China, Intellectual Property

China And Intellectual Property Rights: The Dragon Roars (Part 2)

What can China do to leverage opportunities afforded by the current weakened state of the U.S. patent system?

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Last week, I discussed the Chinese government’s statement of intent with respect to strengthening its domestic IP system, including by cracking down on IP infringement by Chinese companies. I discussed how the proposed approach to IP enforcement outlined by China’s President Xi Jinping made plain his country’s intent to grow its economy by increasing the number of Chinese companies developing their own brands, in the hopes of increasing worldwide sales of their products. While there are a number of Chinese companies that have already made that leap, such as Huawei or ZTE, there are untold more that until now have been content to simply manufacture products for overseas brands. Because China wants that mode of thinking to change, a strong domestic IP system is necessary to give Chinese companies the confidence and wherewithal to develop their own brands — hence the new focus on “punishing infringers” and the like.

While the benefits to Chinese companies (and foreign businesses operating in the all-important Chinese market) of strong domestic IP rights are obvious, China would not be maximizing its sizable opportunities to compete globally if it didn’t look to exploit the systemic IP weaknesses found in other markets — particularly in the U.S.A. In particular, considering the erosion of patent rights in the U.S. as a result of Supreme Court decisions and the America Invents Act — particularly the inter partes review (IPR) system that is ironically currently under Supreme Court review on constitutionality grounds — there has perhaps never been a better time for a foreign government to help its domestic companies prepare to compete in the U.S. market. Since the window of opportunity to fully exploit the U.S. system’s infirmities may be closing ever so slightly, China will likely be moving quickly to support nascent Chinese-branded companies develop a sophisticated IP approach to their dealings in the U.S. market.

In no way am I advocating or suggesting that a Chinese (or for that matter any) company approach the U.S. market thinking that they can get away with blatant infringement without consequence. Such an approach would be folly. At the same time, some of the larger Chinese brands have demonstrated that they are quick learners when it comes to defending themselves against claims of IP infringement in the United States, and have shown a willingness to fight back with their own patent assets on occasion. To that end, there are sophisticated models for the Chinese government to look at when considering how Chinese companies can compete in the U.S. market — even if one assumes that such companies will be at great risk for accusations of infringement by both competitor operating companies and non-practicing entities.

So what can the Chinese government do to help startup Chinese brands protect themselves and leverage opportunities afforded by the current weakened state of the U.S. patent system? For one, the government should provide educational opportunities, either via a trade organization or through other mechanisms, focused on bringing smaller Chinese companies up to speed on IP laws in the U.S. These sessions can focus on realistic scenarios built around relevant industries, and would ideally include real-world examples of issues faced by existing Chinese brands already operating in the U.S. market. In fact, the Chinese government can take steps to make such educational sessions mandatory for companies looking to export to the U.S. market. I have no doubt there would be a long line of IP experts and law firms more than happy to provide these sessions in the hopes of increasing their reputation in the Chinese market.

Going a step further, the Chinese government could also set up mentoring relationships for Chinese companies operating in the U.S. — so that if they do get into an IP dispute they can receive guidance from other Chinese companies that have successfully (or even unsuccessfully) dealt with similar issues. The centralization of the Chinese economy provides an opportunity for the government to develop IP best practices, and to encourage Chinese firms to cooperate when it comes to dealing with outside threats that arise based on activities in foreign markets. Chinese companies in a particular industry could work together to share prior art for example, or even to share negotiation tactics when it comes to dealing with allegations of infringement lodged against them in the U.S. I can even see — assuming the IPR system survives — tacit agreement by Chinese companies to challenge patents being asserted against one or more Chinese companies in a particular industry. To some extent, some of these behaviors are already occurring. With government support, however, these approaches can extend downstream to smaller Chinese brands, who may not be starting with the resources or experience of the larger Chinese multinationals.

Another area where Chinese companies should be acknowledging changing U.S. patent laws is in the area of venue for patent cases. With the TC Heartland decision, the physical location of accused infringers has become a more important consideration in the venue analysis. While a foreign company with no U.S. physical presence can likely be sued in any District Court where infringement has occurred, Chinese companies looking to establish a physical U.S. presence would do well to consider whether TC Heartland affords them the opportunity to set up shop in a patent-defense-friendly locale. In fact, the ability to restrict venue to such a locale could be an independent reason for a Chinese company active in the U.S. market to open a physical presence here in the first place.

Ultimately, China’s increasing sophistication with respect to IP issues will serve it in good stead as it looks to have its domestic companies compete across a broader economic playing field when they operate in foreign markets. Increasing awareness of IP issues by those companies is thus an essential exercise that the Chinese government can (and likely will) insist become standard operating procedure for companies exporting to the U.S. market. Just as U.S. and other foreign companies will need to adjust as China’s domestic IP laws change and strengthen, so should we expect that Chinese companies will adopt ever more sophisticated IP strategies when operating in the U.S. and other foreign markets. The IP community will surely be watching, as it is kinda hard to ignore a dragon circling overhead. (Just ask the Lannister army, or what is left of it after the last Game of Thrones episode.)

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Please feel free to send comments or questions to me at gkroub@kskiplaw.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.

Earlier:

Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at gkroub@kskiplaw.com or follow him on Twitter: @gkroub.

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