A Journey Through the Chinese Patent System: The differences in how patent rights are treated

By Paul Morinville
October 7, 2018

https://depositphotos.com/192604716/stock-photo-usa-and-china-fight-china.htmlThe trade dispute between the U.S. and China started with a U.S. accusation of intellectual property theft on the part of China.  Is China really “stealing” intellectual property?  I’m not so sure.  Perhaps the Chinese are stealing trade secrets, and if parties are engaged in such activities they should be punished, but there is a lot of taking that has been legitimized – even authorized – by the Congress and the Supreme Court in recent years.  U.S. patent law is today enabling foreign corporations, including Chinese corporations, to legitimately take intellectual property developed in the U.S.  That is not theft.  It’s just business.  And far more damage is being done to the U.S. as the result of legalized appropriation of patented innovations than could ever be done by the theft of trade secrets.

In recent years, the U.S. government has gutted the U.S. patent system.  For small inventors like me, the U.S. patent system no longer works. There are no longer contingent fee attorneys or Angel investors willing to fund startups, so my patents and the patents of so many like me just languish. And since patents are a wasting asset, the clock runs on the patent’s term, which eventually make even breakthrough and groundbreaking patented innovations completely worthless.

Recently, I became President of a Hong Kong company. Our assets are the Chinese patents of another independent American inventor.  I am now tasked with defending that inventor’s patent rights in China.  This is the first post on my journey through the Chinese patent system that hopefully will shed light on the differences between the two country’s treatment of patent rights.

These differences are the key to understanding not only the roots of intellectual property transfer between the two largest world economies, but also to understanding organic technology development and commercialization.  It is my belief that China’s rise as a technology powerhouse has much more to do with its own strong patent laws interacting with weak U.S. patent laws than it does stealing U.S. IP. Frankly, that is the only logical conclusion given it also is our own experience from a century or so earlier.

For the last few months, I have been working with Chinese lawyers preparing a patent licensing campaign in China.  Just like in the U.S., potential infringers must be identified.  But that is where the similarities end.

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In China, the parties are strongly encouraged to negotiate in good-faith to resolve a patent dispute before filing a law suit in a Chinese court.  Good faith negotiations start by notifying the infringer that they are infringing on patent rights, which means that the inventor must send demand letter to the infringer.  After notification, the parties generally enter into a nondisclosure agreement (NDA). Once the NDA is in place, the inventor provides claim charts showing in detail how the product infringes on the patent. Technical discussions follow to sort through disputed technical details.  After infringement is clearly shown, business discussions start to establish the value of the patent and structure a licensing agreement to the patents.

In the background of these good-faith negotiations is the very real likelihood that the infringer will be enjoined if the court finds infringement.  The high likelihood of injunctive relief in China serves to move negotiations forward and, importantly, it helps to value the infringement in relation to the value that the invention created.

China’s practice of encouraging good-faith negotiations prior to filing a law suit stands in stark contrast to the U.S.  U.S. courts could care less if any negotiations took place prior to the law suit, and in fact the laws have evolved such that a patent owner would be nuts to initiate negotiations prior to filing a lawsuit. Initiate negotiations in the U.S. and you very well could be staring at a Declaratory Judgment action brought on turf friendly to the infringer.  This is why U.S. patent laws and judicial attitudes effectively discourage negotiating in good-faith prior to launching into litigation.

In China, a patent suit will cost about $250,000 on each side and complete in less than 10 months. While still expensive, inventors can find funding to level the playing field.  However, U.S. patent litigation can cost millions of dollars on each side and can last five or more years with inevitable appeals.  While both sides incur costs, inventors do not have the deep pockets of infringers to absorb the costs and delays and there are very few investors who will accept the high cost given the extended time it takes to get any return.  This financial imbalance puts the inventor at a severe disadvantage.

Infringers take advantage of U.S. financial asymmetry by using litigation tactics to delay closure often by years, and to increase costs to prohibitive levels. This also encourages infringers to launch immediately into litigation upon any perceived threat of infringement because the uneven playing field then becomes the platform for negotiations. Most small inventors are simply forced to capitulate.

But U.S. laws make it even easier for infringers to immediately put the property owner on the defensive and launch into litigation over the patent asset before a district court ever gets involved.  The infringer can file a validity challenge against the patent with the Patent Trial and Appeal Board (PTAB) at the U.S. Patent and Trademark Office (PTO).  There are three types of challenges that are all somewhat similar, but the most popular is Inter Partes Review (IPR).

The infringer files a validity challenge, pays a filing fee, and the inventor now must participate in an Administrative Proceeding that will cost every penny of $500,000 to successfully see through to a conclusion.  The review can take up to three years and any negotiations with the infringer (or any other infringers) that were in process stop until the review is completed.  Time lost off the patent’s term due to a PTAB review is not added back to the patent’s already limited enforceable life – it is just lost altogether.

The effects of the PTAB dramatically shift against the inventor because the PTAB invalidates patents at rates between 60% and 90% depending on the type of invention.  It is not uncommon for a single patent to be challenged multiple times often in a seemingly unending series of challenges from one or more challengers (see here, here and here).  If the patent survives this onslaught of PTAB reviews, litigation in court begins. The patent challenges are never really over unless and until the challengers win. Patents are like virtually any other property right – title is never certain and can always be challenged.

Probably the most important difference between the U.S. and China is injunctive relief.  In China, upwards of 85% of law suits where infringement is found see patent owners awarded injunctive relief.  But in the U.S., it is practically impossible to get injunctive relief.

Because a U.S. infringer cannot be enjoined, they keep the market for the invention win or lose.  This resonates in the background of all negotiations and acts to encourage infringers to intensify litigation to delay and drive up costs, which without the real possibility of an injunction generally results in the inventor capitulating.  In the U.S., if a company steals an invention, that company will keep the market even if a court finds that they stole it in the first place.  This sets up negotiations with one side having no fear of loss and the other side having a very real fear of a total loss.  No inventor will be paid a fair value for infringement of their patent rights under these circumstances.

Negotiating a U.S. patent’s value has nothing to do with value that the invention created in the market. Instead it is valued at its litigation cost because infringers will often settle at a license cost if it is below the costs of litigation.  Inventors will accept that value just to save the patent from a near certain death.

However, in China, due to the low cost of litigation, the speed to closure and the very real possibility of injunctive relief, a patent is valued in relation to the value that the invention created in the market.

This distinction of how patents are valued is the real reason that China is moving ahead of the U.S. in technology, especially in new technologies like artificial intelligence, quantum computing or block chain. It is also why investment is moving to China.

These complex technologies require significant early stage investment to get off the ground.  Like most new technologies, the most important new technologies are brought to us by an independent inventor.  A little guy with a big idea.  Most of these inventors have nothing to collateralize to attract investment other than a patent.  Without a meaningful patent, no investment can be obtained because there is no collateral. Again, this explains why China has taken the lead over the U.S. with respect to startup funding with respect to artificial intelligence related innovations.

In China, a patent attracts investment in relation to the market that the invention creates.  An invention that creates a significant market can attract significant investment. In the U.S. we watched in disbelief as 48% of early stage funding in artificial intelligence went to Chinese startups and only 36% to US startups.  It is not because China is stealing technology.  It is because China’s patent system works, and the U.S. patent system doesn’t.

 

Image Source: Deposit Photos.

The Author

Paul Morinville

Paul Morinville is Managing Director of US Inventor, Inc., which is an inventor organization working in Washington DC and around the US to advocate for strong patent protection for inventors and startups. Paul has been walking the halls of Congress knocking on doors and sitting down with hundreds of offices to explain the damage suffered by inventors due to patent reforms. Paul is an independent inventor with dozens of patents and pending patent applications in enterprise software. He is also CEO of OrgStructure, LLC, an early stage enterprise middleware provider in Northwest Indiana.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 10 Comments comments. Join the discussion.

  1. Bemused October 7, 2018 11:54 am

    Somebody should send a copy of this article to Darrell Issa – the moron that scoffed at Professor Adam Mossoff with this shining example of utter ignorance and stupidity:

    “I’ll now note that I’ve now heard that China is the country that we’re going to base the high mark of (laughing) of patent (laughing) tolerance on.”

    For those interested, Darrell Issa has been nominated to head up the U.S. Trade & Development Agency. Given Issa’s gutting of the US patent system (which has opened the door to massive in-flows of venture capital into Chinese start-ups) is Issa the right person to be advocating for American business to the international community? Hardly.

    I, for one, will be reaching out to my state’s senators to make my feelings clear on Issa’s nomination.

  2. Concerned October 7, 2018 2:29 pm

    Great observations!

    Our patent system will reverse and become stronger again. When is the question.

    With the subprime scam, the corruption had to threaten everyone’s existence, before it was forced to stop. I hope the United States does not have to go to the financial edge again before the patent mess is corrected.

    The Director of the USPTO knows there is a problem, so let’s hope the situation reverses sooner than later.

    We are in year 4 of Alice, the subprime collapse took approximately 8 years.

  3. Jeff Lindsay October 7, 2018 9:14 pm

    Thank you, Paul, for a terrific article and important perspective. People need to understand what is happening in the US and how the greatest danger to the future of the US economy is not foreign theft but internal decay that is blasting away hope for innovators. Meanwhile, China will win because innovation is actively nurtured with a healthier IP system.

  4. Paul Smith October 7, 2018 9:33 pm

    I see value in following your experience in the Chinese system but the constant emphasis on small independent inventors is less relevant to most of our clients who don’t bother with getting parents unless they have the funds to commercialize the invention. I would be interested in a broader patent owner perspective rather than just an inventor perspective.

  5. Paul Morinville October 7, 2018 9:53 pm

    Paul @4. There is no real difference between small inventors and other patent owners except perhaps for the ability to pay for costs. Small guys need contingent lawyers and investors. The patent system in China works the same for all.

  6. Night Writer October 8, 2018 8:17 am

    @1 Bemused

    Darrell Issa — I agree. He has been on the payroll of Google for years and has lead the efforts to gut the patent system.

  7. B October 8, 2018 11:53 am

    @ Paul “There are no longer contingent fee attorneys or Angel investors willing to fund startups, so my patents and the patents of so many like me just languish.”

    Hey, Paul. If you’re aware of a solid infringement of a patent, call me. I might be able to secure financing

  8. CP in DC October 8, 2018 11:59 am

    I so often hear how much better it is in China, and as always a closer look is warranted. It’s a mix bag.

    Prosecuting patents generally allows narrow claims to the exemplified embodiments and not more. I’ve appealed several cases, it’s better than PTAB, but still narrow claims.

    Now on to enforcement.
    Law360 had an article on August 9, 2018 about litigation in China. I can’t do the link thing, but you can look it up. Now the tidbits.

    When foreign companies are involved in patent litigation in China, their experience can be significantly different from what they may be used to in places like the U.S. In China, they may find strict limits on discovery, generally low damages awards and the possibility of political considerations influencing the outcome of a case.

    1. Discovery
    While limited discovery means Chinese patent litigation can be quicker and less expensive, it can make it significantly harder for patent owners to prove infringement. “In China, just trying to figure out whether there is actually an issue of infringement can be very difficult,” Kory Christensen said (Polsinelli).

    2. Damages
    Under Chinese law, patent damages can be based on the plaintiff’s actual losses, the infringer’s profits or reasonable royalties. But if those cannot be proven, the patent owner can only be awarded statutory damages, which are capped at 1 million yuan, or just under $150,000.

    3. Political Interference
    A sense that it is difficult for foreign companies to litigate in China persists, Christensen said, because “the judiciary in China isn’t nearly as independent as it is in the U.S.” The Communist Party or local government may seek to have judges favor local interests, which is “definitely a challenge for foreign companies,” he said. Government officials in China can engage in ex parte communications with the judge, which can be used to apply political pressure one way or another, said Mark Cohen, leader of the Asia IP project at the University of California, Berkeley School of Law.

    The article did mention that injunctions are often granted and that most people go for that, instead of damages.

    I just want everyone to know it’s not all milk and honey, there are real challenges. I look forward to more reporting on this topic to see how the practice matches the theory.

  9. Paul Morinville October 8, 2018 12:44 pm

    B @7. My email is paul@morinville.net. I’ve got clear infringement on billions of dollars of infringing product and solid patents. Trails to huge multinational tech companies showing theft. I don’t know who you are so send me an email.

  10. Tesia Thomas October 8, 2018 5:58 pm

    Yay I’m excited the blogging is starting!
    YAY!!
    I know Paul will discuss the negative aspects of China as well as the positive aspects.
    But, all in all, I hope the juxtaposition alerts our political leaders.

    When you face $20 Million PTAB bills (Josh Malone), No injunctions, and high manufacturing cost in America…it’s no decision whatsoever…
    My company will become a sole Chinese entity if it doesn’t have the financial support and IP support it needs in my home country.

    Comparing the IP laws against big infringers, I’ll be destitute in America but at least middle class in China…and still have my business and patents in China.

    This is especially sad because people must understand how much Paul loves America. He’s a vet.
    When vets have any disdain for America, we have to really think about that. Soldiers are America’s prime ambassadors. Haha

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