1 Oct
2017

Trump hones in on China, but would do well to look closer to home

The Trump administration’s probe into Chinese IP practices that are allegedly harming US interests may be politically charged but is being welcomed by many tech companies. However, it may be US developments which are giving Chinese entities a helping hand

He may have prevaricated a little but on August 15 President Trump finally did what he had promised and authorised US Trade Representative (USTR) Robert Lighthizer to initiate a Section 301 investigation into IP-related practices in China which are said to harm US companies and their interests. The inquiry subsequently announced by Lighthizer will focus on four areas of concern:

  • The Chinese government’s alleged use of various written and unwritten rules to “require or pressure the transfer of technologies and intellectual property to Chinese companies”.
  • Chinese policies and practices that are said to “deprive US-based companies of the ability to set market-based terms in licensing and other technology-related negotiations with Chinese companies”.
  • The Chinese government’s alleged engineering of systematic investment and M&A by domestic companies aimed at bringing about large-scale technology and IP transfer in strategic industries.
  • Cyber-theft of trade secrets and confidential business information designed to advantage Chinese companies or industry.

Beijing was quick to condemn the probe, saying that it “sabotages the existing international trading system, and has poured cold water on all parties that have been working to promote bilateral economic ties”. The comments were made by a Ministry of Commerce official, who also called the investigation “irresponsible” and “biased”, while state media claimed it would “poison” US-China relations and had more to do with Trump’s flailing, unpopular presidency than the underlying IP issues.

The truth is that while nobody in the US business community wants to see a trade war, many believe that despite the big strides China has made in intellectual property over the last 30 years or so, there are issues that need to be addressed. US industry groups such as the US China Business Council have welcomed the inquiry, placing particular emphasis on “the requirement to transfer technology as a condition to gain market access in China”. The American Chamber of Commerce in China echoed that sentiment, noting that while Chinese IP protection advances in consumer goods and entertainment, tech companies are worried about “codified requirements to form joint ventures or provide information for security reviews”.

On the China Law Blog, attorney and old China hand Dan Harris had an interesting reaction to this aspect of the USTR probe: “We have never been involved in a China transaction where it has been clear to us that the Chinese government has forced our client to relinquish its IP to China.” He went on to say that in many cases foreign companies agree to bad or unenforceable licensing deals either because they do not understand the risks or are unwilling to walk away for financial reasons.

One industry group representative who spoke to IAM agreed that companies do often agree to poorly drafted terms that result in loss of their intellectual property in China; but, he added, that does not mean that those deals are a result of government pressure or policy. Often, he explained, the decision to make a risky IP arrangement has been taken at a high business level for just those reasons. By the time that lawyers get involved, the trade-off has already been made.

One specific policy that might well crop up in the 301 investigation is China’s Technology Import/Export Regulations (TIER). These require a foreign entity to indemnify Chinese licensees against third-party infringements, while allowing the licensee to own all improvements to the technology. However, for a Chinese domestic licensor that situation is completely different: it can freely negotiate the terms it wishes. It is not possible for a foreign licensor to license around these rules with its own terms.

There does not ever seem to have been a Chinese litigation case between a foreign licensor and Chinese licensee stemming from these TIER provisions – something that the Chinese government apparently likes to mention in negotiations. However, anecdotally there are any number of cases where foreign parties have walked away from a potential deal after concluding that the regulations are too heavy a burden.

By the time the inquiry’s first public hearing is held at the International Trade Commission on October 10, it will be clear whether any high-profile US companies have decided to formally air their concerns about the issues raised in Lighthizer’s order. While the high-tech industry as a whole may welcome government action on tech-transfer issues, individual corporates might decide that they have little incentive to make their cases. Enterprises that have a major Chinese presence will have presumably already taken some tough IP business decisions about trade-offs; in other words, the horse may already have left the stable.

Any companies that do raise issues will likely be at pains to emphasise the progress China has made with regard to intellectual property. Few will envy the coverage that Apple is receiving in the country following a testy exchange between one of Apple’s external counsel and Iwncomm’s managing director at the Annual China Patent Conference held in Beijing in mid-September (see box).

Many IP executives in China would not dispute the fact that foreign firms often face pressure to transfer assets and technology to local entities in exchange for Chinese market access. However, to paraphrase the response of one Chinese chief IP officer: all countries calibrate their IP policy to benefit domestic companies. Policies friendly to telecoms licensors in various European jurisdictions, he suggested, have kept some European corporates operating long after their product businesses evaporated. It is no surprise that policy makers in those jurisdictions want to maintain such a status quo, he reasoned.

It is telling that the executive pointed to Europe and not the United States as favouring local rights holders. Many have pointed out the irony of the United States lecturing China, where enforcement is rapidly improving, while patent rights are being weakened at home. Moreover, Chinese technology companies have more to gain from US reforms such as the introduction of the Patent Trial and Appeal Board than almost any other group.

Many large Chinese tech companies want to do business in the United States but lack developed patent portfolios; the availability of tools such as inter partes reviews makes market entry a lot easier, as does the general curtailment of patent rights resulting from various Supreme Court and Federal Circuit judgments.

So while the Trump administration is likely to find that certain Chinese policies do put Chinese companies at an advantage in the IP realm domestically, any fully rounded assessment of the challenges faced by US rights holders would also conclude that developments pushed by US legislators, as well as precedent established by US courts and government agencies, might be giving the Chinese more than a helping hand as well.

Public fight shows how explosive patent issues have become in China

It’s not often that IP conferences host stand-up rows between parties representing two sides in a legal dispute, but it happened at the Annual China Patent Conference in Beijing in September. In front of a packed-out room, a question from an Apple-linked private practice lawyer sparked a heated and, at times, ugly exchange between the lawyer and the managing director of local company Iwncomm, with which Apple has been battling it out in Chinese courtrooms over the past 12 months.

Iwncomm is far from a household name, even in its native China (where it is also known as Xi’an Xidian Jietong); but its IP profile has risen significantly since it became the first plaintiff to obtain a standard-essential patent (SEP) based injunction in the country. In a session about IP licensing, Iwncomm managing director Cao Jun introduced his company and explained his view on why China should not be afraid to strengthen IP protection.

The Beijing IP Court ruled in favour of Iwncomm in an SEP infringement case against Sony on March 22 this year. The court ordered an injunction covering 35 Sony mobile device models that it found to infringe the WLAN Authentication and Privacy Infrastructure (WAPI) standard, a domestic WiFi alternative that is mandatory for handsets sold in China. Apple is engaged in a parallel fight with Iwncomm over the validity of the same patent. With its initial 2016 invalidation attempt having been rejected, Apple has appealed the case to the Beijing IP Court.

Cao acknowledged his company’s recent prominence as a result of its landmark win from the outset. But he argued that the case is the last thing he would like his company to be famous for. “It doesn’t make me happy to become well known as a result of patent litigation,” Cao said. “I love the technology; when I have to litigate, it’s a waste of my time and energy.”

Cao also mentioned that he does not typically appear at IP conferences. “I’ve been blamed for being a quick-tempered person who offends people,” he noted, “so I’ll skip the clichés and talk about the experiences I’ve had.”

What he detailed will be familiar to many rights holders. “Our revenue has not necessarily caught up with the increased implementation of our invention,” Cao stated. While the first R&D and patents related to the WAPI standard came in 2001, Cao maintains that the company started to earn revenue from the technology in 2010 only. “If the patent cannot be protected,” Cao asked, “why would I engage in the endeavour? Why would I invest so much?” The answer, he said, is that he had faith in the IP system. Now, he explains, Iwncomm is “harvesting licensing fees after years of work”. He hoped its example showed that China should work to be a leader rather than a follower in standards setting and that Chinese companies should not be afraid of stricter IP enforcement.

In a line that garnered applause from the audience, he entreated companies: “If somebody challenges your bottom line, just fight back with no hesitation.” Cao then went on to criticise unnamed counterparties for negotiation practices he described as indecent. He concluded his remarks by saying: “If you think you’re ‘too big to fail’ and have the right to abuse others’ intellectual property, then you’re wrong.”

A delegate who later identified himself as Gordon Gao of Fangda Law Firm – which represents Apple in China – then rose to ask a question about the WAPI standard. The question began: “I apologise if this offends you, but if your patent is quite important, it’s sad for our whole patent system in China. Every one of us needs to pay a WAPI patent fee to you, but not many in this room have used WAPI technology.” In a move that visibly angered Cao, the lawyer then asked for a show of hands in the room and declared that not a single person there had actually used WAPI.

“Can you tell us who you are? Can you tell us who you represent?” Cao shouted. He then demanded to know whether Gao was a Chinese or US passport holder, a line of questioning Gao described as “disgraceful” and “irrelevant”. As delegates recorded events on smartphones and simultaneous translators struggled to keep up with comments, exchanges became increasingly acrimonious. They concluded with Cao telling Gao: “You’ll pay for what you’ve done, on my honour,” as he left the stage.

Videos and commentaries of the incident subsequently circulated widely on social media – and comments from State IP Office officials at another event in Beijing later in the week confirmed that it had also been picked up at the government level. Cao versus Gao was that very rare example of the behind-closed-doors passion that a patent dispute can raise coming out into the open. That the dispute in question involves a relatively small Chinese entity and a US multinational only added spice.

Cao’s questioning of Gao’s nationality, though, and the support that Iwncomm received both in the hall and on various platforms afterwards is a reminder of what is at stake in the US Section 301 investigation: it is not just about intellectual property. On both sides there is a lot more to it than that. This makes the whole issue potentially very volatile. And in the IP market, nobody likes uncertainty.