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.

Some Good and Bad News in Recent Reports on China’s IP Environment

“The good news is China interested in IP, and the bad news is that China is interested in IP.” This proposition is proved by some of the recent reports on China’s IP environment  particularly the 2016 China Business Environment Member Survey by  the US-China Business Council, European Business in China Position Paper 2016/2017  prepared by the European Union Chamber of Commerce in China and the Global Innovation Index 2016, (GII) which was prepared by Cornell University, INSEAD and WIPO.   

The Good News

As for the goods news: for US China Business Council Members, intellectual property enforcement has slipped overall to the eight-ranked slot for USCBC members doing business in China. The top challenge is competition with Chinese companies in China.  IP enforcement has, in fact, slid from the number two slot (2014), the number four slot (2015) to number eight.  Still, IP concerns remain highly important for the tech sector, which lists IP in the number four slot, but also includes many “quasi-IP” issues in its top 10: innovation policies (number 2), government procurement ( 5 ), antitrust (7 ), standards (8) and cybersecurity (9).

The GII also singles out China’s improvements in IP.  For the first time this year, China became a “top 25” innovative economy in the GII. It is the first middle income country to do so.  China’s rise is attributable to a number of factors, several of them IP related: the country has a particularly high number of R&D-intensive firms among the top  global corporate R&D spenders.  China has had top scores in indicators such as patent applications by origin, utility model patents, high-tech exports, global R&D companies and  research talent in business enterprise (see chart, below).  While some of these indicators are of questionable value (such as numbers of utility model patents), the GII report recognizes many of the steps China has taken towards improving its innovation and IP environment. 

The Bad News

There are several important issues that the EU Chamber suggests China needs to address: procedural reform in the courts and improvements in administrative enforcement; addressing the problems of counterfeiting for OEM production in China and what constitutes infringement domestically; improving trade secret protections when workers leave an employee;  insuring the availability of provisional measures addressing higher barriers to obtaining High and new Technology Entity Status through removal of a global exclusive licensing approval option; and greater coordination and clarification of standards in IP-related antitrust investigations (amongst others).

One area of bad news shared by both the Chamber and the GII:  The GII scored intellectual property payments according to a formula as a percentage of total trade.  China came out below its overall rank at 72nd place, while it ranked number 1 in high tech exports (p. 199).  While the GII did not draw any specific correlation between the two, this is further support to me that China is a “remarkably underlicensed economy.”   

One reason for this disproportionality between licensing payments and high tech exports is the discriminatory provisions in China’s Technology Import/Export Regulations.  These regulations require that a foreigner indemnify a Chinese licensee against third party infringements and that the licensee own all improvements to the technology, while a Chinese domestic licensor can freely negotiate other terms.  As the EU Chamber notes, these regulations they “not only interfere with the needs of Chinese and foreign companies for effective technology trade mechanisms but also contradict the provisions of the Contract Law on technology transfer contract.” 

These concerns are not only directed to foreigners extracting IP ‘rents’ from China.  The ability to negotiate contractual terms is critical to developing flexible international networks for innovation through negotiated sharing of risks and benefits.  The GII recognizes the increasing importance of such international collaboration to China and  that “the Chinese innovation system is now densely connected to sources of expertise everywhere.” (p. 93).  The report also notes that 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.” (p. 125).    These unbalanced provisions can also affect bilateral science and technology cooperation by requiring that a Chinese party owns any improvements to technology that is licensed to it, or is indemnified against infringements by reason of use of this technology.  A recent report by the Government Accountability Office regarding clean energy cooperation between the US and China noted that “The U.S. Patent and Trademark Office has identified a potential discrepancy between Chinese law and the bilateral U.S.-China Science and Technology Agreement upon which the IP Annex to the CERC Protocol is based, according to U.S. Patent and Trademark Office officials. These officials stated that the potential discrepancy is related to ownership of any improvements made to IP licensed between U.S. and Chinese entities….” ( p. 2).

It is time for China to create a more level playing field in technological collaboration for foreigners licensing to China by removing these discriminatory provisions that treat foreign and domestic licensors differently. 

graphchinainnovationSource: GII.