The Federal Circuit Bar Association and USPTO announced on July 17, 2017 that they are hosting a webinar on the latest research and developments in standards essential patents (SEPs) in China on July 25, 2017 from 9:00 to 11:30 AM, EST. The draft agenda and suggested reading materials are available via the link here. Registration is free and is required to participate in the program. Some of the speakers will also be discussing live at USPTO, for which registration is also required. The focus of the program is on developments and research in patent prosecution and injunctive relief for SEPs.
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.
A string of recent events suggest that there is increasing confidence by the foreign community in China’s antitrust and licensing regime and that some of the aggressive posturing in the past by the Chinese government on the ”hegemony” of foreign ownership of SEP’s countries, or (more recently) the abuse of dominance of foreign SEP owners (in cases like Huawei vs Interdigital and NDRC v Qualcomm), is shifting to a more balanced view. Hopefully, policy developments in this new phase will also facilitate China’s efforts to become a global innovator and technology exporter.
One of the more hopeful signs of faith in the Chinese legal system was Qualcomm’s filings against Meizu, Since its initial court filings in China, Qualcomm has filed 17 complaints against Meizu. In addition, Qualcomm announced in October 2016 that it launched a 337 action against Meizu in the United States, and is pursuing litigation in Germany and France.
In another sign of confidence Canadian NPE, Wireless Future Technologies Inc, a subsidiary of Canadian PIPCO WiLAN, filed a patent infringement lawsuit against Sony in the Intermediate People’s Court of Nanjing. The choice of the Nanjing court, rather than one of the specialized IP courts has been a source of some speculation, with the media suggesting any of three factors: faster litigation times, local contacts and even, perhaps, anti-Japanese sentiment. Two other reasons: Jiangsu’s efforts to use actual or implied royalties to assess damages, rather than the low statutory damages that applied in the vast majority of cases in China. Damages in a “model case” for patent infringement in 2014 using a royalty based calculation that was first adjudicated by the Nanjing Intermediate Court, were 3,000,000 RMB, relatively high by Chinese standards. See 江苏固丰管桩集团有限公司 vs宿迁华顺建筑预制构件有限公司, 南京中院（2014）宁知民初字第00108号 , 江苏高院（2015）苏知民终字第00038号. Finally, and perhaps, most importantly, Sony’s phones are made by Arima in Wujiang, Jiangsu Province.
The Financial Times has written on the Arima case, noting that “A new corporate era beckons in which a Chinese judge could conceivably cut off the lifeblood of some of the world’s most valuable companies. It was not so long ago that China’s legal system just did not factor into the risk calculus of most global companies.”
Chinese companies are also showing confidence overseas by bringing cases brought against foreign competition. Earlier this year, Huawei brought SEP-related litigation in the United States against Samsung in both the United States and China, and against T-Mobile in the Eastern District of Texas.
China’s growing SEP portfolio may be contributing to this change in perspective. As Dina Kallay of Ericcson noted at the recent Fordham Antitrust conference: “Of the ten largest contributors of technology to cellular standards — and we like to measure it by accepted technical contributions, so it’s not just measured by the number of patents, which arguably you can play with — but by how many of your technical contributions were accepted into the standard, …Three … are Chinese — Huawei, ZTE, and CATT (Datang). No other nation has as many companies in the Top Ten list.” Considering China’s increasing investments in the United States and its rapidly improving patent portfolios, might a Chinese company soon be a complainant in a Section 337 litigation?
By the way, Huawei’s website impressively identifies their contributions to IP in standards as follows;
Huawei has filed over 57,800 patent applications in China, U.S., Japan, European Union, South Korea, and Brazil, as well as other countries and districts, of which approximately 15000 are in the area of wireless communications.
Huawei has 2,137 essential patents in the area of wireless communications…
In the area of wireless communications, Huawei has submitted approximately 20,009 proposals to international standard organizations … 40% of which have been adopted.
Huawei’s extensive experience in standards setting and its own investments in IP have likely contributed to its opposition to some of the mandatory disclosure / mandatory licensing standards-related aspects of the proposed revisions to China’s patent law (eg., Article 85). Interestingly, Huawei objected to this provision due to the the complexity of international regulation of standards setting organizations, and because it alleged that foreigners do not participate in the development of Chinese domestic standards; therefore this provision might primarily be applied by Chinese against Chinese. Nonetheless, its rejection would be a positive step by avoiding an unfortunate precedent for SIPO and reducing overregulation of standards setting bodies.
One can also point to other recent factors, such as government to government engagement, and the pressure of overseas litigation in Huawei vs ZTE (ECJ), Sisvel vs Haier (Germany), Unwired Patent vs Huawei and Samsung (United Kingdom) and Vringo vs ZTE (SDNY and other jurisdictions) as other informative experience and perhaps sources of pressure for greater international conformity.
These changes in IP ownership, standards participation, litigation experience and maturity due to increased engagement are likely having their effect on domestic policy. Within China, early this year draft IP abuse guidelines of NDRC recognized that ownership of an SEP does not automatically confer market dominance. In July of 2015, the State Council announced its plans for China turning into a “strong IP economy”, and identified several projects involving standards. One of the projects identified by the State Council calls for the development of rules on standard essential patents that are based on FRAND licensing and “stopping infringement”, with the involvement of AQSIQ, SIPO, MIIT, and the Supreme People’s Court (Art. 38). As the focus of this task is on stopping infringement, rather than “abuse of dominance”, this suggests to me that a more rights-holder friendly approach.
Another hopeful sign which I have been following are suggestions that China’s Technology Import/Export Regulations (“TIER”) may now be under revision, as was noted in the European Business in China Position Paper (2016/2017) . Some aspects such as ownership of improvements have been the subject of the TIER and also appear to factor into AML enforcement policy such as in the Qualcomm case. (see also QBPC’s paper on the TIER at “应允许当事人对后续改进的技术成果的权利归属进行自由约定”, attached here.[Chinese Language]).
What do you think? Please feel free to comment with your own experiences or examples (in favor or against) in this area!
Rev. Nov. 19, 2016
According to its SEC filing, Vringo has settled its worldwide claims for patent infringement with ZTE. Vringo’s 8-K filing states, inter alia:
“On December 7, 2015, Vringo, Inc. and its affiliates (the “Company”) entered into a Confidential Settlement and License Agreement (the “Settlement Agreement”) with ZTE Corporation and its affiliates (“ZTE”), pursuant to which the parties agreed to settle all and any pending litigations and proceedings between the parties relating, among others, to patent infringements and patent invalidity claims. In addition, under the Settlement Agreement, the Company granted ZTE a non-exclusive, non-transferable, worldwide perpetual license of certain patents and patent applications owned by the Company.
ZTE will pay the Company a lump sum of $21.5 million in cash within 15 days following the execution of the Settlement Agreement. ZTE will also responsible for the payment of any withholding, value added or other taxes. Within ten days following receipt of the payment by the Company, the parties will withdraw all the pending litigations and proceedings.
The foregoing description of the Settlement Agreement is only a summary and is qualified in its entirety by reference to the Settlement Agreement. The Company intends to file a copy of the Settlement Agreement as exhibit to its Annual Report on Form 10-K for its fiscal year ending December 31, 2015, portions of which will be subject to a FOIA Confidential Treatment Request which will be submitted to the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted material will be included in the request for confidential treatment.”
A thoughtful blog by Jack Elllis from IAM, notes that in light of Vringo’s market cap and the increased difficulties of monetizing patents in recent years, the 21.5 million, while less than what many had expected or hoped for, “isn’t at all a bad result. “ This blog also notes that “this was the first time that a US-based NPE launched major litigation on multiple fronts worldwide with the United States being just one theatre – and arguably, not even the main one. Vringo’s adversary ZTE has its major presence in Asia, South America and eastern Europe.” The blog also summarizes proceedings in 12 of these theater of litigation operations.
I would love to see what the settlement agreement for all of these litigations looks like, particularly due to legal uncertainties in China regarding the regulations that would apply to a license agreement compared with a covenant not to sue.
This settlement will presumably put to rest the threat of sanctions in federal court against ZTE’s general counsel regarding breach of a non-disclosure agreement, which I previously discussed.