My IAM Magazine Article: Defending A Patent Case in the Brave New World of Chinese Patent Litigation
I have had a number of requests for a copy of my IAM Magazine article on defending a patent case in China. Since the new edition of IAM Magazine is now available, IAM has been gracious in allowing me to freely distribute the article. You can download a PDF of the article here.
Please let me know your thoughts!
Prediction fulfilled: China taking steps to dominate its domestic chip industry, and why NPEs are necessary to achieve this goal
About ten months ago, I predicted that China was on a quick path to grow its domestic chip industry. This forecast did not require rocket science, since the Chinese government, in 2015, set a goal to increase its production of semiconductors used in China to 40 percent by 2020 and to 70 percent by 2025. This was remarkable given that at the time, Chinese production for its domestic market was only about 5-10% of the semis used in China. But it looks like the Middle Kingdom is well on its way to accomplishing those goals. As announced last week, state-owned Tsinghua Unigroup is investing $30 billion in a memory chip fab in Nanjing.
Keep in mind that Intel bought a 20% stake in Tsinghua Unigroup a little over two years ago. I have regularly called this move by Intel likely the best strategic move by an American company in China ever. Why? Other than the obvious, it (1) instantly made Intel a Chinese company (in part -- a very political part) and (2) gave Intel a remarkably direct conduit to the Chinese government. This latter point cannot be underestimated, as it should allow Intel to hear about any political or competitive problems much earlier. The affiliated Tsinghua University is not just one of (if not the) top university in China, but it is very politically connected. For example, it is the alma mater of President Xi Jinping. This large investment by Tsinghua Unigroup makes Intel's move even more brilliant, because they can be a part of the inevitable growth and eventual domination of the Chinese domestic semiconductor industry.
I rarely post anything of any real political nature here, but I did want to point out that China wanting to capture the lion's share of its own chip market makes a lot of sense. For China, it is a legitimate national security issue. Keep in mind that semiconductors run every computer, smartphone, or electronic device -- including those that run national security and defense applications. Imagine what would happen if China made 95% of the semiconductors that run the United States' national defense. The US government would scream that the sky is falling and immediately act to change this. China has the right to protect its country and its people. China justifiably wants to have a good share of its own chip market.
Obviously, there are also financial reasons for this. For example, China's smartphone market is the world's largest ( interestingly, India is second, in front of the US). Apple sells more iPhones in China than anywhere else. Qualcomm gets 53% of its revenue from China. China needs to keep more revenue from its mobile industry.
Since this is, after all, a blog focused on patents, what does all of this have to do with patents? The answer lies in how China will achieve its lofty 40% and 70% semiconductor domestic market share goals by 2020 and 2025, respectively. As noted, China is making huge capital investments. This will lead to less "brain drain" from China to the West, as well as outright increases in innovation in this space. Further, China will provide financial supports for domestic companies to outcompete foreign competitors. But this will not be enough.
We will likely soon begin to see more antitrust actions by the Chinese government. But this, too, will be insufficient. Patents and patent enforcement will provide the necessary supplement to ensure China dominates its own market. (Again, because Intel is now connected to China, this will help them if not flourish, at least survive in, China.) The problem is that most of the best-quality Chinese patents are owned by non-Chinese entities. Other than the Chinese tech behemoths such as ZTE and Huawei, Chinese technology companies, including Tsinghua Unigroup, do not own many patents relative to their foreign counterparts, and the patents they do have are not as good as those owned by foreign competitors.
The current lack of quality is nothing to be ashamed of. China has generated a huge number of patents in a very short time. In fact, more than 1 million patent applications were filed in China in 2015, but 96% were filed only in China. This is changing quickly before our eyes, but for now, the best Chinese patents are those that are originally filed in the US, Europe, or Japan and then later filed in China as a counterpart to these foreign filings. China has moved faster in patent protection and innovation than any country in the history of the world. But to achieve more consistent quality, the Middle Kingdom needs a few more years as it shifts from quantity to quality. This move is akin to the growth path of many technology companies around the world, including the US.
For instance, when I was senior patent counsel at Red Hat, the company had completed a period of tremendous patent growth. Unfortunately, because many of these patents were on operating system technology, and unlike Red Hat, its competitors do not freely provide source code, much of the portfolio was of dubious value due to the inability to determine infringement. During my time there, and in the time since, Red Hat's portfolio has matured from a numbers-based portfolio to more of a quality-based one. But this did not happen overnight, and neither will it for China. But it will happen, and it will happen quickly with the emphasis and support currently provided by the Chinese government.
If most Chinese patents owned by Chinese entities are are of lower quality, then how can China use patent litigation to chase away foreign companies to support and grow domestic businesses, especially in the semiconductor industry? The answer is Non-Practicing Entities (NPEs). Whether they are called NPEs, licensing companies, Patent Assertion Entities (PAEs), patent trolls, or any other pejorative term, these businesses have decades of experience in licensing, monetizing, litigating, and enforcing patents. They are fertile ground for advice regarding patent enforcement and strategy for a country and its technology leaders that may be incredibly bright and business-smart, but with little experience in the patent realm. I recently had an article published in the Chinese state media detailing how NPEs can support innovation and technology companies in China.
Further, NPEs are uniquely positioned to help China by attacking foreign entities to clear the way for Chinese companies by exerting pressure in ways that only NPEs can. Even if Chinese semiconductor companies had the necessary patents and experience to engage their foreign competitors, they would risk retaliation from these foreign parties. NPEs, on the other hand, can unilaterally attack foreigners without fear of retaliatory patent suits. Although there are a few of antitrust issues, I do not believe that NPEs that act in the best interest of China should, or will, be attacked by the NDRC or any other antitrust agency in China. Indeed, by being a good "friend of China" NPEs will be exactly what China needs: an agent to help enact the goal of China to dominate its domestic industries in semiconductors and other fields.
Qualcomm: The antitrust nightmare continues - this time at home with the FTC as part of a last-minute lawsuit before the new administration takes over.
My former employer, Qualcomm, has had a difficult last few years regarding antitrust issues. Starting with China in December 2013, the San Diego-based telecom and semiconductor giant has faced numerous governmental investigations regarding its licensing business. After China, came South Korea (February 2015), Taiwan and the European Union (December 2015), and now the good ol' USA launching antitrust investigations.
The FTC complaint filed yesterday, Tuesday, January 17 makes three allegations against Qualcomm:
Qualcomm has posted on its website a response to the FTC complaint which states that "Qualcomm believes the complaint is based on a flawed legal theory, a lack of economic support and significant misconceptions about the mobile technology industry. The complaint seeks to advance the interests and bargaining power of companies that have generated billions in profit from sales of products made possible by the fundamental 3G and 4G cellular technology developed by innovators like Qualcomm."
Perhaps most interesting is the fact that the FTC complaint may be politically motivated. FTC Commissioner Maureen Ohlhausen, who voted against the filing, explained in what she notes is a rare dissenting statement that the Commission’s 2-1 decision to sue Qualcomm is “an enforcement action based on a flawed legal theory that "lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide.” Despite an appeal from members of Congress to refrain from “midnight litigation” with newly created theories that could damage innovation in the U.S., the FTC accelerated the investigation of Qualcomm and directed the filing of the complaint just days before the change of the Administration though only three of five FTC commissioners are in place.
Importantly, the complaint does not allege that Qualcomm charges above fair and reasonable royalties, but rather asserts that Qualcomm held back its IP from competitors and suppliers in an illegal manner. However, the company states that the FTC is incorrect as Qualcomm has never withheld or threatened to withhold chip supply in order to obtain agreement to unfair or unreasonable licensing terms.
I do not have a dog in this fight, but on first glance this appears on its face to be another of a long line of steps the Obama Administration has taken to undermine patent rights. This is great for my practice in China as innovators are chases from the US to Asia, but it saddens me as an American. Stay tuned as we learn more.
SIPO Deputy Director: China is willing to enhance intellectual property right (IPR) cooperation with other countries, but opposes accusations and abuse of IPR to exercise trade protectionism.
Gan Shaoning, deputy director of the State Intellectual Property Office (SIPO), said at a press conference that since the reform and opening-up, China had established a complete and internationally-recognized legal system for IPR protection with Chinese characteristics, including both administrative and judicial protection, and that the system was something that had taken developed countries hundreds of years to achieve.
"Exercising strict IPR protection is not only a demand for the country to attract foreign investment, open up to the outside world, and pursue innovation-driven development, but also an essential requirement for upgrading economic and social development," Gan proclaimed. "We are willing to enhance IPR cooperation and share our experiences of development with our counterparts across the world. At the same time, we oppose unfounded accusations and abuse of IPR to exercise trade protectionism."
Gan vowed to further strengthen IP protection and use of IP to encourage innovation. Specifically, "China will increase compensation for cases of malicious infringement and crack down on infringement on IPR through revised and improved laws and regulations," Gan stated. Gan said a guideline, issued by the State Council earlier this month, specified the goals and major tasks for the development of IPR during the 13th Five-Year Plan period (2016-2020).
Interestingly, the plan calls for IP royalties earned abroad will rise from 4.44 billion U.S. dollars in 2015 to 10 billion U.S. dollars in 2020. Stay tuned, as China continues its rise in importance in the patent world. Not just in China, but in the West as well.
Welcome to the China Patent Blog by Erick Robinson. Erick Robinson's China Patent Blog discusses China's patent system and China's surprisingly effective procedures for enforcing patents. China is leading the world in growth in many areas. Patents are among them. So come along with Erick Robinson while he provides a map to the complicated and mysterious world of patents and patent litigation in China.
Erick Robinson is an experienced American trial lawyer and U.S. patent attorney based in Beijing. He is a Partner at Porter Hedges LLP, where he manages patent litigation, licensing, and prosecution in China and the US.
The ideas and opinions at ChinaPatentBlog.com are my own as of the time of posting, have not been vetted with my firm or its clients, and do not necessarily represent the positions of the firm, its lawyers, or any of its clients. None of these posts is intended as legal advice and if you need a lawyer, you should hire one. Nothing in this blog creates an attorney-client relationship. If you make a comment on the post, the comment will become public and beyond your control to change or remove it.