An Interview with Chinese IP Experts on the Recent Trends in IP Protection and Enforcement
In the lead up to IP Academy’s Global Forum on Intellectual Property 2015 (GFIP 2015), we had a chance to conduct an interview (in Mandarin) with some of our panellists for “China – Recent Trends in IP Protection and Enforcement”, our panel discussion at GFIP 2015.
Director of IP
Wang Haibing graduated from Jiangxi University of Finance and Economics, majoring in Information Management and Information System in 2003. In the same year, he joined Foxconn Technology Group as a patent engineer in charge of drafting and analyzing software-related patents. In 2007, Haibing joined Shenzhen Xunlei Networking Technologies and established its intellectual property department to facilitate and protect the company’s key technologies and product innovations. Haibing joined Xiaomi in 2012 to build its intellectual property department, and he is currently the head of its intellectual property department. He is in charge of Xiaomi’s global IP deployment strategy with regards to all forms of IP including patent, trademark, domain name and copyright. He also manages Xiaomi’s IP licensing negotiation, IP acquisition, IP dispute and litigation.
Zhong Lun Law Firm
Helen Cheng is a partner at Zhong Lun Law Firm‘s Shanghai Office. She holds a master’s degree in science and an LL.M. from Stanford Law School. In addition to her New York bar license, Ms. Cheng is admitted to both the Chinese bar and the Chinese patent bar.
Ms. Cheng has practised Chinese IP law since 2000. Her practice encompasses all aspects of IP, including patent and trademark litigation, trade secret protection, anti-unfair competition, licensing and technology transfer, IP due diligence, and client counselling in a variety of industries.
Ms. Cheng was recognized by Chambers and Partners as an “Outstanding Young Partner” in 2014, a “Leading Lawyer for IP Litigation” in 2014 and 2015, and a “Leading lawyer for Healthcare” in 2015. She is praised by clients for her business acumen as well as her communication skills and strategic approach (Chambers 2015 Edition). Ms. Cheng has published numerous articles on IP protection in China in a number of influential periodicals and magazines. She is also an adjunct professor at the East China University of Politics and Law.
Senior Licensing Director
Mr. Tong Xin is Senior Licensing Director of ZTE Corporation, a globally-leading provider of telecommunications equipment and network solutions. Mr. Tong leads ZTE’s patent licensing and IP monetization projects all over the world. His work covers license negotiation, IPR policy research, business strategy, industry cooperation and investment. His team is trying all efforts to explore approaches of IP management and utilization matching Chinese market environment.
1. Intellectual property (IP) in the smartphone industry is a highly contentious issue, as evidenced by the protracted legal tussle between Samsung and Apple. Given the strides China has taken towards implementing and improving IP enforcement and awareness, what impact do you foresee this having on China’s rising smartphone and high-tech industries?
HB: With respect to this issue, I believe that there is cause for optimism. Since 1985, the Chinese government has actively promulgated and raised awareness about IP and patent laws in China. Within the last two years, we have seen a fine-tuning of China’s IP regulations and policies, such that our market is starting to align itself with other mature IP markets such as in Europe and the United States.
In the early years, IP awareness within China’s domestic companies was fairly low. However, thanks to China’s economic reform and the effects of globalisation, the business environment in China and the rest of the world is now very different – the rules of the game have changed, and there is greater mutual integration and influence between China and the rest of the world.
Corporations today are realizing that there are no geographical boundaries for the protection and enforcement of IP rights. More so, China is realizing that only by respecting the IP of other countries, will there be reciprocal recognition of the IP of Chinese companies abroad. This is evidenced by the large number of patents being applied for by Chinese corporations, not just domestically but abroad as well. This also highlights the aspirations of Chinese companies to protect and respect IP rights. Furthermore, policy-makers are also facing increasing pressure from both domestic and foreign enterprises to make further improvements to the IP legislation and judicial system in China.
HC: In recent years, the strength of IP protection and enforcement in China has greatly increased following China’s large scale reform to its IP regime. This has also increased the value attached to IP in China generally. In light of this, I believe that the smartphone and other high-tech industries will be affected in some of the following ways:
i) Firstly, we will see an increase in patent cooperation and cross-licensing between companies. The smartphone and high-tech industries are all patent-intensive industries, with large patent portfolios. Given the large number of patents owned by these enterprises, competing companies may find that they own patents which rivals may want to utilise, and vice-versa. There is therefore an opportunity for “cross-distribution” of these patents.
Furthermore, the cost of enforcing a patent claim against a competitor through litigation can be very high. This is especially so in the smartphone and high-tech industries, where the state of technology develops very quickly, and would make little commercial sense to enforce an IP that quickly becomes obsolete. In these circumstances, it makes much more sense for the respective patent holders to enter into cross-licensing agreements, in order to create a win-win cooperation model. It is my belief that this will gradually become the norm in the industry.
ii) Secondly, there will be an increased sense of urgency for innovation in China. On the one hand, a judicial environment that is increasingly recognising the importance of IP rights will help to reassure innovative companies that the fruits of their labour are being protected. Increasing the effectiveness of IP protection, curbing patent infringement – these measures will help to accelerate the transformation of Chinese goods from being “Made in China”, to being “Created in China”.
The flipside however is that companies that are less innovative will find it harder to gain a foothold in the marketplace. They must then learn to increase their innovative capacity, or risk being eliminated from the marketplace. For example, there is a race today by some of the country’s leading smartphone manufacturers for the development on 5G telecommunication patents, which is reflective of the urgency for innovation that Chinese enterprises now face.
iii) Lastly, companies will start to increase their efforts to protect their IP rights. I would highlight that in recent years, the Chinese courts have consistently seen rapid double-digit growth in the number of IP cases being heard. In 2014, the total number of new IP cases heard in Chinese courts was 133,863, a 19.52% increase from 2013. While these numbers do not directly reflect the number of cases that stem from the smart phone and high-tech industries per se, it is still instructive given the fact that both the smart phone and high-tech industries require large amounts of R&D and capital investment, and are very likely to be involved in patent disputes.
Given the increasing IP and patent case load, coupled with the increased crackdown on IPR violations, the amount of compensation that has been paid out under infringement cases has also started to gradually increase. It is therefore inevitable that great importance has been attached to the monitoring and strengthening of IP rights for such companies.
TX: As you have rightly pointed out, China is indeed taking measures to improve IPR protection, as well as to enhance its national level of IP awareness. In order to stimulate economic growth, innovations must be afforded adequate protection to incentivize inventors and investors. We believe that this is a key component of China’s National IP Strategy, and is also a key step to upgrade China’s industrial status from the “Made in China” image, to one that is “Created in China”. As a company that invests heavily in building a robust patent portfolio, ZTE fully welcomes and supports these changes.
By examining other jurisdictions with more robust and mature IP protection and enforcement measures, it is plain to see that there is a greater amount of patent and IP related disputes in the smartphone and other high-tech industries, as they utilise a considerable number of integrated technologies, IP, and inventions. The resulting compensation in tort or patent licensing fees arising out of these disputes have also been correspondingly high.
This observation is especially alarming for the industry chain, and related enterprises in the smartphone industry in China. Given the developments and improvements in IP regulation in China, a company that fails to respect innovation, and does not improve its IP knowledge and awareness, will not have the necessary tools and strategies to cope with the increased risk of IP infringement and enforcement actions.
As a result, we believe that the smart phone and high-tech industries in China may face short-term “labour pains” before they mature. However, we believe that these “labour pains” are beneficial in the long run to help increase the awareness and respect of IP in china, as well as help Chinese enterprises to turn their attention towards research and innovation. This will improve China’s competitiveness in the global marketplace in the long run as well.
2. It has been 8 years since the National IP Strategy was announced. In this time, have there been noticeable changes on the ground in terms of IP and innovation in China? Apart from the amazing increase in quantity of filings, have you also witnessed a corresponding increase the quality of these filings?
HB: This is a question that is best addressed by the national patent offices. However, from a business’ perspective, I personally feel that there has been a significant improvement in the quality of patent filings in China.
Apart from the increase in quantity of patent filings, the recent growth of patents in China has also witnessed a significant improvement in the quality as well. Initially, while the quantity of filings in China saw a significant increase, most of these filings were concentrated in the larger and more IP-savvy enterprises within China. This was also the result of increased government funding directed at stimulating the quantity of patent filings in China. In recent years however, we observe that government funding in this area has dropped, but patent applications have continued to increase.
One reason is because many of these firms now understand that it is in their best interest to apply for patent protection, either because they have previously encountered patent-related problems in the past, or because they expect to do so in the future. Another reason is that there are now a large group of innovative SMEs in the technology sector, with very strong IP awareness, who understand the importance of patent protection.
However, the question of patent quality is a very complex issue, and is difficult to define. Enterprises that have invested a large amount of energy and resources into filing a patent, may still be deemed by others to have a low-quality patent. One thing you can be certain of however, is that ever since government funding for patent filings have been reduced, most of the companies that are making patent applications these days have requirements for very high quality patents for their business purposes.
HC: Since its introduction, the National IP Strategy has resulted in an increase patent applications. As a reflection of China’s constantly improving innovation capability, there have also been a concordant changes to the process for patent applications as well.
i) For example, we have seen a large increase in the number of patent applications. IP registration in China can be roughly categorised as patent, utility models and registered designs, with the latter two not requiring a substantive examination for registration. When the National IP Strategy was first introduced, utility models and registered designs formed the majority of applications. In the last 2 years however, this situation has begun to change.
Based on statistics from the China State Intellectual Property Office (SIPO), between 2014 and 2013, the number of registered IP applications received did not change much (with a difference of just 0.7%), but the proportion of patent applications accepted maintained a steady growth rate of 12.5%, while the numbers of utility models and registered designs fell by 2.7% and 14.4% respectively.
ii) There has also been an increase in the proportion of patents being registered with SIPO. This can be seen in the changes to the patent application process. In 2013, the number of applications for patents, utility models and registered designs, were 34.7%, 37.5% and 27.8% respectively; in 2014, this proportion was 39.3%, 36.8% and 23.9% – with patent applications surpassing utility models for the first time.
Furthermore, in 2014, a Chinese company was able to break into Thomson Reuters’ “Top 100 Global Innovators” index for the first time. The 4 main criteria in the formulation of the index are: patent application volume, patent application success rate, global patent applications, and patent influence, with the index being an authoritative measure of corporate creativity. This is an indication that the quality of patents being filed by Chinese companies are indeed increasing.
Of course, improving the quality of patents has not been smooth sailing, and China still has a long way to go in its IP journey. For example, China is still lagging in terms of PCT international applications. Most patent applications are also still concentrated in companies from the IT and telecommunications sector, while other technical areas such as optics, and transportation are still lagging behind. Part of the reason for this imbalance is due to the characteristics of each technical field, but to a certain extent it also reflects the need for technological and innovation capacity to be increased in other sectors in China.
TX: Personally, I feel that I am not in the best position to answer this question. However, I am willing to share my own experience in this respect. We believe that in the last 5 years, China’s creation, protection and use of IP in various fields have improved and experienced steady growth, as evidenced by the various global indices. This is also evidenced in the following aspects:
i) The related IP laws and regulations, such as in the area of trade marks, have been amended and improved;
ii) There has been a rapid increase in the scope and quantity of IP in China. For example, in 2014, the total number of patents, utility models, and registered design applications received by SIPO was 2,361,000 (with 928,000 of those being patent applications).By application volume, SIPO has ranked as the top ranking IP office in the world for 4 consecutive years. In 2014, SIPO also received 26,000 PCT applications.
iii) Judicial protection efforts are being increased, as evidenced by the establishment of the specialised IP Courts in Beijing, Guangzhou and Shanghai.
iv) I have no direct data or statistics that relates to the quality of patents filed, but I believe the following statistics provide anecdotal evidence to demonstrate the increase in quality of patents filed: between 2009 – 2013, China’s patent intensive industries grew on average 11% annually; the effective patent industrialization rate was 33.8%, and in 2014, patent pledge financing amounted to some 48.9 billion yuan.
v) On the other hand, using ZTE as an example, it can be said that the quality of patents filed in China have had a significant increase. ZTE has already intentionally integrated IP into our customer service, product development, marketing, and supply chain and business process management. We have done so in order to align ourselves with market demand, as well as to maintain our forward looking philosophy, which is our competitive edge in the technology industry. As a result of this philosophy, ZTE has become one of the major patent holders in the global telecommunications industry. Our patent portfolios include numerous patents that comply with international standards in the telecommunications industry (aka “standard-essential patents” or SEP). ZTE also accounts for 13% of the total required patents in the 4G LTE industry.
3. One of the objectives of the Strategy involves stepping up enforcement efforts and further judicial protection. In light of this, what strategies and advice can businesses venturing into China adopt, in order to avoid costly IP litigation?
HB: First of all, I believe that the cost of IP litigation in China, as compared to Europe and the United States is still relatively very low. My advice to companies seeking to enter into the Chinese market is not to look to litigation in China as a means to seek compensation for your losses, or as a means to achieve all your desired commercial outcomes, but merely as a tool of last resort – this is the situation in Europe and America as well. For example, Nokia recently brought patent infringement proceedings against Shanghai Huaqin in 2010 for infringement of 8 of its telecommunication patents. However, the Court had recently found for Huaqin’s counterclaim that 1 of Nokia’s patents were invalid.
In my opinion, it is far better to exhaust all other available remedies to protect the value of your IP, including open negotiation and other means of cooperation. Rights holders should not expect to issue a demand latter, and wait at home to collect their compensation. Rights holders will be pleased to note that these days, parties are far more willing to enter into licensing agreements than they were before. The traditional means for protecting IP rights are undergoing a sea change.
HC: Judicial protection for IP in China has been implemented in a number of ways: one is to increase the penalties for IP infringement, and to increase the compensation for rights holders; second is to reduce and simplify the protection measures, while increasing the scope of rights. These are all measures that are directed at improving the IP litigation process. However, while some IP litigation is unavoidable, it remains in the commercial interest of business-minded entities to avoid litigation entirely. I would like to discuss this issue from 2 perspectives:
i) Corporations should seek to establish and improve their IP monitoring mechanisms. For example, the monitoring department should actively track the status of approved patent applications, and assess whether the grants have been made in strict accordance with the legislation. This will ensure that the corporation may effectively use the granted patent. Regular internal IP audits should also be carried out on the company’s patent portfolio, in order to assess the importance of its various grants, and better leverage on them, as well as to avoid unnecessary litigation. The team should assess which patents are being held for strategic reasons, and which are being held for production and operational needs; which patents are mature, and which areas of its portfolio require further strengthening. IP monitoring can help a company to ensure that it does not inadvertently infringe a third party’s IP, help the company to understand how to better frame its claim specifications, or assess if it should even seek to register its IP. IP monitoring can also aid in the early detection of infringement of your company’s IP by third parties, which is helpful in assessing the appropriate dispute resolution strategy against potential infringers.
ii) Companies should also seek to obtain external legal advice and risk assessment. Prior to entering the Chinese market, the proposed venture should be appraised of the IP risks involved in production and operation in China. This can be achieved by engaging an experienced external IP lawyer to carry out the necessary risk assessment and to provide professional legal advice on the potential pitfalls. Based on the external legal advice, the company can then assess whether it should, for example, bring invalidation proceedings against a party, or enter into negotiations for the exploitation of a licence. Furthermore, engaging external counsel to carry out a risk assessment is an effective way to avoid costly litigation down the road.
TX: As highlighted in Question 1, China is determined to implement its National IP Strategy in order to establish itself as an international “Intellectual Property Powerhouse”. Stepping up enforcement efforts and judicial protection is one means to do so. I believe that the considerations for any company seeking to enter into the Chinese market are consistent with the considerations that they must assess when entering into any other country that holds IP in great regard. These considerations should be nothing less than the following:
i) Understand and comply with the laws and regulations regarding IPR protection in China;
ii) Before entering the market, conduct the necessary due diligence and research on the Chinese market and distribution, including the areas of patents, registered trademarks, domain names, trade names, product packaging, advertising, IP investment restrictions and the like;
iii) Conduct an IP risk analysis on your own products. Where necessary, seek the necessary permissions or licences from existing rights holders in China, or where appropriate, enter into cross-licensing and collaborative agreements in order to avoid potential litigation risks;
iv) Establish a risk assessment and IP monitoring system. Avoid unnecessary IP disputes and litigation by entering into good faith negotiations.
v) Build up an effective IP and patent portfolio, and enter into the appropriate agreements with Chinese partners to leverage on each party’s IP.
Interview conducted by Mark Cheng of The IPA Beacon Editorial Team