For­eign firms face chang­ing land­scape in China

For­eign com­pa­nies face al­tered re­al­i­ties as China pro­gresses

China Daily (Hong Kong) - - FRONT PAGE - By WEI TIAN weitian@chi­nadaily.com.cn

Pro­tect­ing in­tel­lec­tual prop­erty rights has been the sin­gle big­gest hur­dle for most com­pa­nies to over­come when think­ing about en­ter­ing the China mar­ket. But that may no longer be the case be­cause the num­ber of IPR cases be­ing filed is grow­ing steadily in China.

It is a clear in­di­ca­tion that the world’s sec­ond- largest econ­omy is be­com­ing more se­ri­ous about pro­tect­ing valu­able ideas and that China is mak­ing rapid strides in the in­no­va­tion lad­der. With more patent fil­ings than any other Western na­tion, China is no longer just a fac­tory, but rather a des­ti­na­tion where ideas are given shape and in­cu­bated into suc­cess­ful global en­ter­prises.

“Al­though there are mul­ti­ple rea­sons for for­eign com­pa­nies be­ing charged with IPR vi­o­la­tions in China, in re­al­ity it has more to do with the fast chang­ing global eco­nomic land­scape,” says Tony Chen, a Shang­hai-based patent lawyer work­ing with US law firm Jones Day .

Ris­ing do­mes­tic IPR aware­ness, re­tal­i­a­tion for for­eign com­pa­nies tight­en­ing their IPR frame­work, or in some cases even sug­ges­tions that it is the out­come of for­eign com­pa­nies ex­ploit­ing or tak­ing ad­van­tage of the loop­holes in cur­rent sys­tem, are of­ten cited by ex­perts for the tight­en­ing IPR sys­tem in China.

Ac­cord­ing to the Supreme Peo­ple’s Court, judges na­tion­wide an­nounced ver­dicts in 24,544 IPR cases dur­ing the first five months of the year, with 2 per­cent, or 504 law­suits, in­volv­ing over­seas lit­i­gants. Most of the over­seas lit­i­gants were from the United States, Euro­pean coun­tries such as UK, France and Ger­many, and Ja­pan, says Kong Xiangjun, pres­i­dent of the top court’s in­tel­lec­tual prop­erty tri­bunal.

Fierce com­pe­ti­tion, as well as a ten­dency for trade pro­tec­tion­ism in cer­tain coun­tries, have led to a re­mark­able in­crease in cross-bor­der IPR con­flicts, he says, adding that most of the IPR law­suits in­volv­ing over­seas com­pa­nies of­ten in­volve in­fringe­ment of trade­marks, patents or copy­rights.

Ris­ing aware­ness of IPR pro­tec­tion among IT com­pa­nies and the in­ten­si­fied ef­forts of ju­di­cial de­part­ments to com­bat copy­right in­fringe­ment have also con­trib­uted to the high in­ci­dence of such cases, Kong says.

Multi­na­tional gi­ants such as Mi­crosoft Corp, Ap­ple Inc, Gen­eral Elec­tric and Ab­bott Lab­o­ra­to­ries from the US, Miche­lin from France, BMW AG from Ger­many and Honda Mo­tor Co Ltd from Ja­pan are among the big ticket IPR lit­i­gants in China in re­cent years.

Larger fo­cus

Chen from Jones Day says that on an in­di­vid­ual ba­sis he has been han­dling more IPR cases in­volv­ing for­eign lit­i­gants this year. Al­though his sam­ple size is rel­a­tively small, the growth rate has been faster than that re­ported by the top court, he says.

“The Chi­nese econ­omy is still ex­pand­ing at a faster clip than other ma­jor economies, while the Chi­nese mar­ket is grow­ing in stature for multi­na­tional cor­po­ra­tions, thereby gen­er­at­ing more value for IPR in the Chi­nese mar­ket.”

IPR in­fringe­ment is not some­thing new in China, but rather some­thing that many for­eign com­pa­nies chose to forgo ro­bust en­force­ment of the past, he says. “En­force­ment of IPR Pro­tec­tion has its own costs, both in terms of time and money. There­fore for­eign com­pa­nies would con­duct a proper cost-ben­e­fit anal­y­sis and see if they get the de­sired re­sults in China.”

“With an as­cend­ing im­por­tance of the chi­nese mar­ket, IPR has be­come some­thing that is worth fight­ing for,” Chen says.

Such ef­forts by for­eign com­pa­nies also have a his­tor­i­cal ref­er­ence as past ev­i­dence shows that for­eign lit­i­gants of­ten have a bet­ter chance of win­ning IPR cases in Chi­nese courts.

Ac­cord­ing to the Shang­hai su­pe­rior court, among the 87 IPR cases it han­dled and pro­nounced de­ci­sions in 2012, nearly 80 per­cent of the fa­vor­able ver­dicts were for for­eign lit­i­gants.

How­ever, sev­eral ex­perts ex­press doubts on the ve­rac­ity of such sta­tis­ti­cal re­sults. They say most of the cases that ended up with out of court set­tle­ments, or in­stances of for­eign plain­tiffs with­draw­ing their pros­e­cu­tion be­cause of in­suf­fi­cient ev­i­dence, are not in­cluded in the statis­tics. If the cal­cu­la­tion cov­ers all the sam­ples since the stage when the case was tabled, there might be a dif­fer­ent re­sult.

But Chen says that lit­i­gants have had a good record be­cause plain­tiffs in China, be­cause their patent rights have more solid ground be­cause they have been tested in courts else­where in the world and they are will­ing to pay more to rope in the ser­vices of good law firms.

More de­fen­dants

How­ever, lately, an in­creas­ing num­ber of cases have put for­eign com­pa­nies in the de­fen­dant’s seat.

In 2009, French elec­tri­cal com­pany Sch­nei­der Elec­tric SA agreed to pay $23 mil­lion to the Zhe­jiang-based Chint Group as set­tle­ment to end a three-year patent law­suit. The French com­pany was ac­cused of vi­o­lat­ing Chint’s rights by sell­ing five mod­els of ap­pa­ra­tus, which fell within the pro­tected scope of Chint’s patent rights.

Chint’s suc­cess spurred sev­eral Chi­nese en­ter­prises to pay closer at­ten­tion to IPR pro­tec­tion and use le­gal reme­dies for pro­tec­tion.

Tech gi­ant Ap­ple Inc was the fo­cal point of sev­eral IPR dis­putes last year. In the first in­stance, a Shen­zhen court found the US com­pany guilty of vi­o­lat­ing the iPad trade­mark in the Chi­nese mar­ket. The trade­mark was reg­is­tered by a lo­cal com­pany Proview Tech­nol­ogy and Ap­ple was forced to pay $ 60 mil­lion to get con­trol.

The sec­ond case in­volv­ing Ap­ple was brought up by Shang­hai-based Zhizhen Net­work Tech­nol­ogy Co, which ac­cused the Cal­i­for­nia-based com­pany of in­fring­ing on its patent for Xiao i Ro­bot in its in­tel­li­gent dig­i­tal as­sis­tant Siri.

At the sec­ond hear­ing of the case ear­lier this month, Ap­ple re­jected Zhizhen’s ac­cu­sa­tion and re­fused to com­pare the two tech­nolo­gies for ap­praisal, say­ing the re­sults would be de­pend­ing on the State In­tel­lec­tual Prop­erty Of­fice’s de­ci­sion on its ap­pli­ca­tion for in­val­i­da­tion of Xiao i Ro­bot’s patent.

Si Wei­jiang, a lawyer rep­re­sent­ing Zhizhen, says the re­sult from the State In­tel­lec­tual Prop­erty Of­fice would be avail­able later this month and the court would prob­a­bly wait for the rul­ing be­fore pro­nounc­ing its ver­dict.

“Ac­tu­ally, it would have been eas­ier to get a re­sult by just com­par­ing the two tech­nolo­gies, if Ap­ple was will­ing. We are ap­palled by Ap­ple’s elu­sive be­hav­ior,” Si says adding that since the case in­volves even big­ger com­pen­sa­tion than Proview, it may take some time for a fi­nal ver­dict.

The com­plex­ity of the IPR cases in­volv­ing over­seas com­pa­nies and the huge im­pact that the rul­ing may have on the lit­i­gant are cre­at­ing more pres­sure for Chi­nese judges, Kong says.

“With rapid tech­ni­cal de­vel­op­ment, it’s be­com­ing more dif­fi­cult to clar­ify some of the tech­ni­cal facts, par­tic­u­larly in high-tech sec­tors such as bi­ol­ogy, chem­istry, phar­ma­ceu­ti­cals, elec­tron­ics and tele­coms,” he says.

In most of the cases, the ver­dicts might have a huge im­pact on the lit­i­gants or be vi­tal for the sur­vival of the com­pany, he says.

To bet­ter han­dle ris­ing IPR cases, Kong feels that more up-to-date leg­is­la­tion is needed for IPR pro­tec­tion along with spe­cial­ized IPR courts.

Do­mes­tic push

Chen from Jones Day feels that the im­ple­men­ta­tion of the “national in­tel­lec­tual prop­erty strat­egy” since 2006 has been the main rea­son why for­eign com­pa­nies are fac­ing many IPR chal­lenges in China.

“The govern­ment has pro­vided pol­icy sup­port in ar­eas such as fis­cal in­cen­tives and tax re­duc­tion to en­cour­age patent fil­ings. This has led to dou­ble- digit growth in patent ap­pli­ca­tions over the past seven years,” he says.

Ac­cord­ing to the State In­tel­lec­tual Prop­erty Of­fice, China re­ceived more than 1 mil­lion patent ap­pli­ca­tions in the first half of this year, up 18 per­cent year-on-year.

China also awarded the most patent last year, even more than the com­bined amount filed by the other four na­tions in the top 5, Chen says.

“Ev­ery April the national and lo­cal gov­ern­ments would put out new re­ports of dou­ble digit patent fil­ing growth over last year. Does this mean China’s in­no­va­tion ac­tiv­i­ties sur­pass the com­bined ac­tiv­i­ties in the next four coun­tries?”

Re­gard­less of their cor­re­la­tion to in­no­va­tion, more patent rights also mean more rea­sons to sue com­peti­tors. the Chi­nese patent of­fice is­sued over one mil­lion patents in 2012, most of which to do­mes­tic par­ties.

Most of the IPR law­suits are gen­er­ally a re­sult of ris­ing aware­ness for Chi­nese com­pa­nies in IPR pro­tec­tion, and Chi­nese IPR own­ers also learned from ex­am­ples in the US about go­ing af­ter deep pock­ets, Chen says.

In the US where com­pa­nies face sim­i­lar cases, Pres­i­dent Barack Obama has taken a se­ries of ac­tions to crack down on such im­moral be­hav­iors in re­spond to re­quests of the ma­jor vic­tims of this be­hav­ior, such as Ap­ple and Mi­crosoft.

Gen­er­ally speak­ing, elec­tron­ics and me­chan­i­cal sec­tors are where most of patent dis­putes hap­pen, Chen says, ex­plain­ing that launch­ing new prod­ucts in th­ese ar­eas of­ten in­volves thou­sands of patents, and thus are more likely to be im­pli­cated in IPR law­suits.

In com­par­i­son, in­no­va­tions in med­i­cal and chem­i­cal in­dus­tries are less likely to in­volve such cases, as they usu­ally in­volve a sin­gle patent.

Many le­gal ex­perts viewed the ac­tions taken by play­ers, who look to max­i­mize their ben­e­fits by tak­ing ad­van­tage of the rules, as nor­mal uti­liza­tion of patent as a tool used to pro­tect ben­e­fits, only that it packs more punch when backed by national poli­cies.

How­ever, it could lead to more moral haz­ard es­pe­cially in China where rules are slightly dif­fer­ent, be­cause the ex­am­i­na­tion process for patent ap­pli­ca­tions is a rather re­laxed process.

Li Chang’an, an economics pro­fes­sor with the Univer­sity of In­ter­na­tional Busi­ness and Economics in Bei­jing, says de­spite the huge vol­ume of IPR cases in China, fewer than 0.3 per­cent of the patents have been ac­tu­ally trans­ferred from the ap­pli­cants to an­other per­son. This is much lower than the aver­age rate of 5 per­cent in de­vel­oped coun­tries.

“China might be a gi­ant in patent ap­pli­ca­tions, but its in­no­va­tion abil­ity is not yet in line,” he says.

An­other phe­nom­e­non is, though patent ap­pli­ca­tions by Chi­nese com­pa­nies in the US mar­ket have risen, very few of them have made com­pen­sa­tion from IPR cases against lo­cal com­pa­nies.

This is viewed by ex­perts to ev­i­dent that the quan­tity and qual­ity (of patents awarded in China) does not match.

Mov­ing ahead

Dan Har­ris, found­ing mem­ber of Asia- fo­cused com­mer­cial law firm, Har­ris & Moure, based in Seat­tle, says Chi­nese courts are start­ing to get tougher on IPR vi­o­la­tions and while that is a good thing, par­tic­u­larly with re­spect to trade­marks, the courts also need to be tougher in en­forc­ing them.

“China’s laws are fine. It’s not just a ques­tion of the laws. It’s re­ally a ques­tion of im­ple­men­ta­tion. A lot of times it’s a ques­tion of im­ple­men­ta­tion not just by the Chi­nese govern­ment but by com­pa­nies that are do­ing busi­ness in China.

“A lot of times for­eign com­pa­nies com­plain about IPR in China, when in re­al­ity it was the for­eign com­pany that made the mis­take when it went to China of not suf­fi­ciently pro­tect­ing its rights.”

Har­ris says China is a lot bet­ter now com­pared to a decade ago, be­cause the coun­try is get­ting wealth­ier, and be­cause Chi­nese com­pa­nies are start­ing to be­come more con­scious about IPR.

“I am of the view that coun­tries start do­ing well with IPR when its own pow­er­ful com­pa­nies re­ally start car­ing about it. And I’ve seen this pro­gres­sion else­where such as in Ja­pan and South Korea.

“The re­al­ity is no­body is go­ing to be able to force China to im­prove its IP from the out­side, but big com­pa­nies within China like Haier, Huawei, and Len­ovo can do so,” he says.

In fact, Chi­nese com­pa­nies, though largely de­fen­dants, have a good record of win­ning IPR cases over­seas. Huawei, which has been in­volved in many dis­putes with strong ri­vals such as Mo­torola and ZTE, pro­vides a good ex­am­ple.

“In­ter­est­ingly enough, in my ex­pe­ri­ence, Chi­nese com­pa­nies that come to the United States take IPR pro­tec­tion more se­ri­ously than Amer­i­can com­pa­nies that go to China,” Har­ris says.

“I think a lot of the rea­son for that is be­cause in the United States cer­tain IPR pro­tec­tions are au­to­matic with­out even need­ing to file for them. So when Chi­nese com­pa­nies come over here in most cases they are pre­pared to file, whereas when the Amer­i­cans go over to China, of­ten­times they ne­glect to do the nec­es­sary fil­ings.”

LI MIN / CHINA DAILY

Tony Chen, a Shang­hai-based patent lawyer work­ing with US law firm Jones Day.

Dan Har­ris, found­ing mem­ber of Asia-fo­cused com­mer­cial law firm, Har­ris & Moure.

PRO­VIDED TO CHINA DAILY

French com­pany Sch­nei­der Elec­tric paid $23 mil­lion com­pen­sa­tion to the Zhe­jiang-based Chint Group in 2009 for in­fring­ing the lat­ter’s patent on elec­tri­cal ap­pa­ra­tus tech­nol­ogy.

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