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China’s tech firms are adapting to an increasingly IP sensitive environment
Over the past few decades, China has been perceived as a land of copycats where local firms duplicate proven technologies and business models from the West without giving due credit. Counterfeit apparel, blatant technology infringements and pirated movies are still stereotypical portrayals of the state of intellectual property (IP) protection dynamics in the Middle Kingdom. Things, however, are starting to change.
The improvements in China’s IP protection environment can be seen on various levels: an increasing number of patents filed by local companies, IP-related lawsuits, as well as the country’s more important position globally as a key venue for patent litigation.
These shifts are of vital importance for Chinese tech firms. While IP is forming a more significant portion of their overall value, Chinese tech companies with long-term vision are adapting to these changes accordingly.
TechNode got a chance to talk with Xiang Wang, China IP Practice Head at international law firm Orrick, on a range of topics on recent development in Chinese patent laws and their implications for Chinese tech firms. As part of the team that helps China form IP policies, Wang has seen the changes since the very beginning.
Wakening IP awareness driven by decade-long government effort
Although these transitions are happening fast, they don’t come overnight and are the results of years of concerted efforts from the whole nation. China’s radical paradigm shift in IP industry is taking a top-down approach.
“The change really is from the central government of China,” said Wang. “The policy is that China is to become an IP exporting country. Based on that, China has over the years reshaped its laws and regulations to set up all kinds of educational programs, amended trademark law and patent law. Also, the government provides incentives including money for Chinese companies to file patents, especially internationally,” he noted.
Data shows that these supporting policies have incentivized Chinese companies to create and file for IP. Chinese companies filed more than 1 million patent applications in 2015, more than one third of the total number of patents filed globally. Now China is the world’s #1 patent and trademark country, filing more than the US and Japan.
“While Chinese invention patents are substantively examined, people may say many of Chinese utility model and design patents are ‘trash’, because these patents are not substantively examined by the patent office. However, many do not realize such patents can create a huge advantage when asserting them in Chinese courts for alleged infringement. The effort to invalidate such patents is tremendous,” Wang commented.
In addition to a complete legal system, several macro-level measures are boosting the change. The Chinese government has reshaped its judicial system to increase the damages awarded via Chinese courts, which in turn adds an incentive for companies to file lawsuits in China.
“There are some damages awards over 50 million RMB, some maybe even over hundreds of millions of RMB. Basically, litigation is a way to create a monetary reward for plaintiffs. Also, it’s a tool to legally deter competition. People realize it’s great to file patents, trademarks, sue competitors, and hopefully they will get big damages that would actually create a very competitive edge for plaintiffs,” said Wang.
In addition, the IP environment has been improving over the years. The judges are better equipped with IP and technology knowledge, so that helps the IP system as a whole.
IP and globalization
Facing a saturating market, Chinese tech firms—especially electronic device manufacturers—have embarked on the voyage of overseas expansion. While competing on the global level, IP is inevitably very important both as an offensive and defensive tactic.
Companies are increasingly looking at multiple jurisdictions on an international level, a landscape in which China is attaining a higher ranking. They feel they are being treated more fairly and it’s a market they can’t ignore.
“US and China are two key litigation venues when we want to sue a company. China is usually the place where the alleged infringer makes products and the US is usually the market where it sells the products, in addition to selling in China. What I want to do is to stamp out this infringer at its source—China–and also from its market, which is both China and the US, putting Europe aside, where the damage is much less,” said Wang, adding “We are seeing more and more Chinese companies using such strategies when going abroad to protect themselves along the way.”
The US market is still a hard nut to crack, so many Chinese companies use Southeast Asia as a launchpad. It’s not only because they have a huge user base that shares similar habits and cultures, but also because there’s an IP gray area. Xiaomi, Oppo, and Vivo are performing exceedingly well in theSoutheast Asian market, and Huawei sells in Southeast Asia, the Middle East, and Europe, where there are very few lawsuits.
“It’s a wise strategy since they can test these markets and make their product stronger. But it is just a matter of time [before they enter the US market]. Chinese companies can cross-license when they have acquired more IP. Now, there are a few options when they are sued in the US court: either to defend very hard to invalidate the patent, defend on non-infringement, or pay license fees. Better yet, if they have patents, they may cross license,” he explained.
More Chinese firms are fighting back rather than always being on the defensive. Chinese tech giants like Huawei, ZTE, and Xiaomi are becoming plaintiffs in litigation against foreign companies. Chinese companies have figured out what IP can do for them.
Many see this as a sign of China’s shift toward an IP powerhouse. Wang warns about being over-optimistic but he also agrees that China is moving in this direction. Although less than 5% of all IP cases filed in China each year involve foreign companies, they are receiving increasing attention from the public, according to Wang.
Local innovation and deep tech also drive the trend
Chinese companies are quickly catching up and even exceeding their foreign counterparts in several industries, like bike rental, mobile payment, and live streaming. They want to build up their unique selling proposition, and IP is an ideal tool for this goal.
Furthermore, the awareness of IP can be tracked to the inception of a company. In the past, IP was often not a top priority for startups, mostly because it would be too expensive a proposition for them to act on. But now deeper tech is gaining momentum.
Read More: Here’s how Chinese VCs are adapting to the ever-changing startup scene
“The strength of a company’s IP has always been a consideration in our pre-investment due diligence,” John Hsin from Huaxing Growth Capital told TechNode. “But it’s taken on greater significance as our investment portfolio has grown to include more companies in cutting-edge areas such as artificial intelligence, big data or biosciences that are commercializing technological innovations. For these companies, we take a harder look at their IP and give it more weight in our investment decisions.”
China’s continued IP challenges
Despite the huge number of IP filings, a large number of them are useless. “Because Chinese patents, especially utility model and design patents, are not substantively examined by the patent office,” Wang pointed out.
Sometimes, people use loopholes to take advantage of supporting policies. China has three patent models: invention patents, utility model patents, and design patents. Only invention patents are substantively examined by the patent office. Some Chinese companies file those patents just to get a patent number.
“We have seen situations where asserted utility model or design patent was a virtual copy of another US patent application. The patent office in China does not substantively examine them so you basically have filed a patent that’s no good. But such a patent would give them ‘patent power’, a significant benefit because they will be able to use the patent to file a lawsuit and/or apply for high-and new- tech company status, from which they will get tax benefits, tax subsidies, and hukou [residence permits for Chinese citizens] for employees,” Wang said. To make it worse, Chinese courts don’t penalize frivolous patents or just levy a small fine.
The more difficult obstacles, however, originate from a more basic level compared with the US litigation system. Whoever makes a claim in China bears the burden to prove, but often it’s difficult to find enough evidence with the single effort of one party. The United States’ discovery system creates a channel for litigants to see the facts of the case, according to Wang.
The second difference is that if a litigant in the US produces fake evidence, the opponent can file a summary judgment to penalize the litigant for producing falsified evidence. The litigant will likely lose the case by summary judgment. “If I prove you lied one time, then I assume you lie every time. But that’s not the case in China, the penalty against falsifying evidence is so low that people don’t take this seriously,” said Wang.
Through years of efforts, China’s copycat stereotype is vanishing as its IP legal system improves and public awareness of IP rights grows. Top Chinese smartphones makers are using IP more tactfully both as the attack and defense measures in their global expansion. Music streaming services are willing to invest big bucks in copyright, and then being able to seek settlement through more sophisticated measures of copyright swaps. Video streaming sites are building their own IP for self-generated content and reaching external partnerships at the same time. These developments should at least be seen as evidence to prove that the country is on the track to a mature IP environment suitable for the innovation it wants to foster.