InterDigital Settles With NDRC

According to a May 22 press release (http://online.wsj.com/article/PR-CO-20140522-903952.html) , InterDigital has settled antimonopoly charges with the National Development and Reform Commission of China.

InterDigital’s commitments regarding licensing of its patent portfolio for wireless mobile standards to Chinese manufacturers of cellular terminal units (“Chinese Manufacturers”) are as follows:

1. Whenever InterDigital engages with a Chinese Manufacturer to license InterDigital’s patent portfolio for 2G, 3G and 4G wireless mobile standards, InterDigital will offer such Chinese Manufacturer the option of taking a worldwide portfolio license of only its standards-essential wireless patents, and comply with F/RAND principles when negotiating and entering into such licensing agreements with Chinese Manufacturers.

2. As part of its licensing offer, InterDigital will not require that a Chinese Manufacturer agree to a royalty-free, reciprocal cross-license of such Chinese Manufacturer’s similarly categorized standards-essential wireless patents.

3. Prior to commencing any action against a Chinese Manufacturer in which InterDigital may seek exclusionary or injunctive relief for the infringement of any of its wireless standards-essential patents, InterDigital will offer such Chinese Manufacturer the option to enter into expedited binding arbitration under fair and reasonable procedures to resolve the royalty rate and other terms of a worldwide license under InterDigital’s wireless standards-essential patents. If the Chinese Manufacturer accepts InterDigital’s binding arbitration offer or otherwise enters into an agreement with InterDigital on a binding arbitration mechanism, InterDigital will, in accordance with the terms of the arbitration agreement and patent license agreement, refrain from seeking exclusionary or injunctive relief against such company.

A quick read of these commitments suggests that item 1 is a re-commitment by InterDigital to F/RAND licensing of its SEP’s,  Item 2 reflects Chinese antipathy to mandatory grantbacks of technology in a technology transfer agreement, including imposing non-essential requirements on the technology transfer agreement under the Contract Law and related Judicial Interpretation and  Item 3 reflects the interest in many parties in seeking mandatory arbitration to resolve increasingly complex F/RAND SEP disputes, including questions concerning the availability of injunctive relief in light of F/RAND licensing commitments. 

My personal observation: the news release does not indicate under what circumstances a Chinese licensee would have lost the right to an arbitration by reason of a lack of good faith in negotiating licensing terms and thereby does little to incentivize licensors entering into negotiations at an early stage after a standard has been determined.  However, it does appear to offer the possibility of expedited arbitration for licensor and licensee in lieu of the licensor’s seeking injunctive relief, thereby potentially mitigating losses of a licensor due to unreasonable delay.

Going Sideways on Chinese IP….?

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The American Chamber of Commerce in China recently released its 2014 American Business in China White Paper (http://www.amchamchina.org/whitepaper2014) (16th edition)  and its China Business Climate Survey Report (http://www.amchamchina.org/businessclimate2014).  These papers present useful snapshots of the perspectives of American businesses in China regarding the IP environment in China.

IP rights were listed as the seventh out of nine concerns of greatest risks facing the China operation of US multinationals. IP ranked ahead in importance of  deterioration of bilateral relations and behind the global economic slowdown.   It was however the sole legally-driven issue, rather than a macro-economic or political concern.   Although some us may view IP as being of core importance to US industry in China, IP in fact did not make it to one of the top five business challenges in 2014.  In the last five years it only made the top five in 2011.  This may be the  good news for IP in these statistics.

What was most disturbing as that 54% of respondents rated China’s IP enforcement “ineffective” in 2014 and 14% rated it “totally ineffective”.  There also has been a marked decline in respondents who answered “don’t know” since 2009, with the decline reflected in a corresponding increase in respondents who said the system was “ineffective” or “totally ineffective.”  This migration from respondents who “don’t know” to an opinion of that IP is “ineffective” suggests that there may adverse opinions developing based upon actual experience.   The news is not all bad, however: nearly an equal amount of respondents indicated that China’s enforcement of IPR has improved (39%) or stayed the same (35%).  Overall, 40% of respondents also indicated that there has been progress in the IP environment over the past five years.

Amongst IP rights of key concern, AmCham respondents rated company name protections as the highest priority (56%), with trade secrets second (50%).  Both showed an increase of 12 percentage points since this survey question was asked in 2011.  Trade secret concerns were also reflected in other contexts in this survey.  For example, a number of surveyed respondents (101) expressed concern that non-competition enforcement “caused negative impact or material damage” to their operations.    Twenty three percent of respondents also indicated that proprietary data or trade secrets of their China operations have been breached or stolen.

Despite an interest in IP courts by members, the number of respondents who were “somewhat” or “very” satisfied with IP court actions dropped from a high of 63 percent to 44 percent over the past three years.  For the first time in three years, the number of American companies dissatisfied with the courts are now the majority of the respondents.  By contrast, 54% of respondents were very satisfied or somewhat satisfied with administrative enforcement.

In looking at this data, it is important to keep in mind that the numbers of respondents to these surveys varies and that  other organizations, such as the US China Business Council also conduct surveys.   The responses to questions also appear to me to naturally skew to the types of concerns that individuals who are on the ground would like addressed:  administrative enforcement, for example, is quicker and cheaper and generates data which shows that the local operations are doing something about IP infringement.  Judicial litigation can take longer and may not result in a collectible judgment.  A Chinese language company name is a critical asset to a Chinese subsidiary, although it may not be understood as critical to US-based counsel who may understand little of the company name acquisition and registration procedures, or of how to establish a marketable Chinese name.   In addition, patent issues may typically be handled by the home office and may not be a concern of the subsidiary or branch.

For over a decade I have been asking the audience in programs in the United States and China if they believe the IP environment in China is getting better.  My non-scientific observations, based on years of asking this same question 10 or more times per year, are that generally people think that the IP environment is improving.   My personal response is that generally the situation is going “sideways,” and the AmCham survey, with its conflicting views of how the system is getting better but enforcement is getting worse, would seem to vindicate this.

Why, to me, is it changing but not getting either better or worse?  China recognizes the need to resolve certain old problems (counterfeiting, piracy), while at the same time new problems of increasing complexity (complex patent infringement, antitrust, etc.) are emerging.  In a sense, the good news is that China is interested in IP protection.  However, the bad news is also that China is interested in IP protection.  Increased higher stakes defensive risks (Schneider/Chint, Huawei/Interdigital, IPad/Proview, etc.), problems of abusive trademark registrations and patent trolls (“cockroaches”)  are among the bad news.

What do you think?

(Picture above by Mark Cohen of the sign at Silk Market, Beijing, April 2014)

The SPC’s “Top Two” Dueling IPR Cases

The Supreme People’s Court (SPC) recently released its ten top cases for IP week at the end of April.  Perhaps the most striking was that the high profile trade secret case in Shanghai that was lost by the SI Group of Schenectady, NY.  Here is a rough translation of the summary of that case by the SPC:

“Fifth, the dispute involving resin patent infringement trade secrets. SI Group and SI Chemical (Shanghai) Co., Ltd. and Hua Qi (Zhangjiagang) Chemical Co., Ltd., Xu Jie appeal against a trade secret dispute.

[Summary] SI Group and SI Chemical (Shanghai) Co., Ltd. jointly claimed that technical information regarding SP-1068 were trade secrets of the SI Group that had been taken over by the defendant Xu Jie, who was formerly an employee of the SI Chemical (Shanghai) Co. When Xu Jie resigned from that company to work at the defendant Hua Qi (Zhangjiagang) Chemical Co., Ltd. (“Huaqi”), Xu Jie allegedly disclosed the two plaintiffs’ trade secrets to Huaqi which used them. The two plaintiffs requested the court to order the defendants to stop the infringement, eliminate the effects, and compensate for the economic loss of 2 million RMB.

The Shanghai Second Intermediate People’s Court entrusted a technical appraisal expert which concluded that that technical information of Huaqi on production of SL-1801 product, as well as patents involved, are not the same substantive technical information and dismissed the plaintiffs’ claim. The two plaintiffs refused to accept the appeal. The second instance court dismissed the appeal and upheld the original verdict.

[The meaning of this typical case] In the trial of a trade secrets infringement case, the court must not only safeguard the rights of people who are claiming trade secret protection, they should also pay attention to the balance between the interests of the parties, regulate fair competition between the parties, and maintain the market’s legitimate order.  In the course of comparing the technologies in the current case, the court of first instance conducted a rigorous, regularized technology appraisal process, and the appraisal body issued a highly professional appraisal report.”

To me, this was one of several “dueling” trade secret cases in the past several years – some of which involved civil, criminal or administrative litigation.  Some also involved high profile political attention, and some also involved conflicting decisions between China and foreign countries.  In this case, there are several “dueling” elements.

The SPC’s assessment of the technical appraisal is itself subject to some dispute in this matter.  According to press reports as well as company announcements, a prior technology verification effort of the trade secrets in China, which was conducted at the behest of the police, had confirmed that the technical information was confidential in nature and that there was a similarity between the plaintiff and defendants’ manufacturing processes.

Another, more important, “dueling” element is that the  US International Trade Commission (the “Commission”) reached a contrary decision to the Chinese courts.  As stated at page 46 of the eighty-eight page Commission decision: “This is classic misappropriation of trade secrets, with copying down to the thousandth decimal place.“ (page 46),  The Commission  also determined that the public interest was not adversely affected by this remedy, and that principles of comity did not preclude it from issuing a decision that is contrary to the holding of a Chinese court (http://www.usitc.gov/press_room/documents/337_849_ID.pdf).

A third dueling element was in the media.  The Chinese press reported that the USITC had found no infringement, when in fact the USITC had not altered its finding of infringement but instead altered the remedy.  The Commission determined that it would issue a limited exclusion order of the infringers’ products, rather than a general exclusion order. Specifically, the Commission determined that the following respondents were in violation:

Precision Measurement International LLC of Westland, Michigan; Sino Legend (Zhangjiagang) Chemical Co., Ltd. Of Zhangjiagang City, China; Sino Legend Holding Group, Inc. of Kowloon, Hong Kong; Sino Legend Holding Group Ltd. of Hong Kong; Red Avenue Chemical Co. Ltd. of Shanghai, China; Shanghai Lunsai International Trading Company of Shanghai City, China; Red Avenue Group Limited of Kowloon, Hong Kong; and Sino Legend Holding Group Inc. of Majuro, Marshall Islands.

The Commission issued a “limited exclusion order for a period of ten (10) years prohibiting the unlicensed importation of rubber resins made using any of the SP-1068 Rubber Resin Trade Secrets that are manufactured by, for, or on behalf of violating respondents or any of their affiliated companies, parents, subsidiaries, licensees, contractors, or other related business entities…

This was hardly the finding of “no infringement” that the Chinese press claimed.

Some explanation of the political importance of this case may also be found in the next “top” case (no. 6) listed by the SPC, the Shenzhen Intermediate Court decision in Huawei vs InterDigital, involving a FRAND license.  Unlike the SI Group case, the SPC did reference the initiation of the ITC action by InterDigital as part of its description of the background of this case.  In the Huawei case, as I previously noted, the Shenzhen Intermediate Court viewed the filing of a USITC action where there was a corresponding FRAND commitment as an actionable violation of China’s antimonopoly law.    Both the SI Group and Huawei cases involved concerns about the market: the court viewed the SI case as regulating fair competition, while one of the Huawei cases involved a claim under China’s antimonopoly law.  To a foreign observer, these two cases suggest that the Chinese courts may be sending a decision about its resolve to fight back against Commission 337 determinations involving foreign companies.

Why then the decision by the SPC to list these two cases as “top 10” cases?  Both Susan Finder in her Supreme People’s Court Monitor blog hand I have previously written about the development of guiding and model cases in China.  Publishing of these cases may also be intended more for pedagogical purposes than to bind the courts.  In 2013, these two cases where Chinese courts took decisions adverse to ITC decisions constituted twenty percent of the top 10 cases published by the court.  This can be compared to the less than two percent of Chinese IP cases that had a foreign element in 2013 – in essence, these SPC is calling attention to high profile statistical outliers.  The cases could suggest a disproportionate interest in matters where foreign companies are defendants, where IP “abuse” is alleged, where market factors need to be balanced, or where there are concurrent Commission actions.   Or are these two “dueling cases” just coincidences?

Revised with minor stylistic changes: March 14, 2019

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