Are China’s IP policies hindering America’s global competitiveness? To find out who is responsible for the demise of American competitiveness you only reflect a mirror against U.S. innovation policy.
Several months ago, the Trump Administration launched an investigation into Chinese trade policies that are responsible for expropriating American intellectual property (patents, trademarks, copyrights). This investigation is premised upon Section 301 of the Trade Act of 1974 which gives the President the authority to take all appropriate action, including retaliatory action, against China if the U.S. concludes that China’s policies on intellectual property are discriminatory and place American companies at a competitive disadvantage to Chinese companies. But, are China’s policies on intellectual property really the problem hindering America’s global competitiveness?
The Chinese patent system has come a long way since the first intellectual property laws were passed in China in 1985. Many would argue that China’s budding patent system has actually surpassed America’s older and more established patent system (which has been around since 1790 when then-President George Washington signed the first U.S. patent) in speed and efficiency and in providing strong patent protection to innovative companies and emerging startups as well as to individual inventors.
For example, China has established courts that specialize in intellectual property litigation so litigants have an experienced, fast and cost-effective forum to resolve patent disputes. These specialist courts take about 10 months to resolve patent infringement lawsuits with litigation costs running at approximately $200,000. In contrast, patent litigation in the U.S. often takes five or more years to resolve with litigation costs running in the many millions of dollars. A fairly ordinary dispute when litigated in the U.S. can easily surge past $3,000,000 when you factor in the inevitable post grant challenges (each of which will run $500,000 to defend, sometimes more) and the federal court litigation after that. See AIPLA 2015 Report of the Economic Survey (starting at page 37). If multiple patents are infringed they will be each challenged in a post grant proceeding, which can and does easily raise the cost litigate to 10 times or more of what it costs in China.
Quickly and efficiently resolving patent disputes, which address whether a patent holder has the right to exclude a competitor from making and/or selling an infringing product or which give a patent holder the right to demand patent license fees from companies wishing to use the patent holder’s intellectual property, is important to spur investment in rapidly evolving industries or in newly emerging technologies. Lower costs for litigation also ensures that capital constrained innovative startups and independent inventors have access to the court system to defend their patented inventions. This increases investor confidence to provide funding for cutting edge technologies and spurs investment in startup businesses because these nascent companies and individual inventors can protect their critical technologies against both deep pocketed incumbents and new competitors.
China’s leadership is also publicly on record as continuing to focus on strong intellectual property rights and in taking steps to upgrade the Chinese patent system to support the efforts of innovative companies doing business in China. Last July, Chinese President Xi Jinping declared that his government would further strengthen the rights of intellectual property owners in China, noting that “Wrongdoing should be punished more severely so that IP infringers will pay a heavy price.” Some have questioned whether this philosophy will hold long-term as Xi Jinping would eventually give way to another President who would under China’s system have extraordinary powers to shift policy. That does not seem to be a worry any longer. The Wall Street Journal this week reported that term limits on Xi Jinping will be removed, effectively allowing him to stay on as President indefinitely.
China’s focus on strengthening patent rights is borne out by Chinese litigation statistics. Last year in China, 84% of patent holders won their patent disputes with infringers, and virtually 100% of the foreign firms that filed patent suits in Chinese courts and proved infringement were also granted injunctive relief (thus preventing an infringer from making, importing or selling an infringing product in China). See Why you should protect and enforce your IP in China.
China’s decision to strengthen its patent system reflects a sound pro-business policy for very good reason. Patents and a strong patent system attract investment in new technologies and businesses as evidenced by the fact that today, nearly half of all global venture capital is invested in Chinese companies.
Compare those statistics to the U.S., where the previous administration signed into law the inaptly-named America Invents Act that created patent administrative review panels (the Patent Trial and Appeals Board) which provide infringers with another avenue to challenge issued U.S. patents. Last year, the PTAB invalidated or forced patent holders to grant low or no cost licenses (due to the high probability of invalidation) in over 90% of the patents that were reviewed by these administrative panels. In addition, patents challenged in federal district court as claiming unpatentable subject matter were invalidated 67% of the time. The vast majority of these invalidated U.S. patents would have been deemed valid under current Chinese patent law, and some of these invalidated patents do actually remain valid and enforceable in China, Europe and elsewhere throughout the world. See Turning Gold to Lead: How Patnet Eligibility Doctrine is Undermining U.S. Leadership in Innovation (at page 17).
In contrast to China’s strong patent system which has led to significant venture capital inflows into that country, America’s patent system – which has been weakened by the patent “killing fields” of the PTAB and by multiple anti-patent decisions from the Court of Appeals for the Federal Circuit (CAFC) and the U.S. Supreme Court – has seen a 62% decrease in venture capital investments in early stage companies and a 40-year low in startup business creation in the U.S.
Compounding the problem for American early stage businesses and innovative startups is the fact that it is nearly impossible to obtain an injunction in the U.S. to stop an infringer from selling an infringing product. Instead, U.S. courts require patent holders to grant a compulsory license to infringers often at below market value due to several decisions from the CAFC that have severely curtailed the size and scope of patent licensing fees available to patent holders.
Stated another way, a patent holder in China has an 84% chance of protecting their patented invention, quickly obtaining injunctive relief, which can completely shut down the infringing activity and securing patent licensing fees that reflect the true market value of their patented invention. Meanwhile, a patent holder in the U.S. has a nearly 90% chance of losing their patent claims to an invalidity challenge. And even if a patent holder can avoid having their patent claims invalidated, the best they can hope for is being forced to grant an infringer a compulsory license to their patent in exchange for licensing fees that do not necessarily reflect the true market value of the patented invention.
American companies often complain that China’s intellectual property policies require them to transfer their technology to Chinese partners in order to do business in China putting them at a competitive disadvantage in China. But that complaint misses the real problem. China’s focus is not solely on its domestic market. China’s focus is also on the global marketplace and the U.S. is the largest of those international markets. Because America’s patent system is so ineffective against infringers, Chinese companies can use appropriated American-developed technology to export infringing products made in China back into the U.S. markets. Even worse, if a Chinese company is held accountable for patent infringement, the worst that can happen (because of the compulsory licensing system mandated by U.S. patent law), is that the Chinese infringer pays the American patent holder a licensing fee (which almost certainly will be lower than true market value).
Given the advantages in manufacturing costs that Chinese companies have over American competitors, as well as easy access to capital provided by state backed institutions, paying a patent holder a licensing fee is really no impediment at all to Chinese companies selling infringing products back into the United States. The end result of all this is that the current state of the patent system in America puts American companies and jobs at risk from the very same technology that was developed by American innovation!
While the Trump Administration should continue its investigation into Chinese practices regarding intellectual property, it must also undo this country’s failed patent policies that have directly led to and will continue to result in America’s significant decline in global competitiveness. While it is important for every country to play by accepted international norms, if President Trump wants to find out who is responsible for the demise of American competitiveness he need only reflect a mirror against U.S. innovation policy over the last decade. The problem, and therefore the solution, comes from within.