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.