French company Schneider Electric paid $23 million compensation to the Zhejiang-based Chint Group in 2009 for infringing the latter's patent on electrical apparatus technology. Provided to China Daily

Improved grounds for IPR in China aid foreign, local firms

Protecting intellectual property rights has been the single biggest hurdle for most companies to overcome when entering the Chinese market. But as the number of IPR cases being filed, including against Western companies, is growing steadily in China, it shows that the world's second-largest economy is becoming more serious about protecting valuable ideas.

The growing number of foreign companies appearing in the Chinese courts for IPR violations are also a clear indication that China is making rapid strides up the innovation ladder. With more patent filings than any Western nation, China is no longer just a factory, but rather a destination where ideas are given shape and incubated into successful global enterprises.

"Though there are many reasons for foreign companies being charged with IPR violations in China, in reality it has more to do with the fast changing global economic landscape," says Tony Chen, a Shanghai-based patent lawyer working with American law firm Jones Day.

Rising domestic IPR awareness, the influence of foreign companies tightening their IPR framework, or even suggestions that they have been exploiting loopholes are often cited by experts for the tightening of the IPR system in China.

According to the Supreme People's Court, judges nationwide announced verdicts in 24,544 IPR cases during the first five months of this year, with 2 percent, or 504 lawsuits, involving overseas litigants. Most of the overseas litigants were from the United States, European countries and Japan, says Kong Xiangjun, president of the top court's intellectual property tribunal.

Fierce competition, as well as a tendency for trade protectionism in certain countries, have led to a remarkable increase in cross-border IPR conflicts, he says, adding that most of the IPR lawsuits involving overseas companies concern infringement of trademarks, patents or copyrights.

Rising awareness of IPR protection among IT companies, and intensified efforts of judicial departments to combat copyright infringement have also contributed to the high incidence of such cases, Kong says.

Multinational giants such as Microsoft, Apple, General Electric, Abbott Laboratories, Michelin, BMW and Honda are among the big ticket IPR litigants in China in recent years.

Larger focus

Chen from Jones Day says that on an individual basis he has been handling more IPR cases involving foreign litigants this year. Although his sample size is relatively small, the growth rate has been faster than that reported by the top court, he says.

"The Chinese economy is still expanding at a faster clip than other major economies, while the Chinese market is growing in stature for multinational corporations, thereby generating more value for IPR in the Chinese market."

IPR infringement is not something new in China, but rather something that many foreign companies chose not to enforce in the past, he says.

"Enforcement of IPR protection has its own costs, both in terms of time and money," Chen says. "Therefore foreign companies would conduct a proper cost-benefit analysis and see if they get the desired results in China.

"With the ascending importance of the Chinese market, IPR has become something that is worth fighting for."

Such efforts by foreign companies also have a historical reference, as evidence shows that foreign litigants often have a better chance of winning IPR cases in Chinese courts.

According to the Shanghai superior court, among the 87 IPR cases it handled in 2012, nearly 80 percent of the favorable verdicts were for foreign litigants.

Chen says defendants have as good a record as plaintiffs in China, because their patent rights have often been tested elsewhere in the world, and they are willing to hire top law firms.

More defendants

However, increasing number of recent cases have put foreign companies in the defendant's seat.

In 2009, French electrical company Schneider Electric agreed to pay $23 million (17 million euros) to the Zhejiang-based Chint Group as settlement to end a three-year patent lawsuit. The French company was accused of violating Chint's rights by selling five models of apparatus, which fell within the protected scope of Chint's patent rights.

Chint's success spurred several Chinese enterprises to pay closer attention to IPR protection and use legal actions for protection.

Tech giant Apple Inc was the focal point of several IPR disputes last year. In the first instance, a Shenzhen court found the US company guilty of violating the iPad trademark in the Chinese market. The trademark was registered by a local company Proview Technology and Apple was forced to pay $60 million to get control.

The second case involving Apple was brought up by Shanghai-based Zhizhen Network Technology Co, which accused the California-based company of infringing its patent for Xiao i Robot, claiming it was used in Apple's intelligent digital assistant Siri.

At the second hearing of the case earlier this month, Apple rejected Zhizhen's accusation and refused to compare the two technologies for appraisal, saying the results would be pending on the State Intellectual Property Office's decision on its application for invalidation of Xiao i Robot's patent.

Si Weijiang, a lawyer representing Zhizhen, says the result from the Intellectual Property Office - to which Apple had applied for invalidation of Zhizhen's patent - would be available later this month and the court would probably wait for the ruling before pronouncing its verdict.

"Actually, it would have been easier to get a result by just comparing the two technologies, if Apple was willing. We are appalled by Apple's behavior," Si says, adding that since the case involves even bigger compensation than Proview, it may take some time for a final verdict.

The complexity of the IPR cases involving overseas companies and the huge impact that a ruling may have on the litigants are creating more pressure for Chinese judges, says Kong from the top court's IPR tribunal.

"With rapid technical development, it's becoming more difficult to clarify some of the technical facts, particularly in high-tech sectors such as biology, chemistry, pharmaceuticals, electronics and telecom," he says.

In most of the cases, the verdicts may even be vital for the survival of the company, he adds.

To better handle the increasing number of IPR cases, Kong feels that more up-to-date legislation is needed for IPR protection along with specialized IPR courts.

Domestic push

Chen from Jones Day feels that the implementation of the "national intellectual property strategy" since 2006 has been the main reason why foreign companies are facing many IPR challenges in China.

"The government has provided policy support in areas such as fiscal incentives and tax reduction to encourage patent filings, and this has led to double-digit growth in patent applications over the past seven years," he says.

According to the State Intellectual Property Office, China received more than 1 million patent applications in the first half of this year, up 18 percent year-on-year.

China also awarded the most patents last year, even more than the combined amount filed by the next four nations, Chen says.

"Every April, national and local governments put out new reports of double-digit patent filing growth over the past year. Does this mean China's innovation activities surpass the combined activities in the next four countries?"

Regardless of their correlation to innovation, more patent rights also mean more reasons to sue competitors. The Chinese patent office issued more than 1 million patents in 2012, most to domestic parties.

Most of the IPR lawsuits are generally a result of rising awareness by Chinese companies of IPR protection, and Chinese IPR owners have also learned from examples in the US about going after companies with deep pockets, Chen says.

The US has taken action to crack down on such speculative suits in response to requests by its principal victims, such as Apple and Microsoft.

Generally speaking, electronics and mechanical sectors are where most patent disputes happen, experts say, because launching new products in these areas often involves thousands of patents, and are more likely to be implicated in IPR lawsuits.

In comparison, innovations in medical and chemical industries are less likely to involve such actions, as they usually involve a single patent.

Many legal experts view the actions of individual companies, which look to maximize their benefits by taking advantage of the rules, as normal use of patent rights to protect benefits, and that it packs more punch when backed by national policies.

However, it could lead to more problems especially in China where rules are slightly different, because the examination process for patent applications is different.

Li Chang'an, an economics professor with the University of International Business and Economics in Beijing, says despite the huge volume of IPR cases in China, less than 0.3 percent of the patents have been transferred from the applicants to another person. This is much lower than the average rate of 5 percent in developed countries.

"China might be a giant in patent applications, but its innovation ability is not yet in line," he says.

And although patent applications by Chinese companies in the US market have risen, very few have led to IPR cases in which compensation has been awarded against local companies.

This is viewed by experts as evidence that the quantity and quality of patents awarded in China do not match.

Moving ahead

Dan Harris, founding member of Asia-focused commercial law firm, Harris & Moure, based in Seattle, says Chinese courts are starting to get tougher on IPR violations, and while that is a good thing, particularly with respect to trademarks, the courts also need to be tougher in enforcing them.

"China's laws are fine. It's not just a question of the laws. A lot of times it's a question of implementation, not just by the Chinese government, but by companies that are doing business in China," he says.

"A lot of times foreign companies complain about IPR in China, when in reality it was the foreign company that made the mistake when it went to China of not sufficiently protecting its rights."

Harris says China is a lot better now compared with a decade ago, because the country is getting wealthier, and because Chinese companies are starting to become more conscious about IPR.

"I am of the view that countries start doing well with IPR when their own powerful companies really start caring about it. And I've seen this progression elsewhere such as in Japan and South Korea," he says.

"The reality is nobody is going to be able to force China to improve its IP from the outside, but big companies within China like Haier, Huawei and Lenovo can do so."

In fact, Chinese companies, though largely as defendants, have a good record of winning IPR cases overseas. Huawei, which has been involved in many disputes with strong rivals such as Motorola and ZTE, provides a good example.

"Interestingly enough, in my experience, Chinese companies that come to the United States take IPR protection more seriously than American companies that go to China," Harris says.

"I think a lot of the reason for that is because in the United States certain IPR protections are automatic without even needing to file for them. So when Chinese companies come over here, in most cases they are prepared to file, whereas when the Americans go over to China, often they neglect to do the necessary filings."

weitian@chinadaily.com.cn

( China Daily European Weekly 08/23/2013 page6)