Patent litigation in China: protecting rights or the local economy?

In recent years patent activity has exploded in China. Since the mid-1990s, the number of patent applications filed annually with China’s State Intellectual Property Office (SIPO) has increased more than 90-fold to a total of 928,177 applications in 2014 – roughly 40% more than were filed in the United States the same year. China has also become the world leader in patent litigation, with 9,680 suits (enforcing invention, design or utility model patent rights) filed in 2012 – almost 80% more than the total number filed in the United States that year.

However, little evidence links China’s patent boom to an actual increase in innovation. Rather, the rapid growth coincides with a major government campaign designed to increase domestic patenting activity through political pressure and myriad incentives, such as cash payments and tax breaks. In contrast to US patent policy makers, who have largely worked over the past decade to rein in some of the US patent system’s excesses, the Chinese government has been hard at work encouraging patent filings and enforcement among its own citizens. These efforts – formally embodied in the China State Council’s National Intellectual Property Strategy – have the express goal of raising China’s ranking “among the advanced countries of the world in terms of the annual number of patents for inventions granted to… domestic applicants” and thereby “improv[ing] China’s capacity to create, utilize, protect and administer intellectual property” by 2020.

Although the Chinese government insists that the National IP Strategy’s goal is to “mak[e] China an innovative country”, many in the West contend that the practical impact – if not the true goal – of the policy shift is protectionism and thinly veiled piracy, rather than innovation. According to a 2010 report prepared by the US Chamber of Commerce and Global IP Centre, China’s patent reform efforts are part of a “refocus on state-industry monopolies” that is “increasingly perceived as anti-foreign” and “considered by many international technology companies to be a blueprint for technology theft on a scale the world has never seen before”. Suggestions are commonplace, even from US policy makers, that the patenting push is an attempt to whitewash and legitimise what, in essence, remains a system built on the piracy of foreign inventions.

Western complaints about China’s patent surge generally take two forms. First, many allege that Chinese patents simply crib inventions previously made elsewhere. Recent headline-grabbing patent suits filed by relatively unknown Chinese firms against high-profile foreign tech companies have added fuel to this fire. Apple has been sued for allegedly infringing Chinese patent rights that cover virtual assistant Siri, videotelephony service FaceTime and aspects of the famously sleek designs of the iPod, iPad and iPhone. Other household names – including Canon, Dell, Philips, Samsung and Sony – have been sued as well.

Second, many contend that foreign companies cannot get a fair shake in Chinese courts and it would thus be a Sisyphean endeavour for Western technology companies to engage the Chinese patent system as a means of deterring infringement there. Warnings about local protectionism, bias, corruption and impartiality – especially in China’s inland provinces – are ubiquitous and go virtually unchallenged at the highest levels of government, the legal profession and academia.

However, given how strident and commonplace such assertions are, there is surprisingly little empirical evidence to support or refute them. Despite the meteoric rise of patent activity in China – and an apparent commitment by the Chinese government to sustain that growth well into the future – Western researchers have paid little attention to the phenomenon. Data on Chinese patent enforcement, in particular, has heretofore been virtually non-existent.

In a new paper, soon to be published by Vanderbilt University, the authors of this article aim to change that. The paper presents the findings of the first large-scale empirical study of patent litigation in China. Among other things, it finds evidence that Chinese patent litigation is highly concentrated in a few large jurisdictions and has success and appeal rates that are very similar to those seen in the United States. Most importantly, it also presents evidence that contradicts conventional wisdom about China’s motivations for establishing, and efforts to implement, the National Intellectual Property Strategy. Although many suggest that China set out to create a system that would benefit domestic industry at the expense of foreign firms, we find that the system has accomplished the opposite. Contrary to conventional wisdom and high-profile anecdotes, foreign litigants in Chinese patent suits play the role of patentee more often than defendant and fare just as well in their suits as privately owned Chinese firms. Moreover, state-owned monopolies – parties that the Chinese government presumably has the greatest incentive to protect – rarely sue and, when sued, lose roughly three-quarters of the time.

On the whole, our findings suggest that the Western tech community has been too quick to write off the Chinese patent system as a rigged game. To the extent that the Chinese authorities sought to establish a protectionist system, they appear to be failing. Rather, they seem to have opened the door for foreign innovators to seek redress against local copyists. Industries that have long accused Chinese firms of idea theft may be well advised to take advantage.

Patent enforcement in China

With almost 1 million patent applications filed last year in China, it is hard to believe that the nation had no patent system until 1985. Originally passed by the National People’s Congress in 1984, the Patent Law of the People’s Republic of China has been amended three times, most recently in 2008, and is supplemented by regulations promulgated by the State Council and guidelines, measures and interpretations issued by the Supreme People’s Court. However, because China is a civil law jurisdiction, decisions of the Supreme People’s Court (and all other courts, for that matter) in individual cases have little direct effect on Chinese patent law.

Claims of infringement can be pursued and defended both judicially and administratively. In the administrative system, challenges to the validity of issued patents are handled by SIPO’s Patent Review and Adjudication Board (PRAB). In fact, because Chinese patent suits are limited to the issue of infringement, the PRAB is the sole venue of first instance for validity challenges. Allegations of infringement can also be brought to the attention of local branches of SIPO, which are authorised to “order the infringer to stop the infringing act”, but are unable to award monetary damages. If SIPO finds infringement or invalidity, its decision can be appealed to the court system, and in practice frequently is. As a result, most serious cases eventually end up in court.

With the exception of appeals from the PRAB, Chinese courts are restricted to ruling on the issue of infringement. Chinese patent suits involve relatively little discovery and proceed relatively quickly, generally reaching a decision on the merits six to 18 months after filing. In cases where infringement is shown, courts have broad power to award remedies, including damages and both pre-trial and permanent injunctions.

Judgments from lower courts can be appealed up through the Chinese court system, which consists of four levels:

• basic people’s courts, located in smaller cities and suburbs;
• intermediate people’s courts, located in major cities;
• high people’s courts, located in each province, autonomous region and directly controlled city; and
• the Supreme People’s Court, located in Beijing.

Patent suits – both infringement suits and appeals from the PRAB – generally begin in an intermediate people’s court, though infringement cases with sufficiently large amounts at stake may be filed in the first instance in a high people’s court. The Supreme Court, all high courts and most intermediate courts (76 to date) have established divisions that specialise in IP cases, including patent suits.

Our study

Although the number of patent suits filed in China has exploded in recent years, little information about Chinese patent litigation is publicly available. Chinese courts do not regularly digitise filings and orders, let alone make them publicly accessible online. Thus, those interested in collecting litigation data generally must collect hard-copy files directly from local courthouses and accumulate them for analysis.

To our knowledge, the largest existing database of Chinese court records related to IP enforcement is the China IP Litigation Analysis (CIELA) database, created by law firm Rouse. This includes all Chinese IP suits litigated to at least one decision issued by one of 50 courts with the most active IP dockets in China, as well as all PRAB challenges proceeding in parallel with those suits. Rouse generously afforded us access to CIELA data on all IP suits with a decision issued between 2006 and 2011. From this we were able to identify 471 cases involving at least one claim for (invention) patent infringement.

Figure 1. Case distribution by jurisdiction

Notes: Size of bubbles corresponds to number of cases in each location. The total number of cases displayed is 471. For case counts by location, see Table 1.

For each of these 471 patent suits, we gathered a variety of data relating to the suit’s outcome and the parties and patents involved. For each suit, we identified the case’s outcome, including whether it was appealed and, if so, whether the ruling was affirmed or reversed. For each litigating entity, we identified the location of its principal place of business, the industry in which it operates and whether it is privately or state owned. Finally, for each patent in suit, we identified the patent’s priority date, technology classifications and, for patents with international counterparts, the country in which the original application was initially filed.

Our findings

Viewing our data first across jurisdictions, we find that cases are highly concentrated in a small number of jurisdictions as depicted in Figure 1. Beijing alone is home to more than one-quarter of all patent suits in our database and the majority of cases take place in one of China’s three largest cities. As a result, only 22 of the 50 most active IP courts issued at least one patent decision per year during the period of our study.

Moreover, we find that cases are clustered by technology. As shown in Table 2, each of the three most active jurisdictions sees a disproportionately large share of patent suits involving technologies in one or more industries. The majority of all Chinese patent suits related to both information technology and pharmaceuticals are filed in Beijing. Shanghai is even more specialised, with almost 60% of all patent suits related to automotive technology. Similarly, Guangzhou plays host to half of all patent suits related to entertainment technology, a category that includes the toy industry. Patent suits in the United States, by contrast, are not nearly as clustered by industry, due in large part to permissive venue rules that draw many filings to plaintiff-friendly jurisdictions located far from the geographic areas where the industries themselves tend to be grouped.

Despite this variation, three other data points appear relatively constant across courts: success rates, appeal rates and remedies. As shown in Table 1, in eight of the 10 courts that issued at least two decisions a year, success rates were between 30% and 60%, a smaller spread than that seen among US district courts. Similarly, rates of appeal in six of the top seven jurisdictions fall between about 60% and 80% – rates that again are roughly similar to those seen in US patent suits. Moreover, as shown in Table 3, remedies are quite consistent across courts. Six of the top seven jurisdictions have an injunction grant rate of roughly 60% and 70% and a median damages award of between Rmb80,000 and Rmb150,000.

Figure 2. Litigants categorised by origin

Turning to the litigants in our cases, we find that they are diverse – both geographically and classified by industry – and yet nonetheless fare consistently well in court decisions across these classifications. First, we find that while Chinese patent cases are highly concentrated in a small number of cities, litigants are not. As shown in Figure 2, almost half of all litigants accused of infringement hail from outside the largest five jurisdictions, as do the largest share of patentees. Also, while individual industries tend to cluster in individual courts, litigants as a whole represent a diverse array of market sectors as shown below in Table 4. Although companies in the mechanical engineering industry constitute the vast majority of litigants, firms in the pharmaceutical, chemical and textile industries also make up a sizeable minority.

Moreover, as shown in Table 5, we find a substantial number of foreign entities engaged in Chinese patent enforcement. Although domestic patentees filed the overwhelming majority of suits in our database, foreign patentees initiated more than 10% of cases. In fact, foreign entities appear in our data more often as patentees than accused infringers. Foreign parties filed suit 49 times, winning 35 of them, and were sued just 29 times. By contrast, state-owned Chinese entities – often singled out as the intended beneficiary of Chinese protectionism – filed just one suit in our database. Even more surprisingly, state-owned monopolies were accused of infringement in 14 suits, 11 of which they lost.

Finally, as shown in Table 6, damages awarded in the suits in our database are surprisingly consistent across litigant types. Successful foreign patentees received a median award of Rmb100,000 in suits against private Chinese firms – exactly the same amount that private Chinese patentees receive when they sue domestic parties. Interestingly, Chinese patentees received 20% less in suits against foreign companies and 30% more in suits against state monopolies.

Figure 3. Priority filings by country

Looking next at the individual patents asserted in our database, we find them to be relatively international in origin, relatively old when asserted and disproportionately related to mechanical and chemical inventions. In addition, we see that surprisingly few faced a validity challenge. First, as shown in Figure 3, almost 30% of patents litigated in Chinese courts were issued from applications initially filed in Europe, Japan or the United States. Another 4%, although originally filed in China, were subsequently filed as Patent Cooperation Treaty applications and had foreign counterparts issued from patent offices located elsewhere in the world.

Figure 4. Patent age at time of litigation

We also observe that litigated patents were, on the whole, roughly middle-aged, with a similar age distribution among patents asserted by both foreign and domestic patentees. As shown in Figure 4, only about 10% of patents litigated in Chinese courts were asserted within five years of their priority date. Approximately 42%, by contrast, were filed more than a decade before they were enforced in court.

In addition, we find that, consistent with the industry distribution reported above, patents by both foreign and domestic parties mostly cover inventions related to the mechanical and chemical arts. By comparison, US patent suits predominantly involve electrical and computer-related technology.

Lastly, we find that a surprisingly small number of asserted patents faced a parallel validity challenge. As shown in Table 7, overall less than 14% of patents were challenged in a PRAB proceeding. By contrast, virtually every patent asserted in the United States faces a validity challenge in court. Even relative to other jurisdictions that bifurcate considerations of validity and infringement – a procedural choice that correlates to fewer validity challenges – this is a relatively low rate of challenge.

Figure 5. Litigated patents by technology

Our analysis

Overall, what we see suggests that Chinese patent litigation is not rife with protectionism. On the contrary, our findings suggest that foreign companies perform as well as, if not better than, Chinese firms.

First, our case-level data suggests that patent suits are rarely litigated in smaller inland cities where, conventional wisdom holds, protectionism is most often encountered. The data indicates that patent litigation is overwhelmingly a big city phenomenon in China and, even among major metropolitan areas, is largely concentrated in just a few of the nation’s largest cities. Moreover, even when foreign companies are sued outside large cities, our data suggests that it is relatively easy to move cases to urban jurisdictions using the appeals process. As our findings show, the rate of appeal among Chinese patent suits is high, perhaps because Chinese patent suits are fast enough and cheap enough to make appeal a realistic option for most parties. Lastly, large urban jurisdictions – particularly Beijing and Guangzhou – seem to be the overwhelming venues of choice for cases involving pharmaceuticals and information technology, the technologies most often cited as targets of Chinese protectionism. Together these findings suggest that, even if protectionism is common outside large cities, foreign patent litigants are unlikely to face suit, let alone a final court decision, in those jurisdictions.

Second, our observations about litigating parties also tend to suggest that protectionism is not rampant in jurisdictions where patent suits are commonly litigated. Foreign companies are not frequent targets of Chinese patent suits and, on the contrary, most often appear in our data as patent enforcers rather than accused infringers. Moreover, when foreign companies sue, they win relatively frequently and are awarded damages commensurate with those awarded to domestic patentees. Chinese companies – especially state-owned firms – fare worse on the merits of their cases, as both as plaintiffs and defendants, and when they sue foreign companies actually receive less in damages than they do against domestic infringers.

Finally, the characteristics of litigated patents in our database also tend to cast doubt on the broader Chinese patent system’s supposed protectionist tendencies. In a system rife with patents that merely copy already popular products, we would expect to see a large population of suits asserting newly minted patents filed exclusively in China. However, the litigated patents in our data set are, on the whole, relatively old, and many issued from applications that are part of international patent families. Just a tiny fraction were asserted within five years of their issue date, while close to half were more than a decade old at the time of suit. Moreover, about one-third had at least one foreign counterpart, which indicates that these applications disclosed inventions deemed novel by at least one other patent office. In addition, the most common technology class among litigated patents is mechanical engineering, while the most common industry classification among litigants is manufacturing. Electrical engineering ranks fourth out of six patent categories, and information technology ranks sixth on the list of represented industries. Thus, although suits against Apple, Samsung and Dell grab headlines in the West, it appears that cases involving software and computer technology constitute just a small minority of Chinese patent enforcement cases.

Challenging conventional wisdom

Taken together, these findings cast doubt on conventional wisdom among Western companies and commentators about Chinese patent enforcement. While we cannot rule out the existence of blatant protectionism in smaller inland courts from which we could not obtain data, patent suits in those jurisdictions appear to be rare. Moreover, while we cannot observe settlement behaviour, our findings on litigation outcomes show little evidence of protectionism. Foreign rights holders brought over 10% of Chinese patent infringement actions in our database and won over 70% of those cases. By contrast, state-owned entities – presumably those that the Chinese government has the greatest interest in protecting – filed only one suit in our database and lost almost 80% of the suits filed against them. Lastly, while we cannot rule out a rush to file and enforce shoddy patents in more recent years, our findings cast doubt on claims that this was a regular occurrence before 2012. Rather than a land rush to obtain and enforce patent rights in the immediate aftermath of the National IP Strategy’s announcement, we found that the vast majority of litigated patents in our database were filed before the strategy was even announced, and that many also had family members approved by other nations’ patent offices.

Accordingly, our findings tend to suggest that, to the extent that the Chinese government hoped that stimulating the national patent system would result in widespread protectionism, this hope was misplaced. On the contrary, the government appears to have created a system that often benefits foreign interests at the expense of domestic ones and that generates a good deal of litigation among domestic firms. Tech companies in the United States and elsewhere in the world – particularly those that have long accused China of systematic piracy – would be well advised to give the Chinese patent system a second look.