Collaboration vs Litigation in IP Licensing in China: 2016 Update

A string of articles and deals in the patent licensing sector are highlighting the increasing importance of collaborative licensing practices for foreigners to attract licensees.  Is such a collaborative approach to licensing necessary due to development, culture or other reasons?   

Let’s review some of the news from 2016:  VIA licensing, a subsidiary of Dolby has reportedly signed up Lenovo . as its newest member of the pool operated by Via for Advanced Audio Coding (AAC) patents.  IAM’s Jacob Schindler, quotes Ira Blumberg, Lenovo’s vice president for intellectual property, who praises negotiators on the other side for “recognizing and flexibly addressing unique market circumstances applicable to China and other emerging markets”. Speaking with IAM, VIA president Joe Siino confirmed that his company is focusing on win-win collaboration opportunities.  Paul Lin of Xiaomi, which has a licensing agreement with Microsoft, has  observed that many Western companies make the mistake of  importing their usual licensing approach to China wholesale, and that a collaborative element needs to be introduced.  Also in 2016, former arch enemies Huawei and Interdigital entered into an  agreement,  announcing a multi-year, worldwide, non-exclusive, royalty bearing patent license agreement  to settle all proceedings.  The two companies (frenemies?)  put in place a “framework for discussions regarding joint research and development efforts”, including a “process for transfer of patents from Huawei to InterDigital”.

Yet, it was also apparent in 2016 that traditional, non-collaborative approaches, continue to have some vitality particularly where recalcitrant licensees are involved, such as the case Qualcomm brought against Meizu, a reported law suit by Dolby Labs against China’s Oppo and Vivo in India’s High Court of Delhi, or the SEP case brought by Wireless Future Technologies against Sony in Nanjing.  The high win rate for foreigners should also be acting as an additional incentive to use the Chinese litigation system, although foreigners continue to play a disproportionately small role of foreigners in IP litigation in China (about 1.3% of the docket).

There may, indeed, be greater incentives for foreign licensors to seek Chinese partners at this time.   One of these factors is of course the size of the Chinese market itself, including a greater reliance on the Chinese domestic market by potential Chinese licensees/infringers, which may provide incentives to licensors to find longer-term licensing mechanisms through close collaboration with a Chinese partner. In looking at IP-related partnerships, most Chinese companies have IP strategies that still tend to be inwardly focused, by having strong domestic portfolio supported by local subsidies, and thereby making them challenging adversaries for practicing foreign entities in domestic litigation.  At some point, these strong domestic portfolios may also encourage collaboration by a foreign company with a Chinese company as an effective way for the foreign company to boost its domestic Chinese portfolio.  Other factors include the greater intervention by the state in monetization of IP rights, which encourages development and ownership of core IP by Chinese companies, with state subsidies and banking support.  Another factor which encourages collaboration is the Technology Import/Export Regulations of China, which encourages related party licensing between the US and China to avoid mandatory indemnities and grant backs. 

There may also be disincentives for US companies from being too US-focused in conducting R&D and IP monetization at this time.  The AIA, legal uncertainties over the scope of patentable subject matter in the United States and changes in the litigation environment may also be weakening the value of patent rights and ultimately acting as a disincentive to investment in new IP-intensive enterprises.  At the same time, Chinese companies have been increasingly investing overseas, including within the United States, and have shown a willingness to bring law suits in the United States (such as Huawei’s suit against Samsung in California) and may have reciprocal needs for a US partnership, as they seek to license their rights in the United States and elsewhere.  Such a need may be at the heart of the Huawei/Interdigital deal, discussed above.

In my estimation, collaborative approaches to licensing are responses to market and legal challenges in China as well as part of China’s maturing engagement on IP issues, including its own talented labor pool and potential as an innovative economy.  Collaborative approaches to licensing are part of greater trends in collaborative IP creation with China.  In 2015, Qualcomm may have kicked off this current trend when it announced a 150 million USD investment fund in China around the same time as its settlement of its antitrust dispute with China.   In addition, we are seeing greater Chinese participation in cross border R&D.  The Global Innovation Index noted the increasing importance of such international collaboration to China last year and  that “the Chinese innovation system is now densely connected to sources of expertise everywhere.” (p. 93).  Chinese companies had “the 7th largest foreign footprint of all countries with 178 R&D centers set up or acquired outside China by year end 2015.”  USPTO data also shows greater co-inventorship in Chinese patent applications, there is also  greater Chinese participation in international standards setting, and greater Chinese co-authorship of scientific publications (now at about 15%). Hollywood is also seeing a high degree of collaboration, in the form of co-productions, investments, and other collaborative mechanisms.

Collaboration in IP creation is occurring in response to changing market circumstances – developmental, economic, legal and perhaps cultural.  It is no surprise that it is also appearing in licensing transactions.

Book Review on Report on Development of Intellectual Property Development in China (2015)

The Report on Development of Intellectual Property Development in China 2015 中国知识产权发展报告 (IP Teaching and Research Center of Renmin University of China / IP Academy of Renmin University) (Tsinghua University Press, 2016) (320 pp., 98 RMB) (http://tup.com.cn/booksCenter/book_06886601.html) (the “Report”), is a bilingual Chinese-English report prepared by Renmin University and commissioned by the Ministry of Education.   The book presents a comprehensive summary of developments and challenges in IP protection and enforcement in China, with a particularly strong focus on legislative developments, the role of national plans, the history of IP in China, government funded R&D, education and training-related issues, and the pressing needs of market and legal reforms.

After a general overview (Part I), where the authors discuss various national plans, and general legislation, such as the Civil Law and the Law to Counter Unfair Competition, the authors discuss patents and innovation (Part II).  The Report notes that quality needs to be improved in life science patents, most of which come from small inventors (such as in TCM).  The report also candidly references critiques of SIPO’s performance (p. 150), as well as the low quality of university patent applications and suggests that there should be additional attention paid to university IP commercialization, including the many restrictions that apply to state-owned assets, a matter that was litigated in the Infineon case here in the United States many years ago.  The report also criticizes unrestricted subsidies and other incentives for patent applications, which has led to “the amount of patent applications to be falsely huge” and has given rise the problem of “rubbish patents.” (p. 163).  Regarding China’s extraordinary growth in patent filings, the authors conclude, as I have often in this blog, that “the motivational role of the market should be strengthened” in lieu of such incentives.

Regarding the proposed Patent Law amendments, the authors also argue that judicial decisions on patent validity should be final and not be subject to a final decision by an administrative agency, and that there should be appropriate limitations on administrative enforcement involving patent infringements (pp. 166-167).  The authors also seek to limit the abusive assertion of unexamined utility models and designs, including by authorizing the courts to consider the abusive assertion of patent rights a matter of unfair competition (p. 173).

In discussing trademarks, the authors similarly note that despite the huge numbers of trademark filings, Chinese companies play an undersized role in lists of global brands.  The authors identify problems in “rush registration of trademarks” involving grabbing a trademark previously used by others, particularly where a mark has international popularity, where there are fictional figures and titles of movies and television hits, and in the case of celebrity names (p. 183).   The authors suggest that where a trademark is not being used, there should be no compensation given to the infringer, as one step to address rush registrations – a practice that apparently is already being used in Shanghai and perhaps other courts.  The authors also suggest that in the case of foreign rights owners, the courts should take into account the popularity of the brand enjoyed outside of China and the subjective malice on the person conducting the registration.   As with low quality patents, the author see a useful role for courts in adjudicating these rush registrations as acts of unfair competition (pp. 186-187).

These themes of addressing proposed legislation, adopting new legislation to new circumstances, more effectively insuring that markets rather than government fiat direct IP commercialization and protection,  and using unfair competition law to address abuse of IP rights play an important role in other chapters of the book, including the chapters on Copyright Law (Part IV), Competition law (Part V), IP protection by the Judiciary (Part VI), IP Education (Part VII), developments in Shenzhen City and Jiangsu Province (Part VIII), and other issues, such as free trade agreements (Part IX).

Overall the authors support the role of the courts as the principle vehicle for adjudicating IP disputes in a market-oriented economy, and that the IP laws should be revised to “attach importance to enhancing the leading and final role of the judicial protection of the intellectual property rights, limit and regulate intellectual property-related administrative enforcement …” (p. 240).  The authors also support the tendency to increase damages on IP disputes (P. 282), the role of specialized IP courts and the case law system, and deficiencies in administrative enforcement reform including problems of coordination among agencies.

In their summary, the authors note that “the sound operation of the IP system is not merely an issue of the IP law; it relies on an improved legal system and environment of the rule of law.  Only with innovation based on the market economy and driven by market interest is it possible to be the lasting, stable fore to drive the socio-economic development.” (pp. 315-316).  The book is a very useful summary of some of the hot issues now facing the Chinese IP system, with a focus on rule of law and market orientation.

I look forward to the 2016 edition.

US-China Entertainment Law Conference Highlights Business and Legal Developments

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(From a presentation by Lisa Wang, General Counsel, Huayi Brothers Media Corporation)

The following is a readout of the US-China Entertainment Law Conference held at Loyola Law School of Los Angeles on November 2, 2016.  A list of the speakers is found at the end of the blog.  The program was co-hosted by USPTO and Loyola Law School.

Industry Trends:

 Although there have been several notable legal developments in entertainment law in China, the most dramatic changes have been in the market.  China is now the world’s second largest market for theatrical films, after the United States.  While box office revenue and attendance are down in the United States for motion pictures, China has experience incredible growth, with box office revenue nearly 50% in 2015 compared to 2014.   China will likely experience slower growth in 2016, and may enter a more sustainable rate of growth thereafter.   The industry is adapt to the increased importance of China through changing content to have wider appeal and including China in marketing and business development plans.   

Among the major China players, Wanda is now the largest owner of theatres in the world.  It acquired Legendary Pictures in a $3.5 billion media deal.  Tencent is the world’s largest purveyor of of videogames, with 4.2 billion USD in global revenues in 2015.  It is also the first ranked publisher on IOS and Apple app stores.  The Chinese market had 489.2 million video game users in the first half of 2016, with a growth rate of 30.1 percent compared to the first half of 2015.   Importantly, Chinese consumers now accept paying a fee for using online videogames.

 The investment trends for films from China include more direct investment in the United States and Europe, more collaborative production, and more local financing, especially for shows and including both television production and online productions.   Box office revenue will likely continue to grow, and online video will continue to disrupt ticket prices.  

Prof. Seagull Song of Loyola noted that in 2015, foreign films captured five of the top ten grossing films in China.  Market access restrictions are still impeding the market, and that the China market is still underperforming for its size.  However, with respect to market access restrictions, the dean of the Beijing Film Academy predicted that the current quota on foreign films is also likely to be relaxed, but that this relaxation is not likely to have much impact due to the preference of the public for locally made films.  

Regarding the on-line environment for content, Prof. Robert Merges of UC-Berkeley suggested that as platforms affect the distribution of content and provide increasing vertical integration, maintaining competition among the limited number of platforms is likely to become more difficult.  With vertical integration, Merges predicted that copyright is likely to become less important in China.  Branding will instead become more important to develop loyalty to a platform that provides a variety of content and services.   In addition, the development and ownership of data originating from platform services will become critical to platform success.

Taking a different approach, Prof. Eric Priest of the University of Oregon addressed the question of what happens when copyright is harder to enforce such as in the online environment.  With changing technologies, copyright allows its owners and creators to access new markets as they are created, providing them with some leverage with intermediary platforms, and helps stabilize the market for content creation by creating multiple revenue streams.  LeTV is an example of a company in China that began driving new copyright norms by investing in licensing of copyrighted content around 2009 and 2010.   The theme of a diversity of licensing revenue streams in addressing new markets and new technologies was later underscored by Shira Perlmutter of USPTO, who also look at trademark rights derived from copyrighted content in her key note speech, while also underscoring many of the continuing enforcement challenges foreign rights holders face.

As an example of the competitive challenges faced by copyright owners, Priest cited the example of ring back tones for music.  Seventy percent of China’s huge netizen population consume music.  However, most are not paying for this music – except for cell phone ring back tones.  Gross revenues received by mobile cell companies for ring back tones were nearly as high as gross revenue for the music industry in the United States.  However, the music industry received a paltry 105 million USD for its content from Chinese cell service providers compared to the 4 billion that was generated.  Thus, Priest’s discussion to a degree validated Merges’ discussion regarding how competition and integration were becoming increasing concerns.

IP Challenges:

Prof. Song gave a brief presentation on some of the top entertainment cases in areas such as defamation, ideas/expression dichotomy, merchandising rights, and first look rights of publishers.

In trademark, several speakers discussed the Kung Fu Panda / merchandising right case, which has also appeared in this blog.  Not all speakers were in favor of this modest trend of creating a new “merchandising right.”  In the United States, the issue was first addressed by our courts and later adopted into amendments in the Lanham Act which look at likelihood of confusion based on misleading endorsement or sponsorship of a product or service. (Trademark Law Revision Act of 1988 – concept of “confusion as to the sponsorship”), as well as the Federal Trademark Dilution Act of 1995 (protecting famous marks against either the blurring of their distinctiveness or the tarnishment of their reputation caused by unauthorized uses of identical or similar marks not solely on related goods but also on unrelated goods.)  In the United States case law requires a case by case analysis, particularly for unrelated goods and services, where the plaintiff can show a likelihood of confusion as to “sponsorship.”  Cynthia Henderson of USPTO underscored that in China, there may be a greater need for a merchandising right because of rampant bad faith filings,  lack of flexibility under China’s first to file system, lack of protection for lesser known marks, and difficulties in addressing infringements for protection across different classes of goods and services.

Prof. Zhang Ping. from Peking University, discussed the various possibilities for protecting the title of a work under Chinese law, including trademark protection, copyright protection and unfair competition.  Trademark protection in her view, could be deficient since  “in [the] real world, one does not pursue trademark protection for the title of a work until this work gains certain commercial value.”  In such instances, unfair-competition protection might be pursued as a supplemental remedy.   Prof. Zhang gave the example of the famous Wahaha mark (1989), which was originally the title of a popular song (1954).  A court determined that the creator of the song did not enjoy copyright protection in the title.  Unfair competition and merchandising rights may help in addressing these issues .

Several speakers addressed problems in copyright protection for live television entertainment, including but not limited to, live sports broadcasting.  Rebecca Borden of CBS noted that the scope of content that has uncertain protection under current Chinese copyright law incudes live broadcasts of sporting events (about which I have previously blogged), but also includes award shows, games shows, annual galas, etc.  Award shows have many similarities to sporting events, including filming of live reactions to awards/unexpected reactions, driving viewership in conjunction with unique performances or achievements, etc.  Prof. Jiarui Liu of the University of San Francisco noted that recognizing the creation of a professionally produced live sports broadcast as a creative work would likely provide the most stable protection for the investment in these works.

The video gaming industry also faces a number of IP challenges, as noted by Zhang Xin of Tencent and Song Haining of the Junhe Law firm.   Haidian District Court has been the epicenter of litigation involving onine gaming IP issues.  Total  adjudicated cases in 2014-2015 involving copyright were 183; trademarks 17, and unfair competition 9.  Courts have been willing to impose progressively higher damages, including damages based on actual or implied revenues attributable to the copyrightable infringement.  Due to the large amounts at stake, some cases will also satisfy criminal thresholds, and the public security agencies have been supportive.  See, eg., WeMade v. Xiaoxian (2016), which involves potentially billions of RMB in damages.

Charles Feng of East & Concord Partners gave an excellent presentation on preliminary injunction (PI) practice in China, an issue I have covered elsewhere on this blog.   Mr. Feng gave permission for me to post his ppt here.

In Mr. Feng’s view, the likelihood of prevailing on the merits is based on a calculation of the “certainty to prevail” minus “opposing evidence.”  If there is sufficient evidence and clear facts, which do not involve complicated comparison or necessitate judicial verification, a plaintiff is more likely to prevail.  PI’s are also rare in invention patent or software infringement cases.  The case should also not involve disputable or controversial issues, such as those involving the originality of a work, the doctrine of equivalents,  a prior-art defense, the similarity of marks  or goods, the well-known status of a mark, etc.  

In assessing the public interest, the court also looks at issues such as the necessity of intervening against fake and shoddy goods, supporting the security of people’s life, environmental conservation, etc. Generally, preliminary injunctions are rejected in case of a pharmaceutical products related patent and SEP’s.

Among the cases he cited: Telpa v. Media Plus(灿星)(Voice of China case), where  the defendant may have used trademarks completely incorporating plaintiff’s registered mark, and there was also trade name infringement.  A contrary case example is HBSA v. General Administration of Sport, involving the  跤王 “Wrestling King” mark in in Cl. 41 covering.  The General Administration of Sport organized games called “China Wrestling King Competition”. During the litigation, the defendant claimed the fair use defense. The Beijing No.2 Intermediate Ct.  noted that “Given the alleged mark of Wrestling King is a generic name, which may not be registered as a mark, and that the Trademark Review Adjudication Board has accepted the application for invalidation, the court does not believe that there is likelihood of prevailing on the merits.”

The concluding panel, which was moderated by me, included a lively discussion over IP, rule of law, the importance of the Chinese market, the role of the Chinese government, and the future direction of “entertainment law” in China.   Monique Joe highlighted the differences and unpredictability in the way the TM law is applied to address infringement and squatting issues.  Joshua Grode noted that he thought IP issues were not a major factor in deals.  Sheri Jeffrey noted that many deals do not contemplate the full scope of rights that may be licensed or created, including rights

Prof. Ma Yide refuted assertions that China is not protecting IP or that there were regulatory risks in China that made investment unattractive, noting that the growth in the market was likely the single biggest attractive force for foreign investor. Regulatory uncertainty was noted as a major factor in driving investors away from co-productions, despite a higher revenue share (47%) for coproduction versus an imported film.  The lack of certainty also dries down liquidity.  Putting together Robert Merges’ comments, the deal makers on the last panel, and the concerns about over the uncertainty of copyright protection in certain areas, several speakers questioned whether copyright was becoming the “chopped liver” of the entertainment sector – beautiful to look at, but rarely exploited in the proper way, which was a somewhat negative way to end an otherwise very positive and forward- looking program.

The preceding are my personal observations only.

SPEAKER LIST

Rebecca Borden Senior Vice President and Associate General Counsel, CBS
Mark Cohen Senior Counsel, United States Patent and Trademark Office
Jay Dougherty Professor, Loyola Law School, Los Angeles
Charles Feng Partner, East & Concord Partners
Neil Graham Attorney Advisor, Office of Policy and International Affairs,                                        United States Patent & Trademark Office
Josh Grode Partner, Irell & Manella LLP
Sheri Jeffery Partner, Hogan Lovells LLP
Monique Joe Head of Trademarks, Dreamworks Animation
LIU Chun-Tian  Dean,  Renmin University Intellectual Property Academy
LIU Jia-rui Assistant Professor, University of San Francisco School of Law
MA Yide President, Beijing Zhongguancun IP Research Institute
Robert Merges Professor, University of California Berkeley School of Law
Shira Perlmutter Chief Policy Officer, United States Patent & Trademark Office
Eric Priest Associate Professor, University of Oregon Law School
Bennett Pozil Executive Vice President and Head of Corporate Banking, East West Bank
SONG Hai-ning Partner, Junhe Law Firm
Seagull Song Professor, Loyola Law School, Los Angeles
Simon Sun Executive Vice President, Le Vision Pictures USA
Lisa Wang General Counsel, Huayi Brothers Media Corporation
Michael Waterstone Dean, Loyola Law School, Los Angeles
Martin Willhite Chief Operating Office and General Counsel, Legendary Pictures
WU Manfang Dean,  Beijing Film Academy School of Management
ZHANG Ping Professor, Peking University Law School
ZHANG Xin Legal Director, Tencent Interactive Entertainment

 

 

 

 

Forthcoming Loyola/USPTO Conference on Chinese Entertainment Law

Loyola University Law School of Los Angeles and the USPTO are jointly sponsoring the first US-China Entertainment Law Conference on November 2, 2016.  Registration information and other information are found here.  The program will cover (1) Year in Review: Recent Developments in the US-China Entertainment Industry; (2) Commercialization of Content; (3) IP Issues Related to the US-China Entertainment Industry; and (4) Opportunities and Legal Challenges in the US-China collaboration of Movies, TV Productions, Music and Gaming etc.

I am scheduled to speak at the conference along with other colleagues from USPTO and a number of leading entertainment lawyers, business people, academics and officials.