Patent Litigation, IP Monetization and Technology Decoupling: Lessons for the Future

The empirical data discussion from the recent 3rd Annual Berkeley-Tsinghua program on transnational IP litigation streams suggests that an increasingly international IP litigation environment is emerging  for Chinese companies outside of China and for foreigners in China.  Chinese and US companies are litigating and licensing IP rights in ways that implicate increasingly diverse jurisdictions and markets.  This increasing diversity may have important implications for how companies and countries engage with China, including the extent to which a technology decoupling can occur between China and the world.  A recording of the Berkeley-Tsinghua discussion is available here.

At the Berkeley-Tsinghua event, Mr. Xiang Pu, CEO of IPHouse discussed patent litigation trends in China and Beijing.  He noted that foreign-related litigation patent litigation dropped in China in 2020. Foreign-related civil cases had increased to a peak of 728 in 2019, with administrative cases (validity and infringement) stable at 272.  Administrative cases remained at 272 in 2019, while civil cases had dropped to 349.  Invention patents were the most litigated right, following by utility models, with a small share of the litigation docket held by designs.  This order of most litigated patent rights has not changed over the prior six years.

The national drop in reported cases in 2020 may not be due to delayed reporting of cases.  In Beijing there was a drop in IP cases to 66,000 in 2020 from a high in 2019 of 80,000.  The Beijing data may also suggest other data trends that have developed or are developing nationwide.  For example, compensation is up across all rights, especially in trademarks.  The typical time to completion of a technology-related case is 9 months. For American cases, the time is approximately 12 months.

Among foreigners, American companies were the most litigious, with about 27% of the cases, followed by Japan, South Korea, and Germany.  These four countries together constituted about 75% of the foreign docket.  American cases have also increased, from about 20% to 31% of the docket from 2017 to 2020.  Still, the overall cohort of foreign related cases compared to China’s exploding domestic docket  remains small.

Other useful data about US companies engaged in patent litigation in China: American cases had a higher level of retrial or appeal than domestic cases, at about 31% versus a national average of 20%.  Fifty percent of the cases American companies brought are against Chinese companies, while 50 percent are against other companies, underscoring the increasing importance of China as an international litigation venue.  The cases averaged 12 months in length, and the patent damages were awarded at about 51.9 % of the requested amount.  The most litigated patent rights were not in the ICT sector (about 6 percent), but in consumer goods such as water bottles, sanitary and dental related goods.  This is a contrast to the patent rights being litigated involving foreign parties overseas, which primarily involve ICT products, as discussed in Melissa Schneider’s presentation from Clarivate on IP litigation involving Chinese companies outside of China.    

According to Ms. Schneider, patent and trademark cases involving Chinese companies are being filed in a diverse set of countries, with the United States the dominant national jurisdiction outside of China. Chinese companies were plaintiffs in these cases only 8% of the time.  When Chinese companies are plaintiffs in patent cases, the dominant venues are the United States, Taiwan, Germany, and Korea.  There is a wider variety of countries in trademark cases, including the United States, Hong Kong, India, France, and Russia

The most active plaintiffs in patent cases outside of China are Huawei and ZTE. The numbers of patent infringement cases in the US involving Chinese parties peaked in 2018, although it has risen again since then.  The primary litigants are Huawei, ZTE, Lenovo and TCL.  Patent infringement subject matter was almost exclusively telecom related. The  primary venues in the United States were the Eastern District of Texas, Delaware, and the Central District of California.

Huawei and ZTE have also become among the top 5 companies involved in SEP litigation worldwide, in most cases as a defendant.  Huawei and ZTE are plaintiffs  in 47% and 24% of their cases, respectively.  Currently about one in three SEP cases worldwide involves a Chinese party.  Chinese companies are asserting SEPs in the Beijing, Guangdong, the US  and Europe (Germany, the United Kingdom, the Netherlands).  Cases greatly increased in 2020 and will likely continue to increase in 2021.  Note: for a separate discussion on SEP-related litigation involving China, you might consider listening to the recent podcast prepared by the Hudson Institute.

John Wiora, the COO of KtMINE, presented an overview of patent-related transactions involving China.   The 2010-2020 data showed a steady increase in US patents being assigned to China-based entities.  There was, however, a big drop in 2020 which may be due to a delay in reporting.  While many of the owners of the patents were based in the United States, the owners came from 70 unique countries.   Canada and the UK were also important owners of these assets.  Much of the movement was from a US-based affiliate of a Chinese company to a Chinese parent, with telecom and related areas the primary technology areas.  ZTE, Baidu, Huawei and Tencent were the leading assignors.  In general, the data show a healthy amount of patent transfer despite – or perhaps because of — the trade war.  Technology areas were also diverse and also included computer hardware and software, as well as the biotech sector.  

Compared to the prior fifteen-year period (1994-2009), there has also been a change in royalty rate calculations.  During the earlier period, royalties were calculated on a net-sales basis for the territory of China.  From 2014-2018 fewer transactions were made on a running royalty but appear to now be lump sum or transaction based.

In Wiora’s view the increase in cases and increases in transactions that are both occurring at the same time may reflect an increasingly healthy judicial environment in China.  In my view, the increases may also be due to increased trade pressure as Chinese companies reduced their R&D in the United States and/or seek to onshore their patent portfolios.  Many of the companies that were involved in relocating patent assets were also the subject of export control sanctions or other embargoes and penalties.

Matthew Chevernak of General Biologic presented on the impact of IP handling and China’s market access reforms, shedding a spotlight on the practical impact of China’s IP reforms in pharmaceutical market access and exclusivity.  In addition to long-standing problems with pharma patents being invalidated or not granted, volume-based procurement results in significant price reductions of products.   Both multinationals and domestic companies face an uncertain future due to China’s market size and the prospect of exclusivity that might come through intellectual property.  On the positive side, both biologic and novel drug approvals have increased in the past several years, and approval times have decreased.  However, once a product is on the national reimbursement drug list, there is a 58% average price cut with volume based procurement eroding the market value of the product. While the Phase 1 Trade Agreement brought notable reforms to the protection of pharmaceutical IP, Mr. Chervenak noted that  it is less clear whether the patent leads to exclusivity in the market.  Exclusivity may “still mean nothing without pricing freedom and opportunity to reach patients.”

In sum, the above data shows that even during a time of trade conflict, there was considerable litigation and patent licensing activity, with an increasingly pronounced role in global markets for Chinese companies and in China for US companies.  Patent disputes and licensing involved a diverse group of technologies as well.  Chinese companies have become more active in SEP litigation overseas.  The United States is an important venue for litigating overseas patent disputes with Chinese entities.  Both the patent licensing and pharma data show the importance of tracking market value and trends to determine the real-world impact of IP-related policies.

The data-driven presentations may be compared with the recently released US Chamber report “Understanding US-China Decoupling: Macro Trends and Industry Impacts.” The Chamber report does not incorporate IP or technology litigation or tech transfer/patent licensing data, although it does rely heavily on trade in technology-intensive goods and services.  Its three top conclusions are consistent with the approaches of these reports: (a) data analysis is critical to policy making; (b) the costs of anything approaching a “full” decoupling are uncomfortably high; and (c) a comprehensive US-China policy program should include polices promoting industry, innovation and technology as well as preserving the rules-based open market order and its institutions.  As with the Berkeley data presentations, the Chamber report also demonstrates the degree to which the Chinese economy is intertwined with the United States and the world, thereby potentially underscoring the value of engagement with allies on China IP issues.

IPO’s Comments on Recent Patent Legislation: Untangling a Complex Web

IPO has graciously made available two recent comments on recent legislative proposals.  On December 10, 2020 IPO  submitted comments to the China National Intellectual Property Administration on Draft Amendments to the Patent Examination Guidelines (Second Batch of Draft for Solicitation of Comments) (“Draft Amendment”) published on 10 November 2020.   The examination guidelines comments are attached here.

IPO’s comments on the examination guidelines are primarily addressed to the patentability of computer programs in those revised guidelines.   IPO has reservations about the Patent Examination Guidelines making substantive changes in the requirements for determining whether applications contain appropriate subject matter for patent protection absent higher-order changes to the laws or regulations, such as the draft Implementation Regulations of the Patent Law of China (“Draft Implementing Regulations”) which were published for comment on November 27, 2020.  The criticism is a fair one, and is one that I also drew attention to in terms of CNIPA/SAMR’s draft rules regarding patent linkage.  It is also an almost inevitable outcome of the current flood of draft IPR-related legislation released for public comment or implementation, including a year-end rush to complete key laws such as the patent and copyright laws. 

Among its other comments, IP also discusses the comments on potential risks  of functional claiming in software patents, and on the need for a stated time period for delayed examination when an invention patent and utility model patent are filed simultaneously.

There are several other changes proposed in the examination guidelines, not discussed in the IPO comments but which may be inherent in its critique regarding changes in the examination practice without higher level guidance in the law. These changes also show a pattern of continuing reform in this area, including an increasingly flexible approach by China’s examiners in examining software-enabled inventions.  Among the changes, a computer program should be interpreted as a software product that realizes its solution mainly by a computer program.  In addition, technical means has assumed a higher priority among the three technical factors (technical problems, technical means, technical effect) in technical solution assessment.  A solution utilizing a technical means implemented by a computer necessarily solves a technical problem and thereby has a technical effect. If an algorithm in the claims improves the internal performance of the computer system, the algorithm features and the technical features can be considered to functionally support each other and be interactive.  The contributions made by the algorithm features to the technical solution shall thereby be considered in examining inventiveness. 

The IPO comments note that some case examples in prior guidelines have been removed in this Draft Amendment. IPO believes that illustrative examples serve an important purpose in providing clarity to patent examiners and guiding applicants to enable higher quality application (and claim) drafting.   I agree. By contrast to the lack of exemplars noted by IPO, there was inclusion of examples in the first batch of draft related examination guidelines, which included significant pharma-related changes.  The PTO translation of the draft is attached.  The amended guidelines were announced December 14, 2020 and are described in greater detail by Aaron Wininger.

IPO also submitted comments to China’s Supreme People’s Court on the Draft Provisions on Several Issues Concerning the Application of Law in the Trial of Patent Civil Cases Involving Drug Marketing Review and Approval (Oct. 29, 2020) The comments are attached here.  My blog on the draft is available here.  My blog also includes links to the previous IPO comments on  NMPA/CNIPA rules on linkage.    IPO flags such issues as: the lack of clarity regarding “abuse of patent rights”; the tight time constraints to prepare for litigation especially in the absence of mandatory notification to the patentee; and the removal in the final patent law of a linkage limitation to those patents listed in China’s “orange book,” which is not reflected in the draft.  

The generalized, persistent and pervasive Chinese concern around “abuse of rights” is troubling.  As I had mentioned in testimony before the House Committee on the Judiciary in 2016, there are  “concerns whether China is overly focused on IP abuse, and not sufficiently directed to improving IP use.“  While there are no doubt individuals and companies “gaming” the system, it is unclear to me if any special rules on IP abuse in patent linkage is necessary particularly at this time and in light of long-standing difficulties in commercializing patented innovative pharmaceuticals in China and other measures that address IP abuse.

The revised Patent Law was passed by China’s National People’s congress on October 17, 2020.  The various patent-related regulations, rules, judicial interpretations and other documents will no doubt be revised to conform to any significant differences made in higher level laws.

The huge number of legislative changes in China’s IP regime in 2020 is likely more extensive than a prior wave of similar reforms made when China joined the WTO.  This “tangled web” of legislation reflects: China’s increasingly sophisticated and complex IP regime; China’s efforts to better implement legislative aspects of the Phase 1 Trade Agreement; and China’s own desire to make necessary reforms in its quest to become an innovative economy.  There is nothing in the Phase 1 Agreement, for example, requiring China to make changes to its computer software patent regime, an area which many view as critical to China’s innovation and industrial competitiveness goals.   

On a related note, Berkeley Law is hoping to host a webinar early next year to review all of these legislative changes and discuss what additional changes in China’s IP regime may be occurring in 2021.

Thank you, IPO, for sharing your comments!

Upcoming China Pharma IP Program

The Berkeley Center for Law and Technology will be launching a five-part webinar series on “Innovation, Regulation in the Life Sciences” on November 17 from 4:30-6:00 PM.   The launch program is devoted to “China’s Emerging Regime for IP In the Life Sciences”. 

Joining me for the program will be He Jing from the Gen Law firm, Dr. Karen Guo from Novo Nordisk, Xuejiao Hu from Beigene, Prof. Guobin Cui from Tsinghua Law School and Dr. Can Cui from Morrison & Foerster.  CLE credit will be provided. 

Students and media are free of charge, BCLT sponsors are half-price. We expect to cover the full range of issues in this first session: patent linkage, regulatory data protection, patent prosecution, the recent SAMR rule and SPC judicial interpretation, etc.  A package of English language reading materials is also available for attendees. The programs costs $75.00 for the session and $300.00 for the series. 

Other sessions in the series include: FDA Innovation, Food Innovation, Drug Pricing and Sharing Data for Research and Development.