Antitrust and Licensing on June 3, plus Standards, Data and E-Commerce: Plenty for Everybody

The US-China trade war began with disputes over the transfer of technology to China, including forced technology transfer.  How much has the licensing environment improved for the foreign business community? How will China’s developing antitrust regime affect foreign businesses seeking to monetize their IP in China?  Considering joining us at next week’s webinar (June 03, 2020, 4:30 – 5:45 PM PST) (previous posting had a typo!).  The speakers are Hao Yuan (Tsinghua Law School/Berkeley Law); Stuart Chemtob (Wilson Sonsini); Deng Fei (Charles River Associates); David Dutcher (Western Digital) and Robert Merges (Berkeley Law). Here is the link to the series description, and to the registration. This series/program incurs a charge, except for students/media/BCLT and other benefactors.

In another licensing-related development, on June 16, 2020, from 12-1pm EDT,  I will be speaking along with Jim Harlan, Senior Director, Standards & Competition Policy, InterDigital, Inc on the US Department of Commerce’s Bureau of Industry and Security’s (BIS) ban of Huawei and its effect on global Standards Developing Organizations (SDOs). This program is sponsored by the American Intellectual Property Law Association’s Standards and Open Source Committee.  Non-AIPLA members may join this open event.  Call: +1 (347) 991-7204, passcode 251151532.

A video of the recent webinar we hosted at Berkeley on “Following the Data: What the Latest Research Says About China’s Legal and IP Environment” with Ben Liebman, Tobias Smith, Fei Deng, Melissa Schneider and Robert Merges is found here.  China Daily’s reporting on the IP Aspects of that program is found here.

Finally, I recently was interviewed by Pinduoduo on e-commerce regulation in China and IP.  Here is a link to the podcast on Spotify.

US-China Security Commission – Readout of Hearing on June 8, 2018

On June 8, 2018, I testified before the US-China Economic and Security Review Commission on “U.S. Tools to Address Chinese Market Distortions.” This was my second time testifying in the past three years.  My written submission is available here.  The written submissions of other speakers, including a video of the proceedings is available through this link.  The presentations of my colleagues were all excellent.

I suggested several non-tariff alternatives for dealing with IP-related concerns with China, and underscored the necessity of developing appropriate domestic government structures to engage China on technology and innovation issues.  For example, the Commission seemed generally supportive of raising the diplomatic rank of USPTO attaches overseas.   I also discussed the importance of data-driven analysis, including use of the case database to look at how foreigners actually fare in the courts.  The Commission seemed skeptical that the data captured some of the more egregious judicial cases of foreign mistreatment, which they viewed as undercutting the credibility of the data that is being generated.  In my written submission, I encouraged the Commission to consider a hearing devoted solely to transparency in the courts.

The President’s recent decision to impose tariffs on Chinese imports in response to Chinese IP practices may render many of suggestions superfluous for now.  Nonetheless, I believe the increasing complexity of China’s IP and innovation environment are issues that cannot be ignored.  As I noted in my written testimony:

“The US experience suggests that innovation flourishes in open ecosystems where there is a free flow of capital, talent and technology. At the same time, the US needs to address mercantilistic practices which not only pose competitive threats to the United States but can also undermine the innovative ecosystems that have driven growth in the US economy, such as exist in Silicon Valley. Any steps taken to reduce collaboration with China or any other country needs to be carefully evaluated about its potential impact on our own technological competitiveness.”

In a separate, but nonetheless related matter, I spoke at the IPBC Global 2018 Conference in San Francisco on June 12 regarding developments in IP monetization in China.  Here’s a good summary of my presentation.  I thought one of the more telling moments in the panel I participated in involved China’s Technology Import/Export Regulations.   One lawyer acknowledged that “the regulations are stupid” and that “what we try to do is have parties to a technology transaction acknowledge that the regulations exist and agree not to enforce them.”  I discussed the regulations as potential “landmines” which could be invoked at a later time by a licensee.  Many licensors appeared to be unaware of these regulations.

Global Antitrust Institute Releases Its Comments on NDRC IP Abuse Rules

Attached are the English and Chinese comments of George Mason’s University Global Antitrust Institute (GAI) on the draft NDRC Guideline on Abuse of Intellectual Property Rights.  The comments were prepared by Koren W. Wong-Ervin, Professor Joshua Wright, Judge Douglas Ginsburg, and Professor Bruce Kobayashi.

I previously distributed on this blog the GAI’s response to the NDRC questionnaire here. Overall, these additional comments of GAI urge the NDRC to recognize throughout its Draft Guideline an IPR holder’s core right to exclude as a “legitimate” or “legal” use of IPRs, and to incorporate the “but-for” approach taken by the U.S. antitrust agencies of comparing the competitive impact of the IPR use against what would have happened in the “but for” world in the absence of a license.

The GAI’s comments also focused on the issues of applying “unfairly high price” prohibitions on IPR royalties. The GAI asked the NDRC to 1) explicitly recognize that “reasonable” compensation should reflect the risk-adjusted break-even price; and (2) state that, in determining whether a particular royalty is “unfairly high,” the NDRC will calculate a reasonable royalty as a minimum floor baseline using the hypothetical negotiation framework from U.S. patent damages law. The patentee should have the opportunity to prove, in addition, its lost-profits as part of its damages, which would seem to be equal to the profits denied by the “unfairly high” pricing provision.  GAI emphasized that the goal of a reasonable royalty calculation is to replicate the market reward for the invention in the absence of infringement, and explained that comparable licenses are often the best available evidence of the market value of the patent. The comments also discuss use of the “Georgia-Pacific” methodology to help determine minimum rates for what a willing licensee and a willing licensor would otherwise have negotiated if an unfair pricing calculation is to be applied.

The comments also consider complex portfolio licensing by urging NDRC not to unduly take into account whether some expired patents are included in a portfolio. The commenters suggest that it would be impractical, if not impossible, for portfolio owners to constantly renegotiate licenses (or provide updated patent lists) every time an IPR in a licensed portfolio expires or, conversely, every time new IPR is added to the portfolio, both of which occur commonly.  As GAI notes, portfolios include patents with a variety of expiration dates and the parties to the license take the variety of expiration dates into account when negotiating a price.   Moreover, patent claims may change due to reexaminations, court and administrative proceedings, which can affect how they read on a particular technology over time.   In my own experience, most licensees are seeking freedom to operate from parties asserting patents, rather than a technical solution found in the patent itself.  Indeed, former Chief Judge Rader at a recent conference hosted by SIPO noted that one of the biggest differences he saw between being a judge and a private practitioner is that judges (and enforcement agencies) may look at litigation as patent-based or even claim-based, while the real commercial world is concerned with portfolios and freedom to operate considerations  I would add one other factor that the comments don’t mention involving licensing expired patents – the patents may still have some litigation value and considerable commercial value post expiration if relevant statute of limitations have not expired. In many cases, such as pharma patents, the principal value is to be found towards the end of the patent term. Moreover, if global licenses are entered into, longer statute of limitations in countries like the United States, (six years versus two years in China, and ten years in many other countries) should necessitate that Chinese licensees actively consider taking licenses on expired patents up until the relevant statute of limitations’ expiration.

The drafters also suggest rejecting that a refusal to license constitute an abuse of IP, noting that a patent exhaustion doctrine could also make refusals to license difficult to apply since licensors may choose to license its patents to a manufacturer, user or distributor.

The comments also suggest a cautious approach, using an effects analysis, in looking at discriminatory analysis. My own personal perspective is that China’s regulatory regime insures that non-discriminatory licensing is almost impossible to universally achieve. More specifically, there will likely be a certain amount of discriminatory licensing, as foreign licensors to Chinese licensees have to provide indemnities, non-mandatory grantbacks and access to markets under Chinese law which they will not need to provide elsewhere, or which Chinese licensors do not need to provide in their own domestic market or to foreign licensees.

The commenters also suggest that that “the NDRC not impose an AML sanction for merely seeking injunction relief” when a standards essential patent is involved, or at worst only deny injunctive relief when the licensor seeks “supra-competitive” royalties, i.e., is engaged in patent hold-up by seeking royalties that are not consistent with prior commitments by the SEP holder. Finally, the commentators direct NDRC to consider as a last alternative adopting a rule similar to the European Court of Justice decision in Huawei vs. ZTE. That case would provide a safe harbor for an SEP holder seeking an injunction that (1) prior to initiating an infringement action, alerts the alleged infringer of the claimed infringement and specifies the way in which the patent has been infringed; and (2) after the alleged infringer has expressed its willingness to conclude a license agreement on FRAND terms, and presents to the alleged infringer a specific, written offer for a license, specifying the royalty and calculation methodology.  The ECJ would then put the burden on the alleged infringer to “diligently respond” to that offer, “in accordance with recognized commercial practices in the field and in good faith,” by promptly providing a specific written counter-offer that corresponds to FRAND terms, and by providing appropriate security (e.g., a bond or funds in escrow) from the time at which the counter-offer is rejected and prior to using the teachings of the SEP.  This approach is necessary to take into account the conduct of both the patentee and the accused infringer when considering whether to impose an AML sanction and is especially useful in the Chinese context where the data suggests there is a high degree of under-licensing.

The GAI also provided comments on numerous other provisions, such as refusals to license, the essential facilities doctrine, bundling, cross-licensing, grant backs, and no-challenge clauses.

Thanks to GAI for making these comments publicly available. Distributing comments such as these, when affected parties may be unaware of the opportunity to comment, and in order to encourage more informed public discourse.

USPTO-SIPO To Conduct Second IP Licensing Program


USPTO and SIPO are cohosting another program on IP licensing on July 29 at SIPO’s training center in Beijing. I reported on the last program earlier this year here. Although the final agenda is not set, this program is intended to take a “deeper dive” on many of the issues raised in the earlier program. Registration can be accomplished by emailing

Note: Drawing is used pursuant to a Creative Commons License for non-commercial purposes.(

USPTO/SIPO Program on Patent Licensing and Technology Transfer – A Quick Readout on a 41 Billion Dollar Business

A China-U.S. Joint Seminar on Patent Licensing and Technology Transfer was jointly hosted by SIPO and USPTO at SIPO’s China Intellectual Property Training Center in Beijing on April 15, 2015.  The focus of the program was on contractual and non-antitrust aspects of technology transfer.  Program speakers included an economist discussing the economic reasons for licensing and current trends, an accountant on tax planning for licensing transactions, Chinese and American lawyers and officials, as well as wide spectrum of company representatives primarily in the IT sector, but also including the life sciences.

Here are my personal, general observations of the points made by the speakers:

To begin, speakers  addressed difficulties in understanding the data on technology transfer.  According to China’s Statistical Yearbook on Science and technology (2007-2014), the value of technology import contracts into China was 41.09 billion USD for 2013, nearly triple of what it was in 2005.   Patent license fees accounted for 15.4% of the total and proprietary technology was 37.7%.  Technology consultation and services were  29.7%.  However, many speakers also noted the difficulty in collecting comprehensive data.   Moreover, payment mechanisms such as extensive use of tax havens and transfer pricing in licensing technology further distorts data on bilateral technology flows.

Several speakers introduced the range of regulations in China affecting technology transfer.  These regulations included the Contract Law, Technology Import /Export Regulations, rules on registering patent licenses, restricted areas of technology trade, license registration rules, and taxation rules.

Many foreign speakers expressed concerns about obligatory provisions of China’s Technology Import/Export Regulations (“Regulations”), including provisions regarding whether the foreign licensor needs to indemnify a licensee against third party infringement, as well as other provisions on grant-backs, no challenge clauses, etc.  Article 24 of the Regulations was noted several time by Chinese and foreign speakers alike, including its conflict with article 353 of the Contract Law, which would give authority to negotiate indemnities if the contract did not involve a technology import into China.  Several Chinese speakers thought that the Contract Law, as superior legislation, may govern any conflict between the two.  However there were significant contrary arguments, including the fact that the Regulations were both more recent and more specific (I tend to side with this argument).  Many felt that these Regulations were out of date and not suited to China’s current circumstances, particularly in light of China’s desire to become a technology trade player, as well as the difficulties of mandtory indemnity provisions in technology imports from start-up companies or in litigtion dense technologies (such as smart phones).

There was a general consensus of a need for more information on the impact of indemnity/grant back and other clauses on licensing transactions.  The Regulations are a source of concern even if they are of uncertain legal impact.  One speaker noted that the uncertainty caused by the Regulations had generated considerable legal work over the years.  Some speakers noted that they thought it would be helpful if the courts provided additional guidance on the Technology Import/Export Regulations and the Contract Law provisions on technology contracts in order to achieve greater assurances about how best to structure technology transfer agreements.

A few speakers suggested that an appropriate strategy in handling mandatory indemnities is to conduct a freedom to operate analysis and negotiate risks, perhaps by reducing them to a liquidated amount in a contract.   Another speaker thought that a way to bypass the warranty provisions of the Regulations is by arbitrating outside of China under New York or other foreign law. However, there was also concern expressed about whether arbitral decisions would still be governed by Chinese policy, or arbitral awards might not be enforced within China.    Many speakers noted that choosing foreign law could lead to uncertain results.  Moreover, if enforcement of some kind is needed in China, choice of foreign law may be sub-optimal as Chinese courts will not enforce foreign judgments and it will be impossible to obtain preliminary injunctions or other immediate relief.  Note that I have discussed the issue about using foreign choice of law in technology transfer contracts elsewhere on this blog, as well as problems that arise if US law is used to enforce the contract in the United States.

Another proposal of a speaker at this program was, where possible, to change the cost of the technology to zero and place more value in to service contracts.  However, one speaker thought this alternative also posed risks, including the possibility of being considered a joint infringer in the event a law suit is brought against the “licensee”/ purchaser.

The Regulations also appear to have an uncertain jurisdictional scope.  One speaker mentioned that one way to avoid application of Chinese law is by licensing foreign technology to an overseas subsidiary of a Chinese company, and then having this company license the technology back to China.  Another speaker suggested that transactions such as these might not be viewed as an import of technology into China which should be governed by the Regulations.  At the same time, regulatory officials have viewed a transfer of technology within China by a foreign-invested company to a Chinese company as a technology import notwithstanding that the transaction occurred solely within China.

Speakers discussed difficulties in differentiating improved licensed technology which belongs to the licensee and the actual licensed technology under China’s mandatory grant back regime.  Another source of concern was determining when the technology has caused infringement if the licensed technology was proprietary in nature and was to be maintained as a trade secret.

Judicial settlement agreements and covenants not to sue were also discussed as alternatives to license agreements.  For example, under what circumstances when one settles a litigation would such an agreement no longer constitute a technology transfer agreement?    Is a covenant not to sue not a technology transfer agreement? I had the opportunity to raise the question of whether the  Regulations governed settlements of technology infringement cases of a senior Chinese judge at another conference – and the quick answer I received is that the answer is — unclear.

Speakers were generally optimistic about future prospects of enforcing audit clauses particularly in light of recent changes in China’s civil procedure law, judicial practices, and proposed changes to China’s patent law regarding production of documents and provisional measures.

Former Chief Judge Rader of the CAFC also provided a useful update on US case law involving no-challenge clauses, and smallest saleable unit as a basis for calculating damages.  He noted that in fact in some cases he now believes the market value of the infringing product should prevail, although the SSU doctrine was originally of his creation.

The role of registering contracts with MofCOM or assignments with SIPO was discussed, as well as MofCOM’s continued supervision of contracts when it registers a contract.  Several speakers also discussed an earlier MofCOM  (or perhaps MofTEC) notice which established an “unoffical cap” of royalties equalling 5% of net sales.  The experience of several speakers was that MofCOM will not say that there is a 5% cap, and that the contract needs to be “fair and reasonable.”  One speaker thought that this unofficial cap was not necessarily a deal breaker, although there remains a persistent belief that 5% is fair and reasonable.  This cap is of especial concern as data from the Licensing Executive Society suggests that average royalties for high tech sectors are 6%, and for life sciences about 5%.

Tax planning in licensing was also discussed, including indirect licensing from tax havens such as Belgium, Holland, Luxemburg and Ireland, as well as advantages to owning IP or technology locally in order to benefit from local Chinese incentives (such as High and New Technology Enterprise or R & D deductions).  An accountant noted that transfer pricing is of increasing concern in China – imposing a burden on licensors and licensees to prove that a transfer is priced at fair value.  It is likely that going forward third country licensors may not be able to obtain special incentives unless one controls and orchestrates the IP from the onward entity.   Moreover, a State Administration for Taxation Announcement (no. 16) provides that if you are paying from China to an overseas entity and the entity just owns the legal rights but doesn’t conduct substantive activities, the tax deduction may be completely denied, and they will reopen 10 years of tax returns.  This Announcement builds upon a previous announcement (146) of 2014.

China’s High and New Technology Enterprise program offers numerous incentives but also contains numerous restrictions, including regarding IP ownership, sufficiency of R & D conducted in China, and percentage of R & D of total turnover or percentage of profits derived from HNTE profits.   An accountant noted that this deduction is of declining use due to aggressive tax auditing when the incentives are used.   Moreover, there is a tension between transfer pricing and HNTE status.  One speaker noted that changes to the HNTE program are due in 2015.   This speaker noted that there is also an R&D super deduction is available, which is more readily obtained, but is also a strong audit risk.  Another HNTE risk is that if a company is developing core IP further and your original IP is no longer necessary, one could lose HNTE status.   Moreover, licensors may risk establishing a permanent establishment in China, particularly if the licensor is engaged in onshore trading.

All speakers and attendees I spoke with believed that this topic is nonetheless of increasing importance.  One academic privately noted to me that she thought licensing was not adequately discussed in academia, and that there was not enough focus by industry and government.   Attendees were also unanimous in wanting to see more programs of this nature going forward.

The preceding is an unofficial summary and should not be construed as a substitute for professional legal advice.  I hasten to add that one should also seek a tax professional for advice on tax planning.

Update of May 4, 2020:  Scott Kennedy of CSIS published a blog concerning US government data on licensing transactions with China.  I completely agree with Scott’s suggestion that data such as this can be used to support a less anecdtoal approach to issues around IP licensing, including legitimate, forced and stolen technology.  Difficulties exist in US government data, including the nomenclature used, the possibility of licensing through tax havens and avoiding direct payments to the United States by licensors, lack of clarity around defined categories related to technology such as what constitutes an industrial process or an affiliated entity, and how to evaluate other country’s data  – particularly China.  I also agree with Scott that when the increase is compared to China’s role as a high tech exporter, there appears to be a dramatic shortfall.  Moreover, since US companies license their technology to China for global and not just local (territorial use), US licensing receipts should also account for sales from China to global markets in addition to the United States.