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.

The Phase 1 Agreement and the Prospects for Piloting A New IP Dialogue

At the recently concluded Berkeley-Tsinghua conference on Transnational IP Litigation,  Tsinghua Professor Yang Guohua addressed the question of whether the Phase 1 Trade Agreement is alive or dead.   Prof. Yang formerly served in the Law and Treaties Department of MofCOM and later as MofCOM’s IP Attaché at the Chinese Embassy in Washington, DC.  I have known Dr. Yang for over 20 years.  There are few people who have had as much experience in China handling IP negotiations with Americans. In Prof. Yang’s view, the non-IP aspects of the Phase 1 Agreement are not likely to survive in the current trade environment. The IP aspects may, however, continue.   

There are good reasons to believe that Phase 1 is dead.  China is behind on  its purchase  commitments.  Those commitments also raised serious WTO concerns over Most Favored Nation obligations.    China has also obtained a WTO ruling that the sanctions imposed by the United States  were not WTO compliant. While the US drifted into unilateralism during the Trump era, China has recommitted to multilateralism.  It extended its global trade reach through both the CAI and RCEP and has also expressed an intent to join the CPTPP in the future. The Biden administration may also have concerns about Trumpian unilateralism and has said that it would like to see more multilateral engagement with China.   President Trump also noted in July 202O that he was pessimistic about prospects for a Phase 2 Trade Agreement.   I have not heard of any negotiations regarding a Phase 2 Agreement in IP, although the Phase 1 Agreement by itself was hardly a comprehensive agreement.  Finally, the new Biden administration may also want to demonstrate its own strategic priorities with new approaches.   

As Yang Guohua noted, the prospects for continued IP engagement are relatively strong.  His optimism has merits.  IP commitments extended by China to the United States typically get extended to all trading partners, thereby avoiding the violation of  MFN obligations.  As many speakers noted during the program, the Phase 1 Agreement also acted as a stimulus for additional reforms in China and was generally consistent with China’s own goals.  I expect that if the Biden administration were to pick up the Phase 1 Agreement again, IP could be a good focus.  However, the Biden administration might also be inclined to show some discontinuity with the past, such as changing the name to something other than a Phase 2 Agreement, or not using names of prior dialogues. National security and human rights issues may also dominate the discussions of how bilateral dialogues should be structured. Every administration for the past 20 years has had its own view on dialogues with China, and the Biden administration should be no different.   

Several polls during the four-day Berkeley/Tsinghua program revealed that the 200 plus attendees from both countries believed that a resumption of bilateral discussions on IP and technology issues would be a positive step forward.  President Biden’s nominees to date, however,  have offered little insight on whether they would like to restart trade dialogues. Many of the Biden nominees and appointees are veterans of Obama-era dialogues, including Secretary of State Blinken, Secretary of Treasury Yellen and Agricultural Secretary nominee Vilsack.  None of these nominees have had experience leading interagency discussions concerning technology or IP.  The general sentiment appears to be that they would not want to be “bogged down” by dialogues.  However, important officials, such as Dr. Kurt Campbell, who will serve as the President’s senior official on Asia in the National Security Council, have noted that there should be room for a dialogue that is “somewhere between the secretive kind of a high-level engagement between the White House and China and this incredibly large strategic and economic dialogue ― a new mechanism that helps support advancing the bilateral interests of the two countries.” A great recent discussion with Dr. Kurt Campbell at the Asia Society of Northern California can be found here (the Asia Society’s full program on relations with China, including interviews with Henry Kissinger and George Schultz, is worth listening to as well!).

The most compelling reason for China and the United States to reinitiate engagement with respect to IP is that it is in both countries’ mutual interests.  China has made dramatic changes to its IP regime in the past two years.  Many of these changes have gone beyond the limited scope of the Phase 1 Agreement.  Some of the changes, such as recent revisions to China’s patent examination guidelines on pharmaceuticals, are welcome improvements that also help in implementing Phase 1 commitments.  Americans and Chinese companies also continue to file for IP rights in each other’s countries, and continue to use the courts and administrative agencies, both as plaintiffs and defendants.  Judges in both countries would also benefit from a better understanding of each other’s legal systems.  Judge Jeremy Fogel (ret.), who previously served as the Director of the Federal Judicial Center (FJC), noted that the FJC greatly benefitted from having Chinese interns during his tenure there.  He also praised the contributions of China’s judges to an on-going project of WIPO regarding patent case management procedures.  Many of the judges speaking at the Berkeley-Tsinghua conference expressed concern about the consequences of a declining level of understanding of each other’s legal systems.  Several judges stated that increased dialogue between judges would also lead to less friction between our legal systems, such as in anti-suit injunctions. Prof. Yang also noted that concrete cases were often points of discussion in prior dialogues. 

As Prof. Dan Prud’homme notes in a recent article, there are many “myths” that each country has about the adequacy or inadequacy of China’s IP system.  An IPR-related dialogue would need to avoid being based on “myths,” which often results in meaningless political posturing, as well as getting “bogged down” and accomplishing little.  During times of trade tension in the past, the United States and China often found common ground in exchanging views on IP-related matters. A useful approach might be to identify shared tangible interests of both countries in areas such as patent and trademark prosecution, complex multinational litigation, patent linkage, plant variety protection, standardization, educating each other’s rightsholders, promoting fair, transparent and predictable litigation, IP issues in emerging technologies, etc.  These discussions should not be “talk-fests”, but should have real outcomes.  If the discussions can have tangible results, they might also serve as a pilot for other, more contentious dialogues. If so, it would not be the first time that IP-related dialogues served as a pilot, such as a past effort in the Obama era on judicial exchanges.

New Proposals on Science and IP Cooperation with China

I previously blogged about several China-oriented proposals released after the November elections here. Three additional proposals have recently been released that involve how the USG engages China on IP and innovation issues.

1.The Day One Project has released a Transition Document for the US Patent and Trademark Office [USPTO].   There are several recommendations that directly or indirectly affect USPTO engagement with China. The recommendations include: establishing a USPTO bureau of economics; developing an interagency China task force on innovation and IP policy where PTO plays an active role; raising the rank of the IP Attaches (which to a degree has already been accomplished);  engaging the new Administration on what PTO’s role should be on China IP policy, including the role of outreach initiatives: and establishing a new Deputy Under Secretary for International Affairs. Note that I contributed to this report.

2.On January 15, 2021, President-elect Biden wrote an appointment letter to his new Science Adviser, Dr. Eric Lander, of the Broad Institute. Paragraph three of that appointment letter sets forth the President’s concerns about science and technological competitiveness with China.  The focus is on American domestic competitiveness. The letter asks Dr. Lander: “How can the United States ensure that it is the world leader in the technologies and industries of the future that will be critical to our economic prosperity and national security, especially in competition with China?”  The letter further notes: “Other countries—especially China—are making unprecedented investments and doing everything in their power to promote the growth of new industries and eclipse America’s scientific and technological leadership. Our future depends on our ability to keep pace with our competitors in the fields that will define the economy of tomorrow. The right strategy for the United States will necessarily differ from that of our competitors, but it will also likely differ from our own past playbook. What is the right level of national investment, and what are the pillars of a national strategy that will rapidly propel both research and development of critical technologies?….” 

This letter does not mention how Dr. Lander could be tasked with more deeply integrating IP, trade, export controls, CFIUS,  visa policies and other areas with our science and competitiveness strategies.  These issues demand a more effective inter-agency  approach.  Nonetheless Lander will bring the rich experience  that the Broad Institute already has in IP and licensing in the US, China and other countries.  This experience can help in engaging the US government in integrating science policy more deeply into trade and IP issues.

3. Ambassadors Earl Anthony Wayne and Shaun Donnelly have recently written an article in The Hill, “Biden’s Trade Policy Needs Effective Commercial Diplomacy.“ The article advocates for an interagency approach to better support US companies overseas, including by advancing greater market access.   Apart from advocating for more diplomatic intervention in technology norms, it does not discuss how commercial diplomacy should advance the ability of US companies to commercialize technology and technology-intensive products.  Technology-related commercial diplomacy involves a more challenging skillset than many other areas. It has long been inadequately staff by the US commercial service, due to its legal and technical complexity, and the lack of familiarity of commercial officers with how deals are done. Without understanding how companies conclude individual deals on genetic editing, video compression technology, or a new plant variety, or how United States universities commercialize their technology overseas, it can be very difficult to understand market barriers that need to be raised “wholesale” in a trade context. Commercial diplomacy on technology is critical to understanding how the US should raise technology concerns. To paraphrase an earlier blog: “Are there any foreign commercial service officers posted overseas that have technology promotion as an export goal? Has the US census changed its antiquated reporting system where it reports technology transfer as exports of ‘industrial processes’– whatever that means… the US [sh]ould at least take steps inside our own government to improve  our knowledge and engagement on these issues.”

The forthcoming Berkeley-Tsinghua Transnational IP Litigation Program is likely to strongly endorse more data-driven approaches to bilateral IP issues, including the use of negotiation and collaboration as diplomatic tools to advance IP protection and mutual understanding.  In addition to the many speakers that will be addressing practical issues, Prof. Zhang Yuejiao (formerly of MofCOM and the WTO Appellate Body) is expected to keynote about the role of trade negotiations and cooperation in promoting IP protection.  Dr. Yang Guohua served as China’s first IP Attaché to the United States and was also part of the pioneering cooperative mechanism between the EU and China.  ktMINE will look at cross-border licensing flows and the impact of the trade war.  Their presentation will be part of a data-oriented panel on the impact of the trade war.  Dean Erwin Chemerinsky of Berkeley Law, a leading constitutional law expert, has expressed concern in a statement filed in the Wechat litigation about the US government being motivated by  “anti-Chinese animus” in its sanctions effort.  Susan Finder and Judge Jeremy Fogel (ret) will also be talking about the steps that courts need to take to make their IP systems more attractive for resolution of international IP disputes.  Judge Fogel has been involved in WIPO projects involving IP judges.  Both of these speakers will likely be addressing the role of enhanced international judicial cooperation.