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

fitch_cronin_ting_yang_rabi_photo

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.

“Case Filing” In China’s Courts and Their Impact on IP Cases

In my experience over the past decade and in talking to local IP courts in China, the IPR judges have for the most part been very forthcoming, knowledgeable and engaging.  However, their colleagues in the Case Filing Division (立案庭) (“CFD”) have operated in a much more opaque way, typically not willing to meet at all, despite their playing a critical role in certain WTO / TRIPS obligations of China, such as granting/denying preliminary injunctions, and preliminary evidence or asset preservation measures (“provisional measures”) (TRIPS Art. 50).  The CFD of a court is more than a court clerk or docketing officer, the CFD actually operates to accept or deny cases, typically without handing down written decisions of any kind.

The opaque nature of the CFD was highlighted more generally in some recent postings on China Law Net, hosted by Prof. Don Clarke.  Dr. Liu Nanping and Michelle Liu recently authored an article on the significance of the CFD.[1]  The article argues, generally without the benefit of the much smaller quantity of data from IPR-related cases, that a right to justice can often be taken away by the CFD before ever reaching the courtroom for trial. In theory, the CFD was designed to filter disputes for resolution through other channels, thereby limiting the judges’ power and controlling court jurisdiction.  In practice, however, it has been found that the division often abuses its discretion, including by pushing off controversial cases.  The authors point out that the CFD rejects cases that should have passed the initial threshold and leaves litigants with reduced channels to pursue justice.

Case filing became especially important after China joined the WTO, as decisions on provisional IP civil measures are initially sent to this division.   As China does not yet afford these provisional measures in other civil cases, the experience of the CFD in handling these matters was likely limited or non-existent before WTO accession.  Regrettably, the statistics to date show only a limited number of these measures actually being made available to rights holders, and call into question whether use of the CFD is the optimal means for China to fully make this right available to litigants.

China’s statistics in this area are confusing:  they show a high “grant” rate of accepted cases involving provisional measures – but they don’t reveal how many cases were rejected by the CFD, since such cases were deemed to have never been “filed”.  This “pre-screening”, I believe, contributes to the high grant rate. A more revealing data point is made by comparing the numbers of such provisional measure cases with the total number of IP cases filed.  The incidence of such cases is very low, most likely because the cases never appear on the docket.   If one were to look at the grant rates alone, one might think that China had particularly robust preliminary injunctions in all IP rights.  In 2009, 85.42% of pre-trial preliminary injunction applications admitted in IP cases were granted.  The number is especially striking because in US practice, preliminary injunctions for patents are rarely granted.  China also showed even higher grant rates for other provisional measures: 98.72% of admitted applications for pre-trial preservation of evidence were granted and 100% of admitted applications for pre-trial preservation of property were granted. In 2010, the grant rates for these provisional measures were 89.74% for preliminary injunction applications, 97.46% of preservation of evidence applications, and 97.41% for preservation of property applications.

A more revealing data point is made by comparing the numbers of such provisional measure cases with the total number of IP cases filed.  In 2009, there were 59 pre-trial preliminary injunction applications, 237 pre-trial preservation of evidence applications, and 56 pre-trial asset preservation applications admitted amongst a total of 30,626 IP-related civil cases admitted at first instance. In 2010, 55 pre-trial preliminary injunction applications, 294 pre-trial preservation of evidence applications, 126 pre-trial asset preservation applications were admitted amongst a total of 42,931 IP-related civil cases admitted at first instance. The high grant rate undercuts the reliability of the overall data: if preliminary injunctions, evidence and asset preservation measures were so readily available, why then did only 0.12% of the civil IPR cases “request” preliminary injunctions, 0.68% of the cases involve evidence preservation, and 0.29% of the cases request asset preservation?

If one compares China to the United States, the rate of grants is likely higher than that of the U.S. for similar types of motions, but the actual number of cases considered by judges is dramatically lower. Moreover, if US experience is a guide, one would expect different grant rates for different types of provisional measures, depending in part on the right being asserted and the context of the case.  Preliminary injunctions in patents are likely to be rare, because of the technical difficulties in adjudicating patent cases and the hardship that might be imposed on an industry if the preliminary injunction was improperly granted.  For example, in the US, traditionally the likelihood of winning of a plaintiff winning in a patent case were 51.45%, versus 85% in trademarks and 75% in copyright.  Patent cases are also generally more complex to adjudicate, making them less amenable to preliminary injunctive relief.  According to one database, patent cases last 417 days on average, compared to 265 for trademark and 331 for copyright.  Because of the significant potential impact on an industry if a patent injunction were granted, injunction rates for final judgments were 30% for patents, versus 48% for trademarks and 21% for copyright (this data was based of FY 2000 data, from a now-defunct database run by Cornell University).  The mean award for patents is $1,759,345, while that of trademark cases is $484,428 and copyright was $837,525.

This U.S. data shows that patents, copyright, and trademark cases are not equal in damages, the length of time to adjudicate or availability of injunctive relief. In China, based on data from http://www.Ciela.cn, in 2008, the average damage award for patent, copyright, and trademark cases were 402,277 RMB, 17,912 RMB, and 88,444 RMB respectively; the duration for the respective types of cases were 8 months, 5 months and 6 months; injunction rates were 74%, 69%, and 85%.  Taken together, these indicate that there are major differences in damages and relief based on right and type of right at stake, which is to be predicted based on the nature of the right and the experience of other countries such as the United States.

It is likely that all types of provisional evidence and asset preservation measures for trademarks and copyrights should be higher, particularly as a remedy to dealing with commercial scale or willful infringement in China, and also because of the difficulties parties have in otherwise obtaining evidence from their adversary due to an absence of discovery-type procedures.  Unfortunately, China often comingles provisional measure data for all rights, making it impossible to determine if China is more readily granting those forms of relief in cases where it is more necessary, or more easily adjudicated.   This lack of distinction adds to the difficulties of evaluating the opaque CFD.

Preliminary evidence preservation measures can be especially critical when evidence is ephemeral, such as in the on-line environment.  Considering the rapid increase of civil copyright cases, the high incidence of on-line copyright cases in China today, as well as the lack of discovery type procedures for all civil cases in China, one would expect a very high incidence of preliminary evidence preservation measure requests and grants.

Apart from the opacity of the case establish division, there are potentially other explanations. Victims wanting a quick remedy, including preservation of evidence, may file administrative trademark or copyright cases.  Administrative agencies can also issue orders stopping infringement, which are enforceable in their administrative district.  These administrative remedies may decrease the burden on the civil courts to seize assets.  In the United States, first amendment rights may also limit the desire of courts to grant injunctions, and instead favor higher damage awards.  Another explanation is that the unclear division in China between when civil and criminal remedies may also drive rights holders to use criminal remedies in appropriate circumstances, as the police can seize evidence even more effectively than the courts. This has been the developing trend in trade secret cases, where lack of discovery proceedings and the need for expeditious action, frequently drive rights holders to use a criminal remedy when a civil remedy might have been adequate for similar actions in the United States.

Another observation that may be drawn from this data is that IPR cases offer a useful window with which to view other general rule of law developments in China.  The transparency and enforcement obligations in TRIPS and other agreements can especially help to drive reform in other areas as well.  Where civil IPR remedies and the enforcement obligations in TRIPS help to establish international standards for their fair and equitable adjudication, such standards might help lift to the standard for all litigants.

Updated: June 29, 2018 with minor typographical changes.


[1] Nanping Liu & Michelle Liu, Justice Without Judges: The Case Filing Division in the People’s Republic of China, 17 U.C. Davis J. Int’l L. & Pol’y 283 (2011)