Meeting the China challenge

The opening plenary – “IP value creation in a rapidly changing world” – gets underway. IAM editor Joff Wild (left), Micky Minhas, Microsoft (centre) and Paul Lin, Xiaomi (right) talk about the dynamics of the ground-breaking deal between the two companies, named as IAM’s Asia IP Deal of the Year for 2016

Enjoying the view at the opening reception

Delegates listen intently to the exchanges in the opening plenary on “IP value creation in a rapidly changing world”

Last December over 400 people gathered at the Ritz-Carlton Shanghai Pudong for 2016’s IPBC Asia. Although developments from all across the region were covered at the event, it was the breakneck pace of change in China that attracted most attention. From litigation to patent quality to world-class deal making, no stone was left unturned. By the end of the three days, nobody was left in any doubt that China is now playing a major role in shaping the global IP market.

Deal of distinction

In the opening plenary session – entitled “IP value creation in a rapidly changing world” – Xiaomi’s Paul Lin and Microsoft’s Micky Minhas discussed a ground-breaking deal between the two companies, announced in May 2016, with IAM editor Joff Wild. They explained that intellectual property was a major driver of the agreement, as the Chinese smartphone maker acquired 1,500 patents from the software giant; but that the transaction was actually premised on a much broader collaboration, with Microsoft applications now set to be included on Xiaomi mobile devices. The tie-up was later hailed as Asia IP Deal of the Year at the Asia IP Elite gala dinner, because it marked a significant advance on previous alliances between western and Chinese companies in the way that intellectual property can be used to create mutually beneficial business relationships.

Minhas – recently appointed as Microsoft’s head of licensing – revealed that the deal had taken a year to unfold after a senior Xiaomi executive communicated the company’s desire to grow its IP portfolio. He added that the relationships between some of the key executives involved in the negotiations proved crucial in getting it over the line. Minhas, Microsoft’s head of business development Peggy Johnson and Xiaomi head of strategic cooperation Wang Xiang all previously worked at Qualcomm, so there was already a level of familiarity. A face-to-face meeting between the respective company CEOs in March 2016 resolved most of the outstanding issues and advanced the negotiations to a point where all that was left was to refine the contractual terms.

The opening reception of IPBC Asia 2016 at the Ritz-Carlton’s rooftop bar

Another new contact made

LG Electronics’ head of IP licensing Joo Sup Kim speaking during a breakout session on top negotiation tips for reducing the IP royalty deficit

Mark Laudi of IPBC TV interviews a delegate during one of the breaks

However, the most crucial factor was that each company had taken the time to understand the other’s perspectives and needs, and was fully focused on reaching a win-win outcome. Lin shared with the audience a misstep which he feels a lot of global companies make when they negotiate with Chinese companies on a fair, reasonable and non-discriminatory basis. Responding to a question about the European Court of Justice decision in Huawei v ZTE, he conceded that the case serves as a good reference point, but took issue with that fact that some companies seem to think it is “the Bible” and can be applied wholesale everywhere: “If you think you can take an EU framework and apply it in China, that’s a mistake.”

Instead, he suggested that an appreciation of local rules and regulations – including reference points such as the National Development and Reform Commission’s handling of an investigation into Qualcomm’s licensing practices which, among other things, saw the US company pay a fine of nearly $1 billion and undertake to amend the way it calculates royalty rates in China – will get you a lot further.

The World Intellectual Property Organisation recently confirmed that China has become the first country to receive 1 million patent applications in a year, surpassing other major markets. Although questions remain over the quality of the patents being issued, according to Lin, this too is changing. He revealed that he was part of a study on patent quality in China conducted a few years ago, which found a notable improvement since 2008.

This trend will have significant implications in many areas. As Lin pointed out, better-quality patents will end up being asserted and ultimately litigated – which will lead to the development of better case law. For his part, Minhas observed: “What is happening in the courts is something of a trailing indicator of things that have been happening in industry here. The level of innovation has really increased in China and this is bound to lead to a maturing of the patent system, which in turn will help to increase confidence in the court system.” He added that it usually takes between 10 and 15 years for a patent to hit its sweet spot in terms of worth. Therefore, with the quality of Chinese patents improving only in the last eight years, it may be several years yet before we see IP value creation strategies in the world’s first million-patent market really hit their stride.

Of injunctions, damages and utilty models

The preliminary injunction is a powerful weapon in Chinese IP litigation, but do not expect to obtain one without a lot of hard work and a strong story for the judge. Speaking in the “Emerging patent battleground in China” plenary, Philips’ head of intellectual property in China Daniel Yan and Benjamin Bai, Ant Financial’s chief IP counsel, talked delegates through the process. 

In the abstract, the rules that apply in China are pretty much as you would expect. According to principles laid down by the Supreme People’s Court in 2001, a rights holder must prove standing, demonstrate actual or imminent threat of irreparable harm and be able to post the required bond. The court will also make a public interest call before handing down a decision. So far, so simple. The devil, though, is in the detail. 

Proving standing is not hard for exclusive licensees; but for non-exclusive licensees it is more problematic and could necessitate obtaining sign-off from the rights holder in advance. You will also need to show that the right in question is stable – in other words, it is substantially valid. This is not an issue for invention patent owners, as their right will have been granted after a substantive examination. For non-examined utility models and design patents, it is much more troublesome and requires an evaluation report from the State IP Office (SIPO) – this essentially involves a full-scale examination and can take two to three months to secure. 

As for actual or imminent threat and irreparable harm, if there is any question as to validity (eg, a pending re-examination or a declaratory judgment case), then you can forget it; likewise, any case that relies on the doctrine of equivalents or is based around complex technology is a no-no. There is no point, either, in relying on an argument based solely on price erosion – it will take more than this to get a judge’s attention. A loss that could not be compensated for by money alone is key – whether it is caused to the owner itself or inflicted on a third party. Then there is the bond: this needs to be posted immediately and can be a considerable sum (Bai mentioned that a Beijing court once required a bond of Rmb40 million, or approximately $5.8 million), so preparations should made in advance. 

Despite all the hurdles, both Yan and Bai made clear that it is possible to persuade Chinese courts to issue preliminary injunctions and that a rights holder which succeeds in doing so is in a strong position. Enforcing them can be a challenge, but Bai observed that there are many more law-abiding companies in China than there used to be (which is encouraging). Even without them, other tools are available to force infringers into line quickly, including administrative actions and customs measures. 

Securing higher damages 

Damages are often an afterthought for foreign companies considering litigation in China – figures presented in the same plenary revealed an average award of just Rmb80,000 (approximately $10,000). But according to Jun Qiu of Liu, Shen & Associates, one reason for this is that plaintiffs simply do not produce any evidence. It can be difficult to get access to a Chinese infringer’s accounting books, but Qiu suggested a few alternatives: for instance, sales information can be obtained from a company’s own annual reports, while local Chinese customs offices can often be persuaded to turn over export data. With this information in hand, a third-party accounting firm can carry out an audit to estimate a reasonable profit rate. 

Although Yan cautioned that awards based on broad financial data are often reduced on appeal, a big initial award goes a long way towards producing a quick settlement. With an increasing number of foreign corporates and NPEs looking at filing patent infringement suits in China, it would be unsurprising to see them come up with other creative ways of convincing the courts to issue bigger monetary rewards.

Remember utility models

Many outside observers tend to write off utility model patents in China ‒ particularly when thinking about statistics such as the 1.1 million patent applications filed in the country last year, most of which were not full invention patents. After all, these rights last for just 10 years, are not subject to substantive examination by SIPO and must meet a lower threshold for inventive step. 

SIPO’s numbers show that foreign companies are just not very interested in owning utility models: 10% of Chinese invention patents are filed by entities based abroad, but for utility models that figure drops to just 1%. However, both Bai and Yan warned that anyone who overlooks them does so at their own risk. 

In discussing preliminary injunctions, Bai noted that “if you can convince the judge that validity is beyond doubt, it’s treated as if it’s a real patent” – meaning that utility model owners could have a very strong remedy at their disposal. Yan added that once a utility model has undergone examination, it is very difficult to invalidate because of the low bar for inventive step. That is a big deal in a country where a major concern for patent plaintiffs is an invalidity rate that is estimated by Bai to stand at about 40%. 

“One man’s junk is another man’s treasure,” added Bai, “but that’s why you have patent trolls.” Given that utility models are available at a fraction of the price of Chinese invention patents, they could be a worthwhile acquisition.

A question from the floor during the “Emerging patent battleground in China” plenary. Panellists from the left: Jun Qiu, partner, Liu, Shen & Associates; Feng Ren, chief IP specialist, IP strategy department, Panasonic; Daniel Yan, head of intellectual property and standards, China, Royal Philips; Benjamin Bai, vice president and chief IP counsel, Ant Financial; Huaibin Wang, senior counsel of patent department, Baidu

Litigation – the good, the bad and the potentially ugly

The message that came through loud and clear in Shanghai is not only that there have been major improvements in the quality of the patents being issued by the State IP Office, but also that policy makers inside the agency are keenly aware of measures that might facilitate the growth of domestic innovation-based start-ups. Recent guidelines on the patentability of software – which appear more generous than anything in the United States or Europe – are one example of this. As patent quality improves, so will comfort levels around deal making and – should the worst come to the worst – using the litigation system too.

That this is more than just words was confirmed in November 2016, when it emerged that WiLAN had filed a patent infringement suit against Sony in Nanjing – the first initiated by a western non-practising entity (NPE) in China. The action was confirmation that China is becoming a serious player and one whose system can be trusted – a view that has become increasingly popular since the launch of specialist IP courts in Beijing, Shanghai and Guangzhou in 2014. WiLAN is no troll and would not have embarked on this course of action if it did not have confidence in the way that its case would be conducted. Many people will be watching to see how events now play out. The suit could presage not only further NPE activity in China, but also more plaintiff-side action from operating companies too.

However, every dispute has two sides – and operating companies can be defendants as well as plaintiffs. For Lenovo IP chief Ira Blumberg, recent developments in China have not all been positive. During the “Asia IP Elite: what keeps them up at night” plenary session, held on the second full day of the event, Blumberg was asked by session moderator Brian Hinman, chief IP officer of Philips, to identify what causes him to toss and turn in the wee small hours. Blumberg confided his fear that patent trolls could become a major problem ‒ particularly if patent damages awards and the number of patents available to buy both continue to increase, given that preliminary and permanent injunctions are available. “If handled in the wrong way, China could be beset by them,” Blumberg warned.

As well as the prospect of higher damages and the growing threat of patent owners obtaining injunctive relief, he argued that the real risk to the Chinese market stems from the fact that it is such a large manufacturing hub. This gives patent owners abundant scope to disrupt a company’s production facility or supply chain, which might prompt foreign and local businesses to look to other jurisdictions. “If courts give out big awards, then the natural reaction will be for companies to relocate their manufacturing,” he cautioned. “China needs to be very careful about how its patent system develops.”

Formerly of Intellectual Ventures, Blumberg has been a vocal critic of trolling over recent years. As we have seen in the United States, the focus on finding solutions to combat the perceived threat posed by this business model often ends up causing a great deal of unintended harm. The Chinese authorities would do well to consider this when they hear the dire warnings issued by Blumberg. He does have a point; but careful, nuanced policy making is perhaps the best way to solve any problems that arise. Looking to Europe, rather than the United States, and exploring why there is no real troll problem there may also be a good idea. What is clear, though, is that as the profile of the Chinese patent litigation market rises and the stakes become higher, the troll debate will have to take place.

Representatives from Asia IP Elite companies honoured at the gala dinner

Front row (from left): Ying-Ping Lin, ITRI; Aditi Khopkar, Reliance Industries; Shigeaki Hayashi, Casio; Ira Blumberg, Lenovo; Wilaiporn Chetanachan, Siam Cement Group; Wang Sijia, ZTE; Joo Sup Kim, LG Electronics; Billie Chen, TSMC; Suzanne Chou, E Ink Holdings; Eiu Beom Roh, SK Hynix; Sang Kyu Woo, KT Corp; Chai Yuan, Sony; Sophie Kuang, CSL

Back row (from left): Daniel Lee, LG Chem; Christine Emmanuel, CSIRO; Jon Harwood, Fisher & Paykel Healthcare; Roger Tu, Foxconn; Alice Wang, DJI; Jung Hyuk Shin, ETRI; Ganapathy Narayanan, Tata Consultancy Services; Kevin Feng, Mediatek; Kenneth Oplinger, Cochlear; David Ho, Alibaba; Motoi Takezono, Toshiba; Ho Cheng Huat, A*STAR; Anan Sivananthan, Creative Technology

However, it is not just trolls that are keeping those running the IP functions at Asia’s major companies awake at night. For Alibaba’s technology and patent chief counsel, Amy Xu, a couple of other issues have caused sleeplessness – and they are probably related.

The first is that as a young business – the average age is 27 – with a 40,000-strong workforce, Alibaba has no deep-seated corporate IP tradition on which to draw. A major task for the IP team is thus to ensure that employees understand why respect for IP rights is so crucial to the company’s long-term future. As anyone who works in the trademark field will tell you, Alibaba is known as a platform through which large numbers of fakes are sold and many believe that it could be doing a lot more to tackle the problem. However, Xu was adamant that significant efforts are being made to this end.

Alongside staff education initiatives, Alibaba is investing heavily in developing technology and big data-driven solutions to track down counterfeits and ensure that they are removed from the platform. Xu pointed out that the company is listed in the United States and depends on the support and confidence of those who use it to buy goods – for these reasons, it is vital that Alibaba not only is seen to be doing the right thing, but also succeeds in this endeavour.

Coping with convergence

Xu and Blumberg reminded delegates that not everything in China’s garden is rosy; and over the course of the event, further potential issues were identified. With more and more connected devices entering the Internet of Things (IoT) ecosystem, standardisation is set to become increasingly important, as the ability of various devices to talk to each other becomes key to their commercial success.

In the Monday morning “Managing IP challenges in technology convergence” plenary, Keith Bergelt, CEO of the Open Invention Network, outlined a wide range of initiatives in this vein; they included Automotive Grade Linux, which is developing an Android operating system for connected cars. Bergelt warned that greater Chinese participation in both formal and informal standard setting is essential. If only a couple of the country’s biggest companies – the likes of Huawei and ZTE, for example – engage with these processes, there is a risk that China could find itself stranded on a so-called ‘technology island’, disconnected from the rest of the world.

Exchanging insights during a networking break

We are accustomed to seeing impressive statistics about the contributions of Huawei and ZTE to the latest mobile standards, but it will be even more encouraging when a greater number of companies get involved in global projects across a range of technology fields.

With that in mind, it was interesting to hear Huaibin Wang of Baidu give delegates an inside look at how China’s major search engine is adapting its IP strategy to the changing landscape in the “Emerging patent battleground in China” plenary. At the end of 2015, Baidu was a major force behind a patent alliance formed by more than 20 Chinese businesses aimed at pooling voice technology patents and making them free to use for members on a royalty-free basis. Baidu has filed over 400 applications relating to voice input and selected about 100 of these to contribute to the pool.

The range of companies involved – members include ZTE, BOE, Haier and BAIC Motors – is a great illustration of how convergence is making it necessary for Chinese businesses from different industries to explore IP deals with partners far beyond their own spaces. However, while the initiative shows that plenty of companies are thinking about how the ecosystem will develop within China, the nature of the IoT is surely such that they will need to go outside China too; if they do not, Bergelt’s warning may well turn out to be prophetic.

Earning trust

The “China boot camp” breakout focused on preparing foreign companies to succeed in the rough and tumble of Chinese IP business and it attracted a great deal of interest. The panellists broadly agreed that a presence on the ground in the country is crucial – China is one jurisdiction where it is hard to effectively manage challenges or exploit opportunities without capable local staff. Yet even once a team is in place, work is needed to build a strong relationship with headquarters.

Jun Chen, greater China IP manager for German outfit Schaeffler, observed that “five to eight years ago, European and US companies did not trust” their local IP staff in China. He said that some of his compatriots who work for other foreign companies remain hamstrung by the fact that they do not have full authorisation to access their organisations’ global IP databases. In such situations, he argued, a fully integrated approach to strategy is impossible. Jessie Kang – IP manager for Switzerland’s Clariant Chemicals – agreed, but maintained that it is up to the China team to build trust by demonstrating the value that it provides.

Kang also emphasised that it is just as important to vet external partners in China as it is anywhere else. Another senior corporate IP leader, meanwhile, related a cautionary tale about one of the local law firms that his company used to file patent applications for inventions generated in China, including for crucial overseas parts of the patent family. Rather than instructing a qualified US patent agent for the US Patent and Trademark Office portion of the filing, the firm was using Chinese patent agents to do the work and a US shell company to register the patents. The speakers noted that even relatively well-known firms are not exempt from quality gaps, so due diligence is imperative.

To Ottawa

It was a fascinating three days in China which once again revealed how the IP market is expanding globally. Delegates left in little doubt that China in particular, and Asia more generally, is where the IP heat is currently being created. IAM would like to extend warm thanks to all those who attended, the top-class speaking faculty and all our valued sponsors, without which the event would not have been possible.

Our thoughts now turn to IPBC Global 2017, which takes place in Ottawa from June 18 to 20. The next IPBC Asia will be held in Tokyo later in the year.