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

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

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Paul Morinville
By: Paul Morinville
October 7, 2018

The 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.

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.


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