** Please note, this article is the English Translation of the original article, “Why Non-Practicing Entities (NPEs) Are Good For China” published on in Chinese on November 8 on the publication Zhi Chan Li, which is the media division of IP House.
In recent years, Non-Practicing Entities (hereinafter referred to as “NPEs”) shifts their focus to China. Some comments are of the view that China is becoming the preferred venue for global companies to obtain and enforce patent rights, which reflects the magnitude of China’s economic impact and its efficient and reliable legal system. The situation also indicated that China is becoming an innovation powerhouse and not merely a source of inexpensive manufacturing and unskilled labor.
The United States company, iPEL, Inc., which is led by prominent U.S. patent lawyers recently declared that Chinese patents are now more valuable and a better investment than U.S. patents. The company has also shown their confidence in the Chinese patent system with definitive actions, which is probably the best example of China’s rapidly transforming status in the innovation economy.
Since its founding in May 2017, when iPEL secured $100 Million USD in initial capital, it has purchased more than 1,000 Chinese patent families and has filed 10 patent infringement lawsuits in three different Chinese courts/tribunals. At least 1,000 of the Chinese patent families originated from Huawei and ZTE.
Although the pricing details are not known, it appears that iPEL has acquired more Chinese patents than any other foreign company and likely paid a significant amount of money for them, which suggests that the patents are of a high quality.
Additionally, iPEL’s investments and enforcement efforts in China show that China’s efforts to improve its patent system have been successful.
In China, patents are increasingly recognized as having economic value as independent assets that can be freely purchased and traded by anyone in the world. And, equally important, all owners of Chinese patents are able to seek monetary damages and permanent injunctions for patent infringement from any of the specialized intellectual property courts and tribunals. It could be said that the economic value of Chinese patents is directly tied to a patent owner’s ability to enforce its rights against infringers through a well-defined and predictable legal system.
Some people believe that China encourages the theft of patent rights from U.S. companies and lacks its own ability to innovate. Apparently, there is no concrete evidence to support these wrong accusations.
Take iPEL for example, iPEL is owned and operated by U.S. patent experts. The President of iPEL, Rasheed McWilliams, is a prominent patent trial attorney who has represented many high-profile technology companies in large patent cases. The CEO of iPEL, Brian Yates, is also a patent lawyer, and through his wholly owned companies, has completed more patent lawsuits and patent license agreements than nearly everyone. The founders of iPEL, from the view of professionals, represent the views of patent practitioners who understand patent issues and are in the best position to determine the value of patents.
The actions of iPEL demonstrates that U.S. patent experts acknowledge and value the innovations made by Chinese inventors, and that non-Chinese companies are infringing Chinese patents and stealing intellectual property from Chinese companies (and not Chinese companies stealing U.S. patents).
The patent analytics company RPX Corporation compiles data for all patent infringement lawsuits that have been filed during that last two decades and only two companies (through dozens of wholly owned subsidiaries) have filed more patent infringement lawsuits than Mr. Yates’ companies: IP Edge LLC and Acacia Research Corporation. That probably explains how iPEL was able to secure $100 Million USD of capital last year, while the entire U.S. patent market struggled. And that is also why iPEL’s conclusions about U.S. patents and Chinese patents are so meaningful.
Before discussing why NPEs are good for China, it is necessary to distinguish NPEs from “patent trolls.”
During the last decade in the U.S., there has been a major effort by special interest groups to characterize all patent owners who do not “practice their patent” (meaning they do not make or sell a product/service that is covered by their patent) as patent trolls, if those patent owners realize value of their patents through enforcing their patent rights. The term patent troll is intentionally insulting.
The current Director of the United States Patent and Trademark Office, Andre Iancu, recently rejected “the patent troll narrative” because it is not accurate and actually inhibits innovation. But, there are indeed examples of NPEs filing frivolous lawsuits and using patents in an abusive way. Those activities are definitely bad and should not be accepted – by any patent owner.
Whether a patent owner is an NPE should be irrelevant to those activities. The criteria should be whether the allegations of patent infringement have merit. If the term “patent troll” is going to be used at all, then it should be defined as: “a patent owner who makes allegations of patent infringement that are either knowingly false or are made without first conducting a diligent infringement analysis.” Such a patent owner is properly called a patent troll, regardless of whether they are an NPE, because they are acting in bad faith.
In fact, all of the risks and concerns related to “patent trolls” are easily addressed through the litigation process in China.
In the U.S., the risks of frivolous patent lawsuits is greater because the merits are decided by a group of jurors who lack patent expertise and can incorrectly conclude that a patent is infringed. Also, the discovery process in the U.S. is expensive and inefficient, which incentivizes parties to extract settlements that are less expensive than the cost of litigation.
In China, however, these inefficiencies and imbalances do not exist. The specialized intellectual property courts and tribunals in China are equipped with specialized judges who are able to quickly and accurately identify frivolous lawsuits. Because there is no discovery process and a decision on the merits can often be achieved within one year, the abusive tactics employed by patent trolls in the U.S. can be avoided in China.
As long as NPEs in China are not patent trolls, they deserve the same rights and protections as all other patent owners. Their investments in Chinese patents and reliance on the Chinese legal system provide significant benefits to Chinese innovative entities.
NPEs increase the value of Chinese patents by enforcing them and holding infringers accountable. Without enforcement and accountability, value of patents will not be respected. Instead patents will simply be ignored. Many patent owners lack the resources and expertise to enforce their patents, and many other patent owners do not want to enforce their patents for various reasons. The existence of NPEs provides those patent owners an opportunity to generate revenue from selling their patents to NPEs. And, everyone in the innovation ecosystem will have greater respect for patents and the rights of others if they understand that patents (regardless of who currently owns them) might be sold to an NPE and asserted against them.
Additionally, inventors and technology companies will have an additional incentive to invent, including in areas that are outside of their core areas of expertise, if they are able to obtain patents that are desirable to third parties.
As NPEs demonstrate the value of Chinese patents by proving infringement through litigation, the demand for Chinese patents will increase, and so will the values/prices. This will incentivize further innovation and patenting, which will perpetuate the positive cycle of further innovation. It is truly a win-win situation. Foreign NPEs demonstrate the value of Chinese patents. Just as the value of American companies largely rely on their patent assets, the value of Chinese companies will directly increase as their patent assets increase in value.
On the other hand, failing to embrace foreign NPEs would immediately tell investors around the globe that Chinese patents are a bad investment, which would reduce demand and reduce value and, ultimately, reduce innovation.
To sum up, the arrival of foreign NPEs into China will have a positive impact on operation and development of Chinese innovative entities. It is direct proof that China succeeded in creating a valuable patent system that rewards innovators and punishes thieves. iPEL and other NPEs are exercising their rights, only make good faith infringement allegations, and do not adopt tactics of “patent trolls”, they will not be a burden for Chinese innovative entities. Instead, they will help increase enthusiasm for invention of the Chinese innovative entities.