NPEs head east

Few may have noticed it outside the country’s patent profession, but NPEs have arrived in China. Over the past three years, with global scrutiny fixated on the IP system at the heart of US-China tensions, licensing players big and small have found themselves embroiled in litigation before Chinese courts against both multinational and domestic manufacturers.

Several years into this trend – which sprang from developments such as the creation of specialised IP courts in 2014, Qualcomm’s antitrust settlement with the Chinese government a year later and negative NPE sentiment about US courts – and some positive results are beginning to emerge.

The nature of China’s civil law system, in which not all judgments are published, makes it difficult to gain a holistic view of patent litigation across the country. Given the complex structures and opaque practices of many patent assertion businesses, it is not always possible to identify who is operating in China – or even what Chinese business name they use.

What is more, some companies believe that there is little upside to publicising their assertion activity in the country. The complex politics between the United States and China could make things especially tricky for US businesses – although it is far from clear that geopolitical factors could damage their campaigns. In fact, some believe that the conflict means that Chinese authorities are striving to ensure the appearance of fairness in IP disputes involving foreign parties.

But while we cannot reach any valid statistical conclusions about the level of NPE activity in China, we can see several distinct types of campaign taking place. Searches through published court decisions and conversations with both corporates and lawyers in the country suggest that there is plenty of NPE activity going on beneath the surface and that this is being driven by some of the biggest names in the space, as well as relatively small players.

This article reviews several campaigns that are underway in China – some of which are revealed here for the first time – and the lessons that they appear to offer.

Seeking China leverage

Figure 1 shows that many of the NPEs active in China have chosen to target foreign firms only with their suits so far, while a handful of others have focused mainly on domestic infringers. Often, China is just one piece of a larger multi-jurisdictional licensing dispute.

Figure 1. NPEs in China – home or away

One of the most notable examples of this is the series of infringement cases that VLSI Technology LLC has brought against US chipmaker Intel. The reason that this is so significant is because VLSI was set up by Fortress Investment Group as a privateering entity to monetise patents that originated with NXP Semiconductors.

Fortress reportedly raised close to $1 billion in 2018 and has amassed thousands of patents via both the acquisition of smaller, cash-strapped NPEs and the establishment of homegrown vehicles such as VLSI. With deep patent expertise and the backing of owner Softbank, Fortress is a market bellwether whose activity in China, when revealed, showed that a Chinese assertion strategy is firmly in the mainstream.

Intel revealed the threat in a US antitrust suit against Fortress last autumn. The Chinese cases, it argued, form a crucial part of the Fortress game plan. Noting that VLSI would not be able to obtain a US injunction under eBay factors, Intel stated: “VLSI is seeking to enjoin Intel in multiple litigations in China, as leverage to coerce Intel to accept unreasonable licensing terms – including for US patents – or face the risk of having its business shut down in a major market.”

Were it not for the major antitrust suit, it is unlikely that we would know about Fortress having asserted patents in China. Until a judgment is handed down, it can be difficult to determine whether a Chinese lawsuit is taking place – and even then, not every record is published. The question certainly remains as to just how much Fortress-backed litigation not involving Intel might be occurring in China.

Xperi presents another example of a well-known NPE in the chip space – in this case, a public IP company – expanding a global litigation campaign to Chinese courts. Several months after Xperi subsidiary Tessera launched US patent claims against Samsung in September 2017, it followed up with a Beijing High Court complaint for patent infringement. Notably, the NPE was able to secure an evidence preservation order from the Chinese judge just two months after filing the case, when obtaining financial statements and other information through Chinese courts is notoriously challenging. Xperi and Samsung eventually reached a settlement less than a year after the Beijing case was filed and just a couple weeks after the China National IP Administration (CNIPA) heard Samsung’s validity challenge to the sole patent in suit.

More specialised assertion entities that do not appear to be connected to major aggregators are also getting in on the action. Dynamic Data Technologies LLC – a relatively new NPE with a portfolio of more than 100 video encoding and compression patents – filed 21 infringement complaints in the United States between 2018 and 2019. However, Chinese court records show that it withdrew infringement cases against Microsoft from the Nanjing Intermediate People’s Court in September 2019 – a few months after pulling the related US litigation.

Another NPE, Innovative Foundry Technologies (IFT) LLC, went after Taiwan Semiconductor Manufacturing Corporation (TSMC) and a number of its customers with US, German and Chinese suits before settling in October 2019. Although the company filed US complaints against Chinese TSMC clients, including Oppo, Vivo and TCL, its sole China suit targeted Cisco and a local distributor.

While IFT falls into the category of NPEs that have sued only foreign companies in China, this could simply be a product of seeking the most leverage against any given company. Chinese businesses will be much more confident operating in a Chinese legal system that foreign businesses might see as presenting significant uncertainty. The legal costs of fighting a US litigation battle could apply more pressure on a Chinese defendant than the threat of a Chinese injunction.

However, IFT’s second wave of suits has directly targeted Chinese chipmaker Semiconductor Manufacturing International Corporation. It will be instructive to see whether its US lawsuits against the company will be joined by actions in China.

Taking on Chinese firms

While a growing number of foreign NPEs have initiated Chinese litigation in recent years, only a handful have sued Chinese companies in their home courts. A number of IP executives still have serious reservations about their ability to get a fair trial against a local company under China’s Communist Party-first legal system. Some continue to point to the experience of InterDigital executives threatened with arrest in 2013.

Dragon Wang of Dunlap, Bennett & Ludwig is one of the most prominent Chinese lawyers to have built up a book of foreign NPE business. Advanced Codec Technologies (ACT) and Fractus – discussed later – are among his firm’s clients. Wang claims that a defendant’s nationality does not play into the strategies that he helps to design: “When I’m advising a client I would not distinguish between Chinese licensees and foreign licensees.”

Larger businesses, especially from the United States, may wish to avoid stirring conflict in China at a time when the political relationship between the two world powers is strained. However, NPEs are less vulnerable to retaliation in China than operating companies, and several have set out to show that the owner of a quality patent can enforce it against Chinese infringers.

IP Bridge – the patent fund operator based in Japan – was one of the first major foreign NPEs to take part in the current wave of China assertions. The firm’s June 2017 settlement with Broadcom revealed that the agreement would end lawsuits not just in the United States but also in the Beijing IP Court. One year later, a wireless SEP deal between IP Bridge and Samsung came hot on the heels of a Chinese patent lawsuit.

But at some point in 2018 the Japanese NPE also sued Huawei in China – a fact that has not previously been reported. CNIPA records attest to the conflict between the pair, showing that in April 2019 the patent office fully invalidated an IP Bridge patent on an “image encoding method” at Huawei’s request. The lawsuit was evidently part of a dispute between Huawei and MPEG-LA’s AVC patent pool; Huawei’s 2019 settlement with the licensing administrator likely ended its conflict with IP Bridge as well.

Barcelona-based antenna technology developer Fractus was perhaps the first NPE to publicly announce a campaign to assert Chinese patents against Chinese companies. In 2018 Fractus and licensing partner Vectis sued Oppo, and a few months later Vivo, in the Shanghai IP Court. The cases were a vote of confidence in Fractus’ own patent strength as well as an acknowledgement that when it comes to mobile devices, a huge portion of the addressable market is now located in China.

“Another point for us was to have a good track record of licensees in China,” Vectis CEO Giustino De Sanctis told IAM. “If you have Chinese licensees that mostly sell in China, of course they want to see that you are fair and go after everybody. Especially in a crowded, low-margin market like smartphones.”

But for all the licensing companies that have been planning and executing Chinese strategies in recent years, it was not until December 2019 that we could point to a concrete and public success – a licensing deal driven by the assertion of Chinese patents.

In June 2018 ACT – a Texas-based NPE with a small portfolio of former VoiceAge patents – brought litigation in China against Xiaomi, Oppo, Vivo and TCL. The firm, which sub-licenses the rights for its owner, Acacia unit Saint Lawrence Communications, faced a predictable response in the form of CNIPA validity challenges, but its six Chinese patent families came out virtually unscathed.

Yet before the first rights in the family began to expire in November (the last are set to run out in 2021), ACT was able to secure a settlement and licensing deal with Xiaomi. The NPE withdrew its Nanjing Intermediate People’s Court complaint in September and IAM reported that Xiaomi had made a one-time lump-sum royalty payment of around $7 million.

Xiaomi vice president of IP strategy Paul Lin points to the portfolio’s quality as the main reason why a deal was done. For one thing, he knew that the portfolio’s US component had stood up to numerous inter partes reviews from the likes of Apple in recent years. Xiaomi also observed the validity challenges brought in China by other defendants and conducted its own analysis. “We spent a lot of effort looking at the patents and came to the conclusion that it’s a high-risk portfolio,” Lin remarks. “It becomes a rational decision rather than an emotional one.”

Even with the will to make a deal on both sides, Lin says that it took some time to find an acceptable price. ACT’s starting offer was “horrendously high”, he adds: “After a year and a half of negotiation, we think we arrived at a reasonable amount… we think it’s a good deal for Xiaomi.”

A China-focused campaign

One NPE to make a particularly big bet on China was iPEL, a California-based firm run by Brian Yates and Rasheed McWilliams. The founders raised a reported $100 million and used it to buy hundreds of patents from Huawei and ZTE, promising Chinese litigation against companies that did not agree to a haggle-free licence offer. Yates struck a confident tone, predicting that the campaign would result in the country’s first damages award of $100 million or more.

Three months later, in October 2018, iPEL made good on its threats with its first round of Chinese infringement suits. The firm asserted at least 10 Chinese patents against Taiwanese electronics maker Asus in the Beijing IP Court and IP tribunals in Nanjing and Xi’an.

Chinese court records show that Asus is not the only company that iPEL has sued with its Chinese patent portfolio. Sony Interactive Entertainment – the Japanese conglomerate’s video game division – is also the subject of several patent suits in the Nanjing Intermediate People’s Court. In addition, San Jose’s Extreme Networks, a vendor of network equipment that competes with Huawei in the data centre business, has also attempted to invalidate several iPEL patents.

So far, the trial records reveal a few individual complaints against Asus and Sony having been withdrawn after patents in suit were invalidated. Other documents show defendants having attempted (unsuccessfully) to get cases moved to a different venue – a common delaying tactic. A closer look at iPEL’s CNIPA validity battles shows that the results thus far have been mixed.

While the iPEL defendants have managed to knock out five patents, the good news for the company is that with six patents fully validated by CNIPA, it has at least one confirmed patent remaining against each of its targets. What is more, there are at least four rights on which the patent office has yet to rule. The iPEL campaign remains ongoing but so far it has proven one thing: China’s top patent owners will readily do business with litigious NPEs.

Put on the defensive

Wang remains bullish about the prospects of any patent owner, regardless of its business model, successfully enforcing high-quality Chinese patents. But he also has a message for licensing businesses that are not yet making the country a part of their assertion strategies: you should be thinking about China anyway.

“If you want to initiate in China or anywhere else against a Chinese licensee,” Wang counsels, “be prepared to be countersued in China. Whether it’s antitrust, anti-unfair competition or patent invalidity, you need to be ready.”

The most prominent example comes from the ongoing dispute between Canadian NPE Conversant and Huawei. The Chinese telco responded to Conversant’s UK infringement action by proactively asking a Chinese judge in Nanjing to set a FRAND rate for Conversant’s Chinese patent portfolio. At the same time, it challenged the validity of nearly all of Conversant’s 15 Chinese patents, which originally belonged to Nokia. Table 3 summarises the results at the time of writing.

Huawei managed to fully invalidate just over half of Conversant’s portfolio through CNIPA proceedings. The Nanjing judge then ruled that six of the remaining rights were not in fact essential to the 2G, 3G or 4G standards. That left one remaining patent, on the basis of which the Nanjing court set a royalty rate for multimode devices of 0.0018% – a figure that was extremely close to Huawei’s proposed calculation during the trial.

Wang estimates that two-thirds of his NPE clients that are active in China are asserting SEPs, so the ability to show essentiality in a Chinese court will be critical to many of those campaigns. “For implementing patents there’s no big issue related to infringement if you can do good claim mapping,” Wang says. “But for SEPs, the mapping must be done between the claim and the standard, so it’s quite tricky.”

The Nanjing court was able to issue its judgment after 21 months; therefore, it resolved at first instance well before the UK case did – despite being a countersuit. This is something that other NPEs should expect to face, as it is part of a deliberate strategy by Huawei that other Chinese companies may well adopt. A Huawei expert witness who testified in the Conversant trial stated publicly that the company’s goal was to “move [SEP] lawsuits to China” in order to obtain a “China-specific licensing rate” on favourable terms. Given Huawei’s sales volumes in China and in developing markets where plaintiffs have sparse patent coverage (forcing them to rely on Chinese patent rights and their potential to restrict manufacture and export), the Chinese rate is extremely important commercially.

There are already two additional tests of this strategy to watch. Huawei has asked the Shenzhen Intermediate People’s Court to determine a FRAND rate for InterDigital’s Chinese patent portfolio at the beginning of 2019. And while it is more of a pool operator than a true NPE, Sisvel faces similar FRAND actions launched by Xiaomi and Oppo in Beijing and Guangzhou, respectively.

Reaction in China

I recently visited the headquarters of one of the Chinese defendants in a licensing campaign mentioned in this article. When I asked the head of intellectual property what he thinks about the influx of foreign NPEs suing companies such as his in Chinese courts, he asked the junior in-house counsel overseeing the defence to answer instead. The young lawyer told me that he viewed it as a positive development for the Chinese IP environment, despite the headaches that it was causing his team.

This was not too surprising an answer and in general many members of China’s IP profession share similar sentiments when it comes to NPEs that are on the more sophisticated side of the market. The willingness of major companies, including Huawei and ZTE, to sell patents to NPEs – both foreign and domestic – provides further indication of mainstream attitudes.

Chinese practitioners also generally find no differences in the ways in which Chinese courts handle NPE plaintiffs and operating company plaintiffs. At the end of 2019 the new unified IP appellate court handed down its first batch of decisions, one of which was a win to local NPE Dunjun against a Shenzhen-based router manufacturer. Dunjun acquired its patents from Huawei, but it is unclear whether the relationship between the two goes deeper than that.

One alarming recent development was the criminal extortion prosecution of a patent troll in Shanghai. In September 2019 a man named Li Xingwen was jailed for using forged licensing documents in the course of asserting a patent against a local company. However, the court acquitted him on other extortion charges stemming from cases in which he had simply asserted patents at the time of a company’s initial public offering.

Nevertheless, prosecutors in Shanghai took the rare step of protesting against the criminal court’s decision, calling the four-year sentence handed to Li lenient because it failed to punish him for the patent assertions that did not involve the forgery of documents.

The case is alarming because it shows how deceptive and dishonest practices on the part of some opportunistic bad actors in the patent market can generate a more general pushback in which the authorities seek to crack down on legitimate patent enforcement.

Professor Yang Yu of the Shanghai University of International Business and Economics says that the idea that “the choice of litigation timing can be regarded as a core element of criminal extortion” is certainly not mainstream among Chinese IP scholars. Instead, Yu described the prosecutors’ appeal as even more shocking than the original charge sheet.

As an increasing number of Chinese individuals and businesses cotton on to the commercial potential of NPE litigation, there are likely to be more controversies over NPE activity. The key thing to note will be whether a patent troll narrative is allowed to take hold in the Chinese media.

Quality is everything

There is no clear answer yet on whether the arrival of foreign NPEs in Chinese courts has been a story of success or failure. But one key lesson stands out.

China’s legal system – with its civil law structure, German patent law influences and professed fealty to China’s Communist Party – seems as far from the US system as can be imagined. Yet the key to success for patent plaintiffs in the two countries appears to be the same: validity, validity, validity.

This means that the most critical task for a prospective NPE litigant is to measure its Chinese patent quality. “You want to use the core patents that are essential to the business and have good technology embedded them,” Wang advises. While rigorous validity statistics from CNIPA are hard to come by, practitioners estimate that around 30% of challenged rights are invalidated fully.

If patents can pass that hurdle, then the most attractive aspects of the Chinese litigation system come into play, including the possibility of an injunction halting sales, manufacturing and export from China. The promise of such leverage ensures that regardless of how these early campaigns go, NPEs will continue to try to crack the market.

“Two years ago, NPEs were asking us whether Chinese patents were even enforceable,” Wang recalls. “Now all the questions are about how to go about entering China step by step.”