Adding IP Fuel to China's Fire of Innovation

Authored by Esther H. Lim

Twenty years ago, the Huangpu riverfront—where my law office stands tall on the 28th floor of a shiny new glass high rise, just minutes from the Shanghai Pearl Tower—was rice fields.  Now, the Shanghai new financial district is the center of finance in the world’s fastest-growing economy and boasts skyscrapers with world-class offices, hotels, and shops.  Peering south along the river, one can see the iconic bright red pavilion, ablaze with the morning sun, at the site of the World Expo to be held in Shanghai beginning on May 1.

The meteoric growth of Shanghai, and China overall, in recent years parallels the historic speed with which IP has fueled the fire of innovation in China.  In just several decades, China has transformed itself from a predominantly agricultural society to a manufacturing powerhouse.  China is also fostering strong R&D-focused industries and developing indigenous technologies.  Take clean energy, for example.  Chinese spending in green technology doubled that of the U.S. in 2009.  Out of the $162 billion invested globally last year on clean technology, China’s investment and financing alone totaled $34.6 billion.

As China redoubles its effort under the National IP Strategy to “make China an innovative country,” understanding the power of IP to foster innovation and knowing how to effectively protect and extract the resulting IP will be critical to the continued rise of Chinese technology companies and enterprises.  Strategic management of IP, however, remains a significant challenge even to sophisticated companies.  IP presents legal complexities often difficult to overcome without assistance of experienced legal counsel.  But some savvy companies have unlocked the secrets of IP for competitive advantage.  Others, such as IBM and Texas Instruments, have reached new heights through IP.  They relied heavily on IP for their corporate vision and generated significant revenue from IP.  The lessons learned by these companies and others that have effectively used IP for corporate success can also help Chinese enterprises grow during this transformational period in China’s history.

Building Intangible Assets in the New Economy

Patent by patent and trademark by trademark, China is building its intangible assets through intellectual property.  In 2009, China’s patent filings reached a record 976,686.  In 2008, China became the sixth largest filer under the Patent Cooperation Treaty (“PCT”) with over 6,000 new patent applications.  Huawei had the lion’s share with over 1,700 PCT patent applications published in 2008.  The record-breaking numbers of patent-application filings are nothing short of remarkable.  After all, China’s patent laws were enacted only about 25 years ago.  Since the patent laws of 1984, there have been three amendments—the most recent amendment becoming effective on October 1, 2009.  This year marks China’s 25-year anniversary of joining the Paris Convention for the Protection of Industrial Property.

Perhaps, the astronomical growth of patent filings in China should not come as a surprise in a country that garnered 8.7% GDP growth in 2009, with a nominal GDP of USD $4.91 trillion, while the rest of the world hemorrhaged from a global recession.  In purchasing power parity basis, China has become the second largest economy in the world after the U.S.  But by any measure, China is the fastest growing economy in the world.  China is also the largest trading nation in the world as the largest exporter and second largest importer of goods.

In many ways, China defies conventional logic and wisdom.  In a country of 1.3 billion, impossible is not a fitting description for its growth potential.  And technology innovation and surrounding IP are critical to that growth.  In the United States, 80% of the market value of America’s largest companies in the S&P 500 is based on intangible assets, the largest component being intellectual property.  Gone are the days of real property and physical assets; ideas, knowledge, and IP are the buzz words of the new millenium.  It is no wonder that, according to an international survey, over 80% of executives think that IP is important to the success of their companies.  Nonetheless, IP management and IP protection remain a challenge for companies.  According to a Forrester analyst, U.S. companies waste USD $1 trillion annually by not extracting the full value of IP.

What about Chinese companies?  What portion of China’s biggest companies are based on value other than physical assets?  And more importantly, what portion of Chinese companies’ value can and should be based on intellectual property?  How much valuable IP do Chinese companies lose every year because of lack of timely and adequate protection?  As many countries have learned, IP is a long-term investment.  It takes careful planning, strategic management, and long-term investment to bear fruit.  IP is one of the most complex and difficult tasks for corporate teams to manage effectively, particularly in a cost-sensitive, budget-cutting corporate climate.

Wielding the IP Sword for Competitive Advantage

But make no mistake.  Companies are using IP as a powerful sword to gain competitive advantage in the global marketplace.  For example, for about a ten-year period starting in 1997, the ten highest IP awards and settlements in the United States are estimated USD $7.4 billion.  That represents only a small fraction of about 3,000 new patent cases filed every year in the United States.

Chinese companies are not immune from U.S. patent suits.  Just look at the number of Chinese companies sued in the United States for patent infringement in the International Trade Commission.  Since 1972, well over a third of section 337 cases filed in the International Trade Commission—which has the power to stop the importation of products that infringe a U.S. IP right—have named Chinese companies as respondents.  Notably, a Chinese company that has no offices, facilities, or employees in the United States can also be sued in the ITC if it makes or sells a component (such as a chip) later incorporated into products (such as a cell phone or a computer), and imported into the United States by third parties.

An exclusion order enjoining a Chinese company from continuing to import into a major market like the United States is immediate and devastating.  As the saying goes, an ounce of prevention is worth a pound of cure.  Analyze potential IP risks before designing your products, before launching your products, and before importing into other countries where third parties may have IP rights that can block your market activities.

China Going on the IP Offensive

Chinese companies are not just taking IP punches by foreign IP holders.  Chinese companies are striking back—in and outside of China.  In the famous case of Chint v. Schneider Electric, a Chinese enterprise won an impressive verdict of 334.8 million RMB (USD $45 million) against a French company for patent infringement by the Wenzhou Intermediate People’s Court in late 2007.  Ultimately, the parties settled for 157 million RMB (USD $23 million).  The record high figures sent shockwaves in China and served to further fuel the strengthening of IP protection and enforcement in China.  China is a hotbed of IP litigation.  The Supreme People’s Court announced that 30,626 civil IP cases were filed in 2009—an increase of 25% from the previous year.  Making another news splash, in March 2010, Fairchild Semiconductor sued Power Integrations in the Suzhou Intermediate Court asserting four Chinese patents.

Not only are Chinese companies running to court as patent plaintiffs in China, they are going abroad.  In a rare case, a Chinese company flexed its patent muscle in a U.S. court in Texas.  In 2009, Changzhou Asian Endergonic Technology Company based in Changzhou, China, sued Best Buy, Walmart, and others, alleging that the retailers are infringing its U.S. patent by selling products made by a competitor.  While still at the vanguard of a new trend, this case shows the increasing willingness by Chinese companies to enforce their IP.

Igniting the Fire of Innovation

Just as strong IP laws and enforcement have encouraged innovation in the United States, China is also igniting the fire of innovation through the changes in its laws and the strengthening of its IP enforcement.  Innovation and IP have been vital to China from the “strengthening the nation through science, technology, and education” motto of the 1990s to the current National IP Strategy for improving “China’s capacity to create, utilize, and protect and administer intellectual property.”

In fostering innovation, developing technology, and building IP assets, the guiding principle is quality, not quantity.  One strong patent that is well prepared and covers a competitor’s key product is worth a 1,000 weak patents that are poorly drafted.  Make every IP investment dollar count by prioritizing important innovations aligned with key business objectives.  Just as China is investing heavily in strengthening science and technology, Chinese enterprises should invest heavily in creating new ideas and products and generating valuable IP.  By adding IP fuel to China’s fire of innovation, Chinese enterprises will be motivated to generate good ideas and good IP. 

And that is good news.

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.