Summarizing the SPC’s 2015 White Paper

 

WP_20160420_005China releases much of its IP data in April, on the margins of World IP Day (April 26).  This year there have been important conferences summarizing these reports in advance of their release, including reports from the Supreme People’s Court on IP litigation, as well as white paper reports on specialized IP courts in Beijing, Shanghai and Guangdong.  In addition, there are SPC reports on fifty model cases and 10 big IP casesThe Western media has also reported on some of these reports, as have state run media in Chinese and in English.   This blog has reported on SPC whitepapers and model cases for some time.  As in prior years many provincial courts, such as Hubei, are also reporting out white papers of various kinds, as have IP and administrative agencies, such as Beijing municipality.

As in prior years, interpretation of the data, particularly for the foreign business community, can be challenging.  Here is my digest of the SPC’s important 2015 White Paper:

Foreign Cases Are a Shrinking Share

Perhaps the most dramatic national news from the official national data involving foreigners is that in 2015 foreign related IP cases dropped 22% in absolute numbers from last year, despite an overall increase of 7.2% of total decided IP cases. The total number of civil cases involving foreigners was 1,327.   As a consequence, foreign related IP civil cases as a share of total cases dropped from 1.9% (2013), to 1.8% (2014), to 1.2% (2015).   By contrast, total administrative cases in 2015 were 10,926, of which 4,928 were foreign or about 45%, continuing the trend of an outsized foreign administrative presence, with an undersized infringement role.

Data from other sources also casts some doubt on the “foreign-related” data in the SPC’s report.  The Shanghai IP courts reported that approximately one in six lawsuits received involved an overseas party, with most pursuing trademark or patent infringement claims.  A newly set up database company, IP House, also reported that over 20% of the IP litigation in Beijing involved foreigners.  Former SIPO Commissioner Tian Lipu also cast doubt on data suggesting that the amount of foreign-related IP litigation is under 5%, in a letter to then USPTO Director Kappos.  Conflicting data on foreign-related cases is likely due to the manner of reporting.  Although there is no official explanation I know of, I believe that foreign-related cases are likely those cases reported as foreign related for purposes of suspension of mandatory time frames for adjudication under China’s civil procedure law.  However, litigation commenced by a foreign invested entity in China may be characterized by the SPC as a domestic case.

Another explanation may be that the high level of foreign-related administrative cases may be due to the centralization of IP prosecution in the headquarters of many foreign companies which file these cases in the name of the parent company.  After China’s patent office or trademark office grants the right, the foreign company might then transfer the rights to the subsidiary.  This transfer is validated by the high percentage of related party IP licensing activity which US census also reports. I have not, however, seen any studies that seek to correlate foreign licensing activity, foreign investment and foreign-related litigation, which might support this hypothesis.

As I have noted elsewhere, comprehensive data must, however, await publication of the relevant source cases or data by the SPC and other courts.

IP Cases Continue to Grow Overall

The shrinking reported foreign share contrasts with the rapid growth of IP cases in China.  The SPC reported that newly reported first instance IP cases increased to 130,200, up 11.73% from 2014.  Total cases adjudicated were 123, 059, an increase of 11.68%, of which 101,324  were civil cases, an increase of 7.22%.  Administrative cases adjudicated constituted 10, 926, an increase of 123.57%, most likely due to changes in China’s trademark law which establish a more direct role for the courts.   Criminal cases adjudicated were 10,809, maintaining their slightly decreased level since 2013 (the SPC report notes that the cases are “stable” 同比基本持平)。

Patent Cases Continue to Grow

The SPC reported that patent and licensing cases continued grow, and that they increasingly involved complex areas of technology, with an increase of 22.1% to 13,087 cases.   However, I have not yet seen a breakdown of cases by type of patent or technology type which fully documents this observation.  The data appears too general at this point, considering that perhaps 2/3 of China’s patent cases involve unexamined utility models and designs of varying technological complexity, the relatively small share of licensing disputes, and the reality that many software and unfair competition cases may in fact involve high technology cases (but may not otherwise be reported as such).

Unfair Competition Cases on the Rise

The SPC report shows that unfair competition cases have increased, including those involving the internet and software technologies. Civil cases increased to 2,181, with antitrust cases increasing to 156. The total increase was 53.38%. Trade secret cases have not yet been separately reported out. They are generally a significant share of this relatively small portion of the IP docket. In 2009, for example, there were 1,282 cases under the Law to Counter Unfair Competition in the courts, of which 253 involved trade secrets.

What the Data Suggests on Courts Foreigners May Want to Pay Attention To

A foreigner traveling to China who is considering where to bring a case, or risks of being sued in a particular venue, should not consider all court as equally well situation.  The Beijing courts, for example, clearly play a key role in foreign related IP adjudication. As administrative cases are overwhelmingly located in Beijing, the Beijing IP court hears perhaps 80% of the combined civil/administrative foreign docket.

In addition, the SPC reports that Beijing, Shanghai, Jiangsu, Zhejiang and Guangdong accounted for 70 percent of the first instance IP litigation of all types. Shanghai is also a good place to engage, as it has the SPC has established an international exchanges base there. Indeed, the Shanghai white paper also reported out on its exchange activities, including singling out a significant conference last year with the US Court of Appeals for the Federal Circuit. Still, several courts are assuming increasing importance, and some may pose defensive risks and opportunities for foreigners.   Jiangsu’s docket increased by 38.71%; the docket in Tianjin increased by 50.41%. Anhui saw an increase of 101.26%, while courts in Shandong, Shaanxi, Hunan and Helilongjiang all saw increases of over 30%.

Just as the specialized IP courts were releasing their white papers, the SPC reported that NPC delegates from a number of provinces had been asking to establish their own IP courts in their region, and that the SPC would report out in August on these proposals.  In my opinion, these requests reveal the problem of this otherwise noble experiment in specialized IP courts: if multiple regions have specialized IP courts at the intermediate level, then efforts to insure national unity in reduce local protectionism in IP litigation through a national appellate court may be compromised. However, it is also important to note that these specialized IP courts would replace specialized IP tribunals – a significant difference from US trial court litigation, which  involves courts of general jurisdiction.

At the same time as these papers were being released, a judicial delegation from China was engaging with US federal and state judiciary to discuss the role of IP courts and possibility of future cooperation (see picture above by me from the Wisconsin Supreme Court).  I also believe that we can expect more discussion on these important issue in the months and years ahead.

Three Upcoming Programs

Here are three upcoming programs:

Stanford is hosting a program on guiding cases at Stanford on Wednesday April 6, 2015.

The China General Chamber of Commerce is hosting a programChina-U.S. Intellectual Property Cooperation Dialogue & Chinese Brands Going Global Forum” on April 11, 2016 from 9:30 to 12:30 in New York City.  I will be moderating a session on IP developments in China, with leading companies, lawyers and officials.

George Washington University Law School is hosting a program with USPTO on IP developments involving China on April 14, 2016.  The program looks at challenges faced by US companies in China and challenges faced by Chinese companies in the US.  A dozen Chinese officials, including six judges will be attending the program.  I will be moderating the program with Dean John Whealan.  These programs are usually sell-outs, so please pre-register if you are interested in attending.  Here is the draft agenda. Registration is required for security to gain access to the USPTO, here’s the link: http://goo.gl/forms/TeyiFahzY8 .

Ox Herding, Industrial Policy and China IP

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Many Westerners have little sense of how deeply industrial policy is built into the China’s intellectual property system.   In the past, this blog has reported on some of the industry focused plans, such as the biotechnology plan and the development and execution of the National IP Strategy. China has also woken up to the problem of its plans being misunderstood.  It recently released an animated film  encouraging foreigners to study the new 13th national Five Fear Plan (十三五), presumably to increase understanding of this newly released plan.

I recently participated in a panel on industrial policy and intellectual property at the 2016 Fordham IP Conference, where we discussed the role of industrial policy in antitrust, copyright and patent policy in China.   In my search for a new way of approaching this issue, I turned to another Chinese tradition regarding dispelling illusion to present to the audience how foreigners approach this issue.

The 10 Zen Ox Herding Pictures are useful metaphors for stages of awareness of industrial policy in IP, much as they are for Buddhist enlightenment, from finding the ox to enlightenment where the ox and self disappear.  In the West, the ox herding pictures were popularized through Cat Stevens’ album “Catch Bull at Four, ”  which had several songs related to Buddhist meditation and practice.  I think the analogy to dispelling illusion holds.

Here are my four stages of riding the “ox” of industrial policy in IP in China: unawareness of the ox; seeing the tail; understanding the ox; and riding the ox.

The first stage in understanding IP and industrial policy is unawareness.

Some individuals after a few visits to China and seeing the incredible growth and dynamism of the economy, believe that China is a fully market-oriented economy and may remain ignorant of how much China’s economy continues to be planned.   Denial is not unawareness, for an individual in denial is unlikely to notice the presence of industrial policy.

In fact, foreigners that are first introduced to industrial planning in China because of the incredible growth in China, much of it due to market mechanisms.  Notwithstanding this growth, the United States doesn’t have patent quotas, subsidies, early warning systems, administrative enforcement operating on annual campaigns, with an extensive administrative IP enforcement system – to name but a few “distortions” from letting markets govern the protection of intellectual property rights.  Moreover, as my colleague Eric Priest pointed out at the Fordham Conference with respect to copyright licensing, and as Prof. Breznitz has reported with respect to innovation, much of the dynamism in China’s economy has stemmed from places where the market, and not the state has governed the choices that enterprises make.

What, I believe, distinguishes Chinese industrial policy is its pervasiveness.   As an experiment in private practice a few years ago, I once copied and summarized several articles in a Chinese government affiliated publication about China’s patent holdings in a highly competitive ICT field.  The articles described several US companies as having a “monopolistic” control of the technology through their patents and described how China would develop competing technologies.  I send the articles to one of the fortune 100 US companies mentioned in the article.  One of their senior lawyers called me up suggesting that I must have infiltrated a Chinese competitors’ computer network.  “No”, I advised “in fact you too can subscribe to this government publication for about 10 USD per year.”

The next stage is seeing the tail.

Often the tail of the ox, but not its full body, is perceived first.  The tail may be manifested by actions of a Chinese partner or the Chinese government that seem contrary to market policies, but are probably mandated by government directives.   An example might include China’s failed launch of a home-grown 3G standard.  The tail gives us a glimpse of what is likely to be a much larger body.

Many companies at this stage may view industrial policy issues solely as government relations issues, and they may handle many IP issues as non-legal matters.   A foreign company might link up with large, well-connected companies thinking that a major Chinese company will offer some measure of protection or good “relations” (关系) for their business.   They may also have a large government relations or media relations team.   The company recognizes that the government plays an outsized role in China’s IP environment, but they have not yet judged how much that role might affect their plans.  Because of this focus on government relations, companies may also face risks involving compliance and/or legal ethical standards as they try to navigate their understanding that the Chinese government accomplishes its goals via ‘relations.’

A few years ago, I met with a company that was concerned about rampant patent infringement of its high tech steel alloy product.  They had partnered with a major SOE in a JV to manufacture market this product in China, and were surprised that the SOE seemed unable to stop the infringing activity.  I asked them if they had looked up any of the industrial policies surrounding this product, national or local.  They said they were unaware of any such policies, but instead relied on their SOE partner.  In a matter of minutes, we discovered several national and local policies Chinese plans to develop technologies and products in their field market.  I told them that it was my impression that they, in a sense, were targeted, before they ever entered into a venture in China.  The company had now seen the tail of the ox —  it was up to them now to decide how to best steer their activities in light of the national focus on their technologies.

The chief IP counsel of a European company recently told me of her client’s legal problems: “I feel like we are just seeing an iceberg.  What we are seeing with the courts and regulatory agencies is only a small part of the story.”  This lawyer was concerned about handling of patent validity determinations and regulations for her company’s products.  The tip of the iceberg that this lawyer in the form of interference with its actions, was in fact the tail of the ox, where industrial policy concerns may be affecting legal and policy decisions.

The third stage is understanding the ox.   Jeff Immelt of General Electric was one of the few CEO’s to recognize the importance of studying China’s five year plans.   Understanding the ox is not a simple task.  The plans are wide and far reaching, and extend deeply in the Chinese political system.   IP and innovation related plans, for example, also encompass areas such as talent development, subsidies for IP filings, government training, foreign cooperation and collaboration, public awareness, standards for civil service promotion, amongst other areas.    Properly understanding the ox means one needs to develop appropriate IP, government relations, media relations and related strategies based on how China plans and allocates resources.

Sometimes understanding the ox may mean abandoning certain pre-conceived legal ideas.  Generally, most western lawyers look to the law as written as their principle guide for planning a company’s behavior.  All lawyers should also look at the law as applied – recognizing that certain laws or provisions are likely to be actively enforced and have a more dramatic impact that statutory drafting may suggest, as they are incorporated into state or agency planning.  The numbers China  collects for planning and evaluation may tell a different tale from foreign perceptions of China’s IP system.  Whether or not they are fully accurate, they are often helpful to foreign positions, and they are the numbers that determine Chinese policy.

Being able to engage Chinese counterparts in the terms by which they could be useful to you or officials themselves are being evaluated is also helpful in advancing a company’s goals.   Some of the most remarkable discussions I have had with Chinese IP agencies have involved their plans; in most cases officials were quite familiar with their IP plans and were able to tell me their goals for patents per capita, PCT filings, copyright registrations, trademark filings, etc.  Increasingly those IP plans have also included specific goals for IP commercialization.   Interestingly, most plans have not adequately considered how to calculate trade secret protection in their planning matrices.

The last stage is riding the ox.  Once the ox is perceived and accepted as part of one’s business activity in China, it is a presence that can no longer be ignored.  Successful companies recognize that they will never tame the ox.  Instead they must learn to incorporate the ox into their IP strategies, so that they maximize their advocacy and effectiveness in the Chinese market.  Examples of this strategy may be Qualcomm’s recent efforts to invest in China and leverage its settlement with NDRC to obtain additional licensing income.  Other companies have also found that by teaming up with Chinese regulatory authorities, their perceived adversary of the regulatory state can often be an important ally.