As patenting grows, an era of big IP lawsuits is coming for Chinese startups

4 min read
IP change in China
(Image credit: Bigstock/BCFC)

Bull Group (Gongniu Dianqi), one of China’s biggest household electronics firms, was well on its way to an IPO last week, when it was hit by a patent suit (Chinese link) for RMB 1 billion (about $149 million). In China, it was a novelty—the tech world here isn’t used to blockbuster intellectual property fights. But as more Chinese startups go to market, we’re going to have to get used to them. How many startups are ready?

Chinese intellectual property protection has got a bad rap during the trade war. The US has accused it of refusing to protect patents in order to steal technology. But the truth is that we in China’s high tech sector need a strong patent system to protect our own IP. China leads the world in the number of patents filed.

In China’s technology sector, it feels a bit different. China’s large jumps in patents, in addition to big strides in copyright, trademarks, and other forms of IP have come to a turning point. China is producing films that gross over a billion dollars, and is home to some 30% of the world’s 200 plus unicorns—none of which would be possible without some sort of effective IP protection.

The issue that worries me is bad patents.

Today’s young tech entrepreneurs know that in a few years they will be at the center of IP clashes inside and outside China. They value their IP just as much as any founder in Silicon Valley. But patent attorneys and agents often fail them, filing patents that simply aren’t good enough.

Plenty of patents

I have interacted regularly in the last two years with founders and/or CEOs of startups in technology, including blockchain, automatic driving industrial vehicles, ride sharing, AI music production, medical imaging, transcribing and translation software, classroom education, internet enabled offline advertising, and even agriculture.

Most are active in protecting their IP—impressive, considering that it is less urgent task than bread and butter ones such as design, prototyping, production, and sales.

Let me introduce a composite character, a founder/CEO whom I’ll call Jeff.

Jeff’s company has a history of three years and has raised Series A and sometimes Series B funding, which in China typically means over RMB 1 million, with 30 engineers and additional personnel. The company has won quite a few startup roadshow awards, and local governments have been generous with breaks on rent and taxes.

Jeff is what I call “classically trained”: he has a doctorate degree in engineering or medicine or agriculture from a good research university, and more often than not he has spent years in an English-speaking or European country for a degree program. Jeff is five or ten years out of school, and still has many “research traits.” One of these traits is patenting.

Jeff is likely to be the inventor of 20-40 patents, having filed some while a doctorate degree researcher. The startup will also have filed a steady stream of patent applications over its three years.

If you take a close look at the portfolio of patents owned by the startup, and if you know the basics of the field the company is in, chances are you can see that these patents cover the major three to five branches of the technology, showing that the patents have been organically grown at the company, and that he has good enough sense to follow sound principles of creating a portfolio of patents.

When telling the startup’s story, Jeff will almost always point out the number of patents they have been granted or in application, and sometimes its “rank in the world in our field in terms of patents.” He has a good reason to do so. One, the encouragement from the venture capital community. Two, the newly announced Science and Technology Innovation Board of the Shanghai Stock Exchange has issued qualification criteria that cover the applicant’s holdings in intellectual property, especially the number of invention patents.

Not enough protection

Startups like Jeff’s have plenty of IP on paper. But when I look over patents for a startup, again and again I see badly written applications that offer nearly no protection against competitors. Patent attorneys and agents often fail to protect their clients’ interests.

The basic problem is a lack of experience. Startup culture in China only goes back about 20 years to the founding of Alibaba. Chinese companies only began filing major patent claims in the last two or three years. Since a lawsuit often takes five to 10 years to resolve, and most patents are a few years old before their owner tries to enforce them, neither entrepreneurs nor attorneys have the experience to know what works and what causes pain down the line.

Equally important is how patent attorneys and agents are paid in China: typically, they receive lump sum for a patent application—sometimes even for a lawsuit—unlike their US counterparts, who are paid by hour. This pricing structure incentives them to get the job done as fast as possible.

Subsidies encourage startups to accept this approach, paying companies based on the sheer number of patents in their name. This encourages CEOs to seek volume at low prices, rather than quality. The result is patents that provide too many details, include many nonessential steps, and specify irrelevant details about how the company applies the technology. These extra details limit the company’s protection and make it easy for competitors to circumvent it.

For example, if a company has developed technology for use with touchscreens, an agent or attorney should do their part and draft a patent claim for all kinds of screens—otherwise the claim leaves the field open for any competitor to apply it to other screens and own that application. Badly constructed patents may also be vulnerable to being invalidated in court.

These failures threaten to cost Jeff and thousands of real life founders time and money in a few years, when they seek to enforce their patents and find out they are not as protected as they thought they were.

The coming years will probably see many hard fought IP battles in the tech world—but I suspect these disputes are the only way to sharpen everyone involved, and China’s CEOs, patent agents, and attorneys will come out of them battle-hardened.