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23 April 2017Patents

China: a big appetite for semiconductors

With the top two semiconductor chip buyers, Samsung Electronics and Apple, consuming $61.7 billion worth of semiconductors in 2016, this high-tech area is big business.

According to the research firm Gartner, Samsung and Apple’s consumption amounts to 18.2% of the total worldwide market.

In 2016, the top ten consumers consisted of four companies from the US, three companies from China (Huawei, BBK Electronics and Lenovo), two from South Korea and one from Japan.

This was the first time that Chinese companies ranked in the top ten, demonstrating that despite China’s slowing economy, its electronics market is growing in importance.

China is now at the forefront of the industry—PwC’s report “China’s impact on the semiconductor industry: 2016 update” highlighted that semiconductor consumption and production revenues increased at a greater rate than worldwide revenues in 2015.

As a result of the increase in consumption and production, China’s share of the worldwide consumption market increased to 58.5% in 2015, while its share of the worldwide semiconductor industry increased to 16.2%, according to PwC.

But are the IP rights attached to semiconductor technology being protected well enough in China?

According to Xiao Jin, attorney at CCPIT Patent and Trademark Law Office, they seem to be: “IP protection is strong when it is in the national interest for it to be strong,” he says.

This is exactly what’s happening in China—in the past two years, the government has issued a series of policies to encourage people and companies to be creative.

Jin adds that being creative is now considered by the Chinese government to be a new incentive to boost economic growth.

In response to the government’s policies, China’s IP courts are now exploring ways to enhance IP protection, leading to some changes in practice.

In December 2015, a new draft of the fourth amendment to China’s patent law was published, in a bid to better protect innovation.

The draft, submitted by the State Intellectual Property Office (SIPO), increases infringement costs, among other changes.

The Chinese Supreme Court also issued new interpretations on judgments on patent infringement which are binding on all Chinese courts and have been effective since April 1, 2016.

Rights owners and the courts are now provided with rules for litigating patent infringement, increasing predictability.

The highest amount of damages claimed in 2015 in the high-tech arena was RMB 98 million ($14.2 million).

According to Jin, this amount of damages shocked IP lawyers in China.

But it was not to be—the damages were reduced to RMB 5 million by the Guangdong High Court.

Jin believes the highest amount of damages requested in 2016 was RMB 50 million, in the case of Hengbao v Watchdata.

What’s more intriguing is the increase in average damages over the past two years.

“The average damages in 2015 was RMB 0.45 million, and according to incomplete statistics, in 2016 this number is RMB 1.41 million for patent cases, RMB 1.65 million for trademark cases and RMB 0.45 million for copyright cases,” according to statistics published by the Beijing Intellectual Property Court and noted by Jin.

Before 2015, the average was RMB 0.08 million, he says.

Although this trend of increasing damages is not only found in China’s high-tech industry, the sector does play an important role.

"China’s share of the worldwide consumption market increased to 58.5% in 2015, while its share of the worldwide semiconductor industry increased to 16.2%."

Law and practice now enhance the plaintiff’s ability to prove the damage and this has led to the increase in damages, says Jin.

He adds that some very high damages were claimed in previous decades, but few of them were supported by the courts because it was very hard to meet the burden of proof under China’s previous practice.

In the past, explains Jin, if a plaintiff failed to prove the damage it suffered or the profits earned by the infringer, the court had the right to determine the damage between RMB 10,000 and RMB 1 million.

The decision would be based on factors such as the type of patent right, nature of the infringement and the seriousness of the case.

The new interpretation of China’s patent law provides a mechanism similar to a disclosure system, in order to help rights owner prove the damage, he adds.

Jin also believes that in response to the government’s policies and new focus on innovation, the Chinese courts now pay much more attention to damages, so as to demonstrate their attitude towards IP protection.

“When the IP holder is able to prove infringement and the court also wants to show improved IP protection, the damages go higher and higher.”

Under the microscope

Integrated circuits, a vital component of semiconductors, are also hitting new records in China.

According to PwC’s study, China reported a notable reversal of growth in the gap between consumption and production of integrated circuits in 2015.

The report shows that China’s integrated circuits design (fabless) industry continues to be the fastest-growing segment in China’s semiconductor industry.

Revenues from this exceeded $20 billion for the first time in 2015 and have now grown to represent 25% of the worldwide fabless industry.

Yusheng Shi, partner at King & Wood Mallesons, explains that the number of integrated circuit patent applications has continued to increase in recent years.

“In 2015, there were a total of 29,735 integrated circuit patent publications and 19,828 patents granted,” he says.

In China, integrated circuits are protected by the Regulation of Protection on Integrated Circuit Layout Design, instead of patent or copyright law in the country.

In order for an integrated circuit to be protected, the layout design should satisfy the “ingenuity” requirement and must also be registered at SIPO.

Unfortunately, it’s not all clear cut. Current cases on infringement of integrated circuits focus on five main issues, according to Shi.

The first point of contention is the key components of infringement, in particular whether the defendant had access to the plaintiff’s registered layout design and whether the allegedly infringing design is substantially similar to the plaintiff’s design.

Second is whether the layout design drawn on paper and submitted at registration or the sample chip submitted at registration determines the plaintiff’s rights.

Another issue is whether the ingenuity requirement of the layout design should be tried by a court, or whether courts should rely on the registration.

The last issues are whether the criterion for determining whether the “substantial similarity” component and the “access” component are satisfied.

For IP owners, it’s uncertain—the courts are “divided into different views”, explains Shi.

Eyes on Taiwan

Just across the South China Sea, Taiwan’s high-tech industry is thriving.

Taiwan’s Ministry of Economic Affairs claimed that investment by electronics component makers has grown at a double-digit pace for the third consecutive quarter, according to news website Focus Taiwan.

According to the ministry, semiconductor suppliers in Taiwan want to continue to grow, and to develop high-end technology processes with diverse applications.

“Companies here in Taiwan know the importance of IP and actively seek their protection,” explains C F Tsai, president of Deep & Far Attorneys-at-law.

However, he adds that although companies want to have IP protection, they do not appear to care whether “perfect protection” has been achieved.

He says that it is the head of IP in a company, instead of the managing team, who decides what kind of IP protection is appropriate for the company.

Semiconductor manufacturers in the region report high revenues, according to Tsai, but despite this, they “blame the government” for not providing enough benefits, such as tax deduction, to help them compete with major players in the world arena.

Overall, China and Taiwan both seem to be playing increasingly influential roles in the global semiconductor industry, in terms of both production and consumption.

But it remains to be seen whether these countries will continue to play an important part in the high-tech industry, and if the Chinese government will do enough to encourage innovation and protect IP.

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