Asking the “Better Questions”: Lessons for the AML … from a Nobel Physics Laureate

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Several people have reached out to me in the past few weeks about questionnaires that have been sent out by China’s National Development and Reform Commission, which brought the Qualcomm IP abuse cace, to academics, companies and experts regarding IP abuse in preparation for the drafting of the IP Abuse Guidelines. I understand that some of these responses were due at the end of August, while others may be due mid-September. The guidelines themselves are being prepared by the Antimonopoly Enforcement Agencies (NDRC, MofCOM and SAIC), with NDRC as the coordinator and the additional involvement of SIPO. Due to their interagency drafting process, they will be more authoritative than the IP abuse rules issued by SAIC in April which came into effect August 1.

Hopefully by soliciting information from the right groups, the relevant agencies will collect the information needed. Hopefully as well the group of respondents is broad enough to avoid any selection bias in responses. However good questions drive good policies as much as good answers. Although respondents are free to supplement their responses, I was nonetheless reminded of Nobel Laureate Isidore Rabi’s explanation of his own upbringing: ”My mother made me a scientist without ever intending it. Every other Jewish mother in Brooklyn would ask her child after school: ‘So? Did you learn anything today?’ But not my mother. She always asked me a different question. ‘Izzy,’ she would say, ‘did you ask a good question today?”’

There are several “good questions” being asked globally today about such issues as antitrust and standards, patent trolls, F/RAND obligations to license, “smallest saleable patent practicing unit” and the standards setting process.  China is certainly an important part of those debates and these questionnaires tend to focus on these concerns and their role in Chinese law.  However, I think some equally interesting questions involve issues specific to China’s stage of IP development.

In the spirit of Izzy Rabi, here are the questions I might ask:

How Much Should China Be Focusing on Harmonizing Its AML Regime with International Practices in Light of Its Current IP and Licensing Environment?

China has long sought to have a more aggressive global antitrust posture which has been at odds with traditional notions that focused on territoriality of patents and judicial sovereignty in dispute resolution.  With the Huawei/InterDigital case, Chinese courts recognized that initiation of a litigation on a standards essential patent in an overseas court (USITC) could constitute a per se abuse of China’s AML law, essentially showing no deference to foreign proceedings or notions of patent territoriality.  Moreover, the Court applied Chinese law, nothwithstanding that the relevant agreements were based on French law.  China-based global antitrust cases are occurring at a time when our legal systems are increasingly interacting, when Chinese judgments are being enforced in the US, when US courts are struggling with delays in obtaining evidence from China, and when Chinese courts are misunderstanding US decisions involving identical fact situations.  Moreover, China persists in aggressive use of pre-AML practices, such as pricing to determine of abuse of dominance, and invalidating of mandatory grant-backs without the benefit of economic analyses.  These are practice that are not typically found in jurisdictions such as the United States.  Despite these nationalistic views of IP and antitrust, China is also seeking to become a major IP and technology consumer and exporter and will increasingly need a more harmonized environment for its own intangible exports.  In short, Chinese regulators may wish to consider how much they wish to continue to create AML and enforcement disciplines that factor into global best practices.

How Much Should A Patent’s Pro-Innovation Effects Outweigh Alleged Anticompetitive Effects?

Chinese officials, like officials in many companies are asking about right “balance” between IP protection and antitrust enforcement.  The questions often assume that some of those balances have not already been established and that new doctrines need to be created.  In the United States our constitution clearly establishes that patents were established for a pro-competitive purpose, namely to “promote the progress of the … useful arts.” The basic notion is simple: this pro-competition process requires a disclosure of information that might otherwise be maintained as confidential, in order to secure a limited right to exclude others from practicing the invention.  Overly aggressive antitrust enforcement can result in a diminution of incentives to disclose and affect global innovation ecosystems.  In short, patent and antitrust doctrines are not necessarily in conflict, and, in fact, help foster competition together.  The starting point of that discussion however is the incentive afforded by the patent system to disclose technology in order to exclude others and ultimately contribute to the public domain of technology when the patent lapses.  As the world’s largest high tech exporter of goods that China in large part did not invent and the country with the largest patent system, China has benefitted enormously from the stability afforded by that patent system.  Rather than seek to minimize IP rights through euphemisms such as “balance” perhaps a better approach would be how to optimize the patent system to foster long term innovation and competition and insure that the competition system supports and does not retard such development.

Is There Sufficient “Use” of IP Rights in China to Justify Aggressive Enforcement Against IP Abuse?

China has long had problems in protecting and enforcing IP, which the Chinese government itself has publicly acknowledged.  Considering the high incidences of infringement and the low rate of utilization of IP, how much an antitrust regulator must take into account the weak IP environment that creates incentives to infringe, in determining whether a patentee is abusing its rights.  In short, can a country strongly support doctrines of IP abuse(滥用) if there is inadequate IP use (用)? Overly aggressive enforcement against “abuse” might in fact delay development of markets for “use.”

Available data suggests that China is a remarkably under-licensed economy – accounting for a lion’s share of high tech production and exports with a limited share of licensing revenue.  China is also a major “exporter” of IP litigation, with many companies reluctant to bring suits in China against Chinese infringers but preferring to bring suits which they believe will afford a more effective process, such as the United States or Germany.  The Chinese government has complained that patents, in particular, are difficult to enforce, due to challenges such as damages being far too low, litigation too time consuming, difficulties in satisfying burdens of proof, etc.

The challenges to foreign licensors are especially acute.  As one commentator noted: ” anti-trust compliance is just one challenge faced by licensors in China; other challenges relate to restrictions on technology imports, under-reporting of royalties, difficulties with audits, dispute resolution and more.” A related questions to this issue is What circumstances exist to suggest that a prospective licensee is engaged in patent hold-out, i.e., refusing to license in good faith which might suspend the licensor’s F/RAND obligation, or when a prospective licensee is using the licensing negotiations to precipitate a Chinese antitrust case  – circumstances which the court appears to be facing in the Vringo/ZTE case.

Other related questions are How Much Should AML Damages Be Proportionate to IP Damages? China is imposing AML damages, as in the Qualcomm case, that are fifty times or more higher than typical patent damage awards (according to http://www.ciela.cn).  Still another question is whether reducing the availability of injunctive relief for SEP’s in China makes sense as in most cases damage awards do not create incentives to license patents, and  injunctive relief is the only meaningful relief for IP infringement due to these low damage standards

How Much Should China’s AML Practices in IP be Governed by the TRIPS Agreement?

I personally believe that a too-often ignored discipline on AML practices involving IP remains the TRIPS Agreement.  Articles 7, 8 and 40 of the TRIPS Agreement discuss abusive licensing practices.  If an AML investigation involves IP licensing practices, the national treatment and most favored nation treatment obligations of TRIPS should also apply.  I believe the enforcement provisions of the TRIPS Agreement also establish certain minimal due process standards, which are further enhanced by China’s commitments at WTO accession. For example,  WTO members bringing IP abuse cases are likely obligated under TRIPS to provide “fair and equitable proceedings” (Art. 41), written and reasoned decisions (Art. 41), decisions based on evidence (Art. 41), judicial review (Art. 41), the right to written notice (Art. 42), the right to independent legal counsel (Art. 42), the obligation to substantiate claims (Art. 42), the means to protect confidential information (Art. 42), and approximate conformity of administrative procedures to civil procedures (Art. 49), amongst others.

How Much Should China Rely on Economic Analysis in Making AML Decisions and/or Explicitly Reject Industrial Planning?

China desperately needs more qualified economists in assisting with policy decisions and actual disputes in both AML and IP matters.   China’s metrics-driven approach to IP and innovation based on criteria such as numbers of domestic service invention patents in key areas, licensing revenue and costs, numbers of global famous brands, plans to develop China’s own products in IP-intensive sectors, Chinese participation in global standards setting bodies, and the subsidies that are often provided for these efforts –  place additional burdens on regulators as antitrust policies could be bent in the direction of state industrial goals to increase licensing revenue, decrease licensing expenses, provide import substitutions, develop local champions, etc.  A hopeful sign in this area would be the additional employment of economic experts by both the enforcement agencies and the courts.

How Much Should China Be Concerned About NPE’s or How Much Should China Be Concerned About Patent Quality?

China’s research entities generally play a more active role in China’s patent environment than in the US. An undue emphasis on “non-practicing entities” as a source of “IP abuse” or litigation abuse could weaken the role of this important sector of the Chinese (and global) research environment. Rather than asking if non-practicing entities are a source of IP abuse, a “better question” might be “should the nature of the patent owner have any bearing of whether the owner is engaged in abusive conduct.” In general, I side with former Chief Judge Rader’s perspective on this issue: the question is not one of the nature of the owner, but the quality of the right. High quality patents should be enforced, no matter the nature of the owner of the right. This question is especially important to China due the higher incidence of research institution and non-service invention patenting.  Moreover, the relatively high damage awards and rate of injunctive relief for unexamined utility model and design patents, suggests that there may continue to be problems with assertions of low quality patents in China.

I hope that NDRC and its sister agencies publish their surveys and the results of the surveys for the public to better understand the nature of the debate and questions being asked. This is a laudable task and I hope the right questions, in addition to the right answers, are being given to Chinese agencies.

These are my personal observations. Please feel free to supplement or correct with information that you have, and feel free to share your thoughts and opinions.

Photo source: http://www.nobelprize.org/nobel_prizes/physics/laureates/1944/rabi-photo.html

Courtesy Brookhaven National Laboratory. 1980 Laureates Val L. Fitch and James W. Cronin, and 1976 Laureate Samuel C.C. Ting. Sitting (left to right): 1957 Laureate Chen Ning Yang and 1944 Laureate Isidor Isaac Rabi.

FTC Chairwoman Ramirez on China’s Approach to Licensing Standards Essential Patents in China

Federal Trade Commission Chairwoman Ramirez recently delivered a speech on  “Standards-Essential Patents and Licensing: An Antitrust Enforcement Perspective at Georgetown University’s Global Antitrust Conference” (Sept. 10, 2014).    Here’s what she said about China:

“In contrast to the FTC’s and EC’s approach, media reports indicate that China’s antitrust authorities may be willing impose liability based solely on the royalty terms that a patent owner demands for a license to its FRAND-encumbered SEPs, as well royalty demands for licenses for other patents that may not be subject to a voluntary FRAND commitment.

I am seriously concerned by these reports, which suggest an enforcement policy focused on reducing royalty payments for local implementers as a matter of industrial policy, rather than protecting competition and long-run consumer welfare.

As I have stated previously, here and elsewhere, I am of the firm belief that consumers are best served when competition enforcement is based solely on sound economic analysis of competitive effects. A contrary approach risks damaging the investment incentives that are critical to continued growth in many of today’s global technology markets, in the ICT sector and beyond. We intend to continue to engage with our counterparts in China and around the world on these issues, in an effort to build consensus on policies that will benefit competition and consumers globally.”

Here is the link to the full text of the speech.

 

In an unrelated development, Deputy FTC Commissioner Marueen Olhausen was reported by the Chinese press as cooperating in a “joint siege” (共商围剿) on “Patent Troll” companies, with the Chinese, European and Korean enforcement agencies, at an antimonopoly law conference in Seoul, Korea on September 4 which focuses on Patent Assertion Entities.  At that conference, NDRC’s Xu Kunlin reportedly discussed  “problems arising from bringing enforcement actions against patent trolls companies” with foreign competition enforcement counterparts.   Xu also reportedly discussed enforcement actions against holders of SEP’s involving bundling of patents, including licensing of expired patents.

Of course, patent trolls have some history in China, as I have previously noted.  The Chinese press noted that Olhausen referred to the FTC’s on-going research into this area.

Xu Kunlin also took the opportunity to respond to criticisms of selective enforcement of China’s AML law against foreign companies. (update posted Sept. 14, 2014)

 

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 amongst the bad news.

What do you think?

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

 

 

Debating Chinese Innovation At Davos

The Chinese “Summer Davos” just ended yesterday (Sept. 12) in Tianjin with  Premier Wen Jiabao, several heads of state and senior leaders, Thomas Friedman, and many CEO’s and leading business officials attending and speaking.  The Summer Davos has a clear focus on intellectual property and innovation.    In his presentation, Premier Wen also sought to give comfort to foreign investors:  “I want to tell you that we will strengthen IPR protection and give foreign companies the same treatment in government procurement.”  The reassurance on government procurement at a high level was especially comforting. Continue reading