Foreign companies face altered realities as China progresses

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, has 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."

http://www.chinadaily.com.cn/cndy/2013-08/26/content_16919324.htm