese companies own some of the largest US patent portfolios, they are more often than not defendants. As with a subset of US tech companies, the majority view in Japan tends to be that recent US reforms have had a positive effect when it comes to restoring balance. “In terms of the US rebalance, we think its impact is limited to low-quality patents,” says Sony’s general manager for IP risk management, Motoyuki Koike, adding that Sony has made great use of the inter partes review system. Indeed, for many Japanese companies, the United States is mainly a business threat, in patent terms – they would prefer not to have an equally significant business threat in their crucial home market.

Hidero Yokoo
Former secretary general, IP strategy headquarters, Cabinet Secretariat

However, there is also a sense that, despite the IP risks of the US market, the high level of both legal and commercial activity lends its companies and professionals a dynamism that makes them more competitive globally. Presently based in the United States, Yuichiro Kawamura, senior vice president of Honda Patents & Technologies North America, tells fellow Japanese IP executives that it does have its charms: “I’m not here to say everything is great about the United States, but I will say it is very exciting. There’s a lot to learn about how money moves around and how business is developed.” He concedes that the pendulum swings of the US experience require careful monitoring, but believes that this engenders a lot of creative problem solving and mobility in the market. At the end of the day, he admits: “I don’t want Japan to be like that, but it’s interesting to watch – and Japan is moving in the right direction”.

As Komiya implied in his comments to IAM, the current proposals on the table are far more modest than the US status quo. On the whole, Kenichi Nagasawa, a leading conservative voice in Japan’s IP establishment, seems to agree: “The programme is well balanced; that is the overall evaluation. But for the details, we want to have an in-depth dialogue.”

However, some doubts about the proposals for strengthening patent enforcement seem to be motivated by the suspicion that Japan’s patent power is on the wane. A comparison of the patent ownership in the 4G standard with that in 5G reveals that the ratio of Japanese ownership is much lower in the latter. Nagasawa chalks the trend up to financial pressures on Japanese companies which have led them to cut back on investment in areas including patents. It is feared that this practice could leave local corporates more vulnerable to assertions of standard-essential patents. Assets sold to third parties by cash-strapped companies, he cautions, could end up in the hands of “patent trolls in developing countries”.

Kenichi Nagasawa
Managing executive officer and group executive, corporate IP and legal headquarters, Canon Inc

NPE fears

As in the United States, concerns about NPE activity in Japan dominate much of the debate over patent reform – despite the fact that there is little NPE activity before Japanese courts. “The whole idea behind the reforms is to make the system more pro-patentee,” explains Yoshida, “but as in the United States, many companies don’t want a pro-patentee system because they are so worried about NPEs coming after them”.

There is just one reference to patent assertion entities (PAEs) in the Cabinet’s reform proposal. The document notes that the right to exclude is a crucial element of patents and that restricting the availability of injunctions could severely burden licensing and other ways of recouping R&D expenses. “Such restrictions should be the exception rather than the rule,” it continues. “Even in the case of standard-essential patents and PAEs, it is essential that such restrictions not be implemented uniformly, but be handled on a case-by-case basis.”

However, on September 30 2016 press reports announced that the Ministry of Economy, Trade and Industry would undertake a study of the NPE sector with a view to regulating it within Japan. Driven by the perception that NPEs are expanding their operations beyond the US market, a panel of lawyers, academics and other industry voices reportedly convened in October. As the group studies the NPE landscape, it is likely to find that litigation activity in Japan itself is limited and the few foreign NPEs with a significant presence are mostly partnering with Japanese industry.

It is certainly true that Japanese companies have been affected by PAE assertion in the United States. Sony was ranked as one of the top 10 targets of NPE litigation in the most recent annual report on the subject released by Lex Machina and has been on the receiving end of 21 such campaigns. In terms of NPE litigation in Japan itself, there are just a few examples. European PAEs IPCom GmBH and High Point SARL asserted patents bought from Bosch and AT&T respectively against Japanese telecoms, although both cases were dismissed in 2014. Acacia Research subsidiary Adaptix sued Huawei in the Tokyo District Court; that case, along with US litigation, was settled in 2014.

In fact, apart from nuisance litigation in the United States, significant NPE activity is geared towards partnering with Japanese companies to help them earn revenue from underutilised patents. WiLAN has been one of the most successful, partnering with companies including Panasonic, Funai and Rohm in privateering-style arrangements. While Acacia sued Huawei in Japan, it has not done so against domestic players, although it has partnered with Renesas Electronics and other local semiconductor companies.

A small number of home-grown NPEs have cropped up as well. Nagoya-based ADC Technologies, founded by a Japanese patent attorney, has targeted the likes of Sony and Softbank in Japanese courts. It last filed a US case in 2012 against Kyocera. Semiconductor Energy Laboratories has a business model based on licensing patents which it has generated through its own R&D – it claims to own 9,800, mostly in the United States and Japan. The company does not have a large litigation footprint and distinguishes its so-called ‘agricultural’ business model from the ‘hunting’ business model of buying and asserting third-party patents.

Any study of NPE activity in Japan has to consider IP Bridge. Currently considered a sovereign patent fund, its CEO says that the company is moving steadily towards privatisation. “From the beginning, our plan was to become private after five to seven years,” Yoshii explains. “Starting with government support was one reason we are running the business successfully; but gradually as companies understand us more, we’ll be able to get them as clients in the future without government endorsement.” If and when that day comes, Japan will have a home-grown NPE with a very significant patent portfolio whose principal work has been in support of domestic industry.

Yuichiro Kawamura
Senior vice president, Honda Patents & Technologies North America

Looking overseas

If concerns about potential NPE activity do scuttle even modest reforms to Japan’s patent system, the transformation of its corporates will still continue apace. There is still plenty of room for improvement, observes Yokoo – particularly when it comes to how internal IP functions are run: “It appears that IP-related matters have been contained within immediate circles. Nagasawa is part of management and that situation is ideal, but it is not replicated within enough companies.”

There is also a real question about the future of Japanese patents. Local companies are under immense pressure to trim their portfolios, which they might increasingly do at home. Foreign companies are already making this calculation. A Korean corporate head of intellectual property told me that when his company decides to file a patent abroad, it automatically files in the United States, Europe and China. Japan was the fourth country on that list until recently.

The same cost pressures which will motivate further pruning of patent portfolios are likely to drive more Japanese companies to continue to pursue patent monetisation opportunities. Working with an external partner – whether a foreign NPE or an entity such as IP Bridge – is likely to remain one of the dominant methods of doing this, which means that US patents, and potentially US litigation, will still be at the centre of these efforts.

Authorities also seem to realise that China could become a potentially important country for offshore patent enforcement by and against Japanese companies. In June the JPO announced the country’s first insurance programme to cover IP litigation costs – the only country mentioned by name in the press release was China, where it was said there is a growing tendency for Japanese SMEs to become embroiled in IP disputes. The insurance appears to cover costs for both plaintiffs and defendants. China is quite plaintiff friendly (even for foreign companies), offers stronger remedies than Japan and has not seen much activity by the foreign NPEs which have vexed Japanese companies elsewhere. While this is an attractive combination, Japanese companies have so far been cautious about pursuing actions there, partly because of fears of political bias.

Whether in Japan or elsewhere, Yokoo says that for Japanese companies of all sizes, gaining experience in all phases of IP enforcement – including court battles – is important for the future development of the country’s tech industry. “We want to have a good balance between defendant and plaintiff; we want a rebalance of the entire system so that we can deliver on the rightful value of intellectual property,” explains Yokoo. “Japanese companies, especially our small and medium-sized enterprises, will have to become more accustomed to litigation to face the globalised environment and compete in the global arena.”

A conversation with Japan Patent Officer Commissioner Yoshinori Komiya

Yoshinori Komiya became commissioner of the Japan Patent Office (JPO) in June 2016. Before this he worked in the Cabinet Office, having previously been co-chief operating officer of the Innovation Network of Japan. Between 2001 and 2004, he was director of the IP Policy Office of the Economic and Industrial Policy Bureau. At IAM’s IPBC Japan in September 2016, he sat down to talk with Asia-Pacific editor Jacob Schindler.

Jacob Schindler (JS): You have worked in intellectual property on and off going back to 2001. What has changed the most about the Japanese IP environment in these 15 years?

Yoshinori Komiya (YK): Yes – between 2001 and 2004, I served as director of the IP Policy Office of the Economic and Industrial Policy Bureau within the Ministry of Economy, Trade and Industry. Also during this period, we collaborated with the JPO to examine issues of IP strategy. During the tenure of Prime Minister Koizumi, we drew up the IP Basic Act, and since then, after 12 years, I feel like I have returned to a home near to my heart. The situation has certainly changed during that time. In the past there was an extremely long waiting list and the wait for a granted patent in Japan was up to two years. We did away with various administrative measures and now the average is one year or less… It’s a completely different world.

JS: I have been told you were instrumental in setting up IP Bridge during your tenure with the Innovation Network Corporation of Japan. Why was the project so important to you?

YK: In July 2013 we made the decision to invest in IP Bridge. Back then, Japanese companies were deploying vast R&D funds and investment, and had accumulated enormous patent portfolios. But the proportion of sleeping patents was high. These were not being effectively used by the entities that developed them. Further, because of the evolution and integration of certain businesses, the sale of patents to overseas markets was increasing. To prevent the outflow of patents from Japan, we looked to aggregate them and use them, for example, to support domestic small and medium-sized enterprises. The aim was to aggregate these patents not used by the companies that developed them. We drafted the idea for IP Bridge also to utilise the know-how of company engineers, so that we could offer patents together and avoid the outflow of this knowledge. So this is the history that led to the decision to invest in IP Bridge.

JS: In recent years, patent applications to the JPO have decreased. Do you see this as a cause for concern?

YK: On the one hand, filings to the JPO are on a declining trend. But with the globalisation of Japanese companies, overseas patent filings generated in Japan are increasing, including applications through the Patent Cooperation Treaty. Another factor is the ballooning expenses incurred by those companies which are filing more overseas patents – because of these costs, only truly critical applications will be pursued. So companies are becoming more selective and focused when it comes to obtaining patents and that makes the overall environment more sound. Further, looking at the yearly trend since 2009, the trend is towards a fading or tapering off of applications. Registrations, on the other hand, are staying approximately level. The way we analyse it is by looking at the proportion of registrations to filings. So the registration rate is bucking that trend.

JS: You mentioned in your inaugural speech that Japanese industry is in a “transition state” and that companies are moving towards “creating revenues by assigning and licensing IP rights”. Are there steps the JPO can take to assist in this transition?

YK: What I’d like to do is touch on how we perceive the monetisation of IP rights. The patent right is the outcome, or deliverable, of technological development. It is also essential for companies to engage in the management of that right. It is a foundation or a wall which companies build to protect themselves from imitation of their products. I do not believe it is significant in and of itself that IP rights be traded in the marketplace. However, selling or trading IP assets together with business activity is a natural course. In recent times, we have seen M&A activity and separation of certain business divisions lead to rapid changes, and valuation and the trading of IP rights are progressing. If you look at the macroeconomic trends, Japanese companies are becoming more globalised – and the licensing income returned to Japan is increasing. The origin of much of this income is from overseas subsidiaries set up by Japanese companies. The increase in licensing fee income is actually a result of this trend.

JS: We heard from Secretary General Setsuo Iuchi of the IP Strategy Headquarters this morning that patent litigation levels in Japan are ticking upwards, but remain relatively low. I understand that the JPO is studying the issue as well – do you expect to introduce proposals for litigation reform?

YK: Our intention this year is to act based on the findings of the IP Promotion Plan 2016. We will look to set up a sub-committee to deliberate on potential measures of IP reforms going forward. To be frank, there are various views when it comes to litigation. There are objections by industry in Japan to certain proposals. For example, some of the experts stress the importance of emulating the system in the United States, where litigants can obtain triple damages in cases of wilful infringement. However, Japanese industry claims that this concept will not be well received in Japan. Industries in Japan are also claiming the importance of re-examinations and administrative proceedings. Other views include scholars who say we should be examining criminal law to enhance the severity of penalties or that there should be certified means for calculating damage amounts and preserving evidence. The views on these topics are quite wide. Given that, the sub-committee’s role will be to capture all these views.