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Building IP Assets and Implementing Strategies for the Future

China IP News
August 2008

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The importance of intellectual property to Chinese companies is growing and likely will continue to grow in the future.  In fact, in many competitive high-technology fields, a strong patent position already may represent the lifeblood of a Chinese company and determine the strength of that company in many markets.  To attain a strong patent position, a company cannot simply build a patent portfolio in a vacuum.  Instead, a patent strategy must include a system to obtain competitor information and then use that information to the company’s advantage.  The system must track competitor products so that the company can creatively craft patents to cover those products and thereby build leverage.  The system also must track a competitor’s patent publications to enable the company to avoid patents, evaluate the need for licenses, and enter the market with the least amount of risk.  This article discusses the importance of a strong patent portfolio, ways to obtain information on a competitor’s products and patent publications, and strategies to employ that information.

The Importance of a Strong Patent Portfolio

A Chinese high-technology company cannot underestimate the importance of a strong patent portfolio and its value as a company asset.  A patent grants the exclusive right to exclude others from practicing (e.g., making, using, selling, or importing) the patented technology.  A patent, however, does not grant its owner the right to practice that technology, as other parties’ patents may block that right.  Patents, therefore, first and foremost protect revenue and R&D investment by preventing competition.  Enforcing rights through litigation is one well-known method of preventing competition.  But recently, patent portfolios are preventing a competitor’s financing and forcing competitors to move in a different technical or market direction.

Patent portfolios also generate revenue through infringement litigations, licensing fees, and outright sales of patents.  Often, a patent portfolio covers more than one field outside the patent holder’s market.  For example, a company in the medical imaging field may hold patents relating to imaging technology relevant to paper copying and scanning.  In such a case, the portfolio can generate a revenue stream through field licensing to copying and scanning companies. 

In addition to traditional ways of generating revenue, venture capital groups and other investors highly scrutinize your and your competitors’ patent positions when making investment decisions.  They want to know that your product has patent coverage so that no one can copy the product, and that no patents cover your product, permitting you to go to market.  Competing financing decisions may be made based on which company has the stronger patent position. 

Perhaps the most important aspect of a strong patent portfolio is its use as leverage.  For example, a strong patent portfolio can discourage a competitor from enforcing its own patent rights, due to a fear of its own products being the subject of counter enforcement.  Inevitably, however, a successful high technology company will face patent obstacles from competitors.  The company therefore must have bargaining chips at its ready for enforcement, cross-licensing, or partnering, such as a strategic alliance, a joint venture, or other collaboration. 

Obtaining Competitor Information
To help build patent leverage, a company should track its competitors’ issued patents and published patent applications in commercially significant markets.  The company should generate a list of potential competitors, inventors in the field, and key technical words or phrases that may be found in the patent publications.  The company then should perform regular searches of computer databases.  Free websites, including the U.S. Patent & Trademark Office (www.uspto.gov), have search engines to locate this information based on search parameters.  The patent publications may be downloaded from those sites.  Regular searches of comprehensive subscription service databases of worldwide patent publications can be automatic.

A company also should obtain from the various national and regional patent offices the histories of a competitor’s pending, published patent applications.  This will identify the patent claims (i.e., the portion of the patent that defines the scope of protection) that a competitor is pursuing and the progress of the application in the patent office.

In addition to patent information, a company must track its competitors’ products.  Sources of that information include:  (1) the competitors’ patent literature, as technology disclosed in a patent application often mirrors their product development; (2) competitors’ websites; (3) trade shows, conventions, and other industry meetings; (4) press releases, which may be monitored through Internet services; and (5) publications relating to submissions to government regulatory authorities.

Using Competitor Information
Armed with competitor information, a company should develop “defensive” and “offensive” strategies relative to its competitors.  Defensive strategies relate to your company’s avoiding a competitor’s patent rights, whereas offensive strategies relate to obtaining patent rights to exclude competitors.

“Defensive” Strategies
A company should review its competitor’s patent claims for ways to avoid the claimed technology.  Brainstorm sessions of engineers and patent counsel to design around the claimed technology should be regular.  These design arounds themselves may be inventions worthy of patent protection. 

If designing around is not an option, the company should attempt to obtain rights through a license or other purchase.  Licenses can take many forms, including exclusive, nonexclusive, royalty or non-royalty bearing, field restricted (especially if the technology is not core to the patent owner’s market), and cross-licenses if your company has built patent leverage relative to your competitor’s product development. 

Another defensive strategy includes instituting patent office proceedings that challenge a competitor’s patent.  In the U.S., one such proceeding is a patent reexamination.  In this procedure, you can request the U.S. Patent and Trademark Office (USPTO) to reexamine whether a competitor’s issued patent claims are indeed patentable, based on the application of prior art.  This can be a less expensive alternative to litigating that matter in court.  Many other patent offices have similar procedures.  For example, Europe has an opposition procedure in which the grant of a European patent may be opposed within nine months of that grant, also based on prior art.  Thus, it is important to closely monitor the grant of a competitor’s European patents so that this option is not lost, due to the passage of time.  Recent legislation has been proposed in the U.S. that would add a similar opposition procedure to the U.S. patent system.  To date, however, the proposals have not become law.

In the U.S., you also can institute a so-called declaratory judgment action in a federal district court, requesting the court to declare that your product does not infringe a patent and/or that the patent is not valid or otherwise not enforceable.  As a requirement for such an action, your competitor first must have threatened infringement against you.  This is an aggressive and often costly defensive strategy and one that should be carefully considered based on the potential risks.  Courts of many other countries entertain similar types of actions.

A review of competitors’ patents also will determine whether you will need legal opinions clearing your product relative to those patents.  An opinion can provide a basis that the competitor’s patent is not infringed, is invalid, and/or is not enforceable.  The opinion may serve several purposes.  For example, an opinion can help evaluate the business risk of marketing your product in the U.S.  In addition, should the competitor later seek to enforce its patent against your product, and a U.S. court finds that your product infringes, the opinion can help protect against a finding of “willful” infringement and a resulting increase in damages by the court.  The opinion essentially can provide an insurance policy against the possibility of increased damages later.  To avoid that increase, the opinion, among other things, must be relied on in good faith in taking your product to market.  Timing of the opinion is therefore important.  Clearance opinions also can provide value during financing by demonstrating your company’s awareness and careful study of competitive patents.  A company should seek advice of counsel, however, prior to disclosing the existence or substance of any legal opinions outside of the company.  Such disclosure can result in, among other things, waiving the U.S. attorney-client privilege, which may have consequences later.

“Offensive” Strategies
Using the information obtained about competitive products, a company should craft patent claims to cover those products.  To do so, the company should review the disclosures of its applications pending in the patent offices to see if those disclosures will support patentable claims that cover the products.  The company also should have its engineers invent based on the anticipated direction of its competitor’s technology.  The company then should file new disclosures with claims focused on anticipated commercially significant features that block a competitor’s ability to practice in that direction.  These strategies build significant leverage and bargaining chips. 

If a competitor is pursuing or has obtained a patent directed to an invention that your company may have invented sometime earlier, the U.S., unlike the rest of the world, has what is known as a “first-to-invent” standard and an “interference” proceeding for determining what party is entitled to that patent.  The proceeding will determine which party first invented the claimed subject matter and therefore is entitled to own rights associated with it.  The procedure, which takes place in front of the USPTO, requires you to copy the competitor claims in your patent application and request a determination of who is entitled to that claim.  Importantly, you must copy the competitor claim within one year of its publication in the competitor’s U.S. patent or, in certain cases, patent application.  Thus, once again, it is important to closely monitor the publication of a competitor’s U.S. patents and applications so that this option is not lost due to the passage of time. 

Most countries outside of the U.S. have a “first-to-file” standard under which the patent applicant who files first for the invention in that country is entitled to corresponding patent rights.  Recently proposed U.S. legislation would change the U.S. system from a “first-to-invent” system to a “first-to-file” standard.  This proposal, like the patent opposition proposals, has not become law to date.

The most aggressive offensive strategy is enforcement of your patent through an infringement action.  This, like other court actions, is an option that must be carefully considered due to its cost, counterclaim risk, potential reward, possible drain on company resources (including money and employee time), and other factors. 

Conclusion
The significance of intellectual property grows as Chinese high technology companies increasingly look abroad to market their products.  In many regions of the world, including the U.S. and Europe for example, systems are well-established for obtaining, defending, and enforcing patent rights, and companies regularly take advantage of those systems to minimize competition.  Chinese companies marketing in those regions similarly should use those systems to their advantage to protect their revenue and investment.

Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws.  This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.