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Patent Litigation Increased in China

Those who deride China for failing to take patent protection seriously might just be provoking a sleeping dragon.

China, experts argue, has intentionally maintained a lax intellectual property enforcement regime for decades, waiting until its internal invention industry had become strong enough to warrant something more robust.

More patents will soon be filed in Beijing each year than in Washington, D.C., and Chinese entrepreneurs are stealing the attentions of Silicon Valley pundits and investors. Many believe the Chinese patent dragon is beginning to show signs of stirring. Once that happens, experts say, foreign firms looking to do business there will need to worry less about losing IP to China¡¯s infamous underground economy and more about losing an IP infringement case in a Chinese courtroom.

¡°I¡¯m amused when I listen to people who speak in a patronizing manner about China,¡± said Ikechi Mgbeoji, an associate professor at York University¡¯s Osgoode Hall Law School specializing in intellectual property. ¡°As if the Chinese did not know what they¡¯re doing and suddenly they have now seen the light and have embraced the international patent system and so forth.

¡°No, this was a deliberate policy of the Chinese state. It was a calculated and well planned thing. It wasn¡¯t as though they didn¡¯t understand the value of patents,¡± Mr. Mgbeoji said.

Under intense pressure from its Western trading partners, China passed its first laws dealing with the protection of intellectual property in the early 1980s; starting with the Trademark Law in 1982 and the Patent Law in 1984. The statutes were instantly and heavily criticized by Western powers as being ¡°non-conforming to international standards¡± and thus providing no protection to the multitude of multinational companies who were at the time flooding into the country.

But China¡¯s early IP system was not set up because China¡¯s leaders wanted to protect the patents of foreign firms, argues Mr. Mgbeoji.

¡°It was because they understood if they had very strong patent system at that stage in their development there will only be payment to foreign patent owners,¡± he said. ¡°So what they did was have a regime in place where they were free to copy, to steal ideas from other countries.¡±

Nearly three decades later, the result is a Chinese version of every major western invention that exists everywhere else: Weibo is China¡¯s Twitter and Baidu is China¡¯s Google, both are protected under Chinese patent law.

More recently, China¡¯s entrepreneurial community has been developing ideas and technologies that even the West admits are entirely original and innovative. Noted Silicon Valley news blog TechCrunch held its first ¡°Disrupt¡± conference for tech startups in Beijing last month and just last week, Kleiner Perkins launched a US$250-million fund specifically to invest in Chinese companies.

It was the second time the venerated venture capital firm had established a fund focused on China, having launched a similar US$360-million fund in 2007.

¡°It now makes sense for them to have a very strong patent system because they have met and surpassed that threshold of development,¡± Mr. Mgbeoji explained. ¡°Chinese companies have their own brands and they are willing to defend their own brands.¡±

It was almost exactly 10 years ago, when China first joined the World Trade Organization (WTO), that Mike Elmer first predicted the rise of China¡¯s patent powers.

¡°I was asked to give a speech when China joined the [WTO] in November of 2001,¡± recalled Mr. Elmer, an internationally recognized patent litigation expert and senior counsel at Finnegan, Henderson, Farabow, Garrett & Dunner LLP, among the world¡¯s largest IP law firms.

¡°Everyone there was criticizing China for the Chinese copies and all the things you¡¯ve always heard about China, but the only thought that I came back from China with was ¡®China is going to blow right by us.¡¯¡±

Eight years later, when China announced it had issued a record 580,000 patents over the course of 2009, his prediction came true. With Thompson Reuters not expecting China to surpass both Japan and the United States in total patent filings until this year, Mr. Elmer notes 2009 as the more important milestone.

That was the year the number of patent litigation lawsuits filed in China exceeded those filed in the U.S., he said.

¡°In Canada, you have maybe 60 patent infringement cases filed per year, maybe 80, and in the United States there are 3,000,¡± said Mr. Elmer. ¡°China now has more than 3,000 ¡­ probably closer to 4,000 now.¡±

Foreign firms should fear that trend, Mr. Elmer warns, as it represents a fundamental shift in how Chinese companies make use of their patent portfolios.

¡°Historically, when we represented a Chinese company at Finnegan it was almost always as a defendant and it was usually in some kind of semiconductor or metallurgical case at the [International Trade Commission],¡± he said.

¡°But now, the Chinese are starting to develop their own portfolios, and these are defensive portfolios so if you get sued you can turn around and sue somebody else. Ultimately, [their] game plan will become an offensive one.¡±

Non-Chinese companies are slowing catching on. Some are even beginning to develop their own Chinese patent portfolios, since patents only apply to the jurisdiction where they were granted.

Apple Inc., arguably the worst victim of China¡¯s hereunto lax patent regime, was reported in September alone to have received 40 patents from China covering 37 of its products including the iPhone, iPad, MacBook Air and the architecture of its retail stores.

There have been growing the warning signs, the most recent being in October of 2009 when the Third Amendment of China¡¯s Patent Law went into effect, effectively streamlining the country¡¯s patent approval process to make it even faster. But some still believe China¡¯s rising patent dragon is not a cause for concern.

About 85% of all patent litigation cases in China are not over the classic ¡°invention¡± patents that form the hallmark of the American system, Mr. Elmer said, but are instead waged over ¡°utility model¡± and ¡°design¡± patents which do require formal examination for approval.

While initially comforting, the statistic fails to pacify Mr. Elmer.

¡°I used to think only invention patents would be important to global companies because why on Earth would you sue a company based on a patent that hadn¡¯t even been examined?¡± he said. ¡°But I was wrong, [utility model and design patents] issue faster, they¡¯re cheaper and they¡¯re being enforced in China.¡±

So all of this raises the question: Will patent-rich Chinese firms soon begin to point their legal weapons in the faces of Canadian and U.S. companies?

¡°That is already starting to happen,¡± said Mr. Elmer, though he was unsure what proportion of Chinese patent litigants are plaintiffs. ¡°That is one of the data points I have on my agenda to develop,¡± he said, ¡°but I do know it is increasing.¡±

For Professor Mgbeoji, the question is not so much ¡®if¡¯ as it is ¡®when.¡¯

¡°It is only a question of time before we see Chinese inventors asserting their claims here or in the U.S.,¡± he said. ¡°It is not a surprise to anyone who understands how the system works.¡±

Web link: http://business.financialpost.com/2011/11/07/patent-dragon-awakes/

Lehman, Lee & Xu is a top-tier Chinese law firm specializing in corporate, commercial, intellectual property, and labor and employment matters. For further information on any issue discussed in this edition of China IP In The News or for all other enquiries, please e-mail us at mail@lehmanlaw.com or visit our website at www.lehmanlaw.com.

© Lehman, Lee & Xu 2011.
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