The new normal? NPE issues in China

Non-practising entities are a relatively new phenomenon in China, but are likely to make headway in the next few years, says Guanyang Yao of Liu, Shen and Associates.

In recent years, a trend has emerged in China of patentees who don’t sell or manufacture any products or conduct scientific research, asserting their patent rights against active players in the market.

They have patents, and then aggressively aim to claim injunctions and large damages. These patentees are the Chinese versions of non-practising entities (NPEs). Although not as mature as the NPEs in the US, these Chinese NPEs have similar approaches and motivations.

One of hottest IP stories in China in 2018 was that of a self-described “inventor”, Mr. Li, who established two companies which owned more than 400 patents. He was charged with extortion in Shanghai when he launched group patent infringement litigation cases against several manufacturers and sellers of electrical readers at the critical time of initial public offerings (IPOs).

This was an exceptional case because to date, no other patentees have been charged with extortion for initiating patent infringement litigation in China.

In a different example another inventor, Mr. Zhang, who also owns a company holding several patents, filed group patent infringement lawsuits in 2018; in that case all the patents were invalidated.

Developments

There are some common characteristics among such “unserious” NPEs: initiating patent infringement lawsuits around the time of an IPO; claiming low damages for one case but accumulating group cases for high damages; and relying on patents of dubious validity.

"The Supreme Court judgment database shows that patent litigation in the high-tech field has become a prime attraction, even for international players from the US and EU."

There are also “serious” domestic NPEs now in China. The Supreme Court judgment database shows that patent litigation in the high-tech field has become a prime attraction, even for international players from the US and EU.

One high-profile NPE from the US, iPEL, announced in 2017 that it had raised $100 million to purchase around 1,040 patents from Huawei and ZTE as the basis for patent infringement cases in China. Currently, iPEL has filed 10 cases in Beijing, Nanjing and Xi’an, and it is said that next wave of around 40 cases is just around the corner.

LongHorn IP, WiLan and GPNE from the US and Canada carrying their standards essential patent (SEP) weapons are also jumping on to this wave.  For example, LongHorn IP sued HTC based on 2 LTE SEPs in Beijing IP Court in 2017 and WiLan sued Sony in Nanjing in 2016.

These foreign NPEs have their own characteristics: mostly choosing foreign companies but not Chinese companies as adversaries; focusing on the fields of semiconductors, microprocessors, telecommunications and electrical devices; and currently in the process of building Chinese patent portfolios.

Reasons NPEs can boom in China

China is now providing strong judicial protection on intellectual property, fuelled by the belief that social economy has developed to a stage where it should be driven by innovation.

The whole patent system can be regarded as pro-patentee. Injunctions are granted in more than 95% of cases, except for few cases with national or public interest concerns or those governed by fair, reasonable and non-discriminatory (FRAND) principles.

Moreover, NPEs are considered by courts in the same way as other entities and so can obtain injunctions. Even preliminary injunctions are not as rare as in the past, having been granted in three cases nationwide in 2018. Injunctions cover both manufacturing and export, which means that for infringing electrical devices, injunctions in China can effectively extend to the rest of the world, providing the perfect leverage for licensing negotiations.

At the beginning of 2019, the IP Tribunal of the Supreme Court was established for patent infringement cases on appeal, with the main purpose of unifying the judicial approach and providing equal and efficient protections.

For patent cases, generally three professional judges are assigned to hear legal issues and claim charts, with one or two technical advisors further assisting on technical details.

There is no jury in patent infringement cases. In the first instance, the timeline from case filing to judgment issuance generally does not extend beyond 18 months. The win rate for patentees is over 70%, and even higher for foreign patentees.

When it comes to invalidity challenges, the Patent Reexamination Board (PRB) generally takes four to six months to issue invalidity decisions. The reversal rate in court was about 13% in 2018. The PRB will not consider whether a company is an NPE during the invalidity procedure.

"Cooperation between NPEs and domestic patentees can provide a great opportunity to show and respect the values of ‘golden’ patents via patent infringement litigation."

Although damages for patent infringement cases are not as high and punitive as in the US, average damages are on the rise—from $50,000 in 2015 to $200,000 in 2017. There were some high damages cases in 2018, such as the $12 million awarded in a mobile phone case and $5.8 million in an air-conditioner case. The doors of the courts are open to high damages, but only if solid and convincing evidence can be produced.

All of above elements are favourable to NPEs. Their cases will be carefully adjudicated by professional judges in a relatively short time. They may expect injunctions as leverage for licensing or settlement negotiations.

It is even possible for NPEs to obtain damages through fast-track legal proceedings. In a similar way to the German patent system, China is on a fast track to become a preferred venue for NPEs in five to 10 years. One thing that would accelerate this would be a substantial increase in damages awards.

Checks and balances on NPE activity

NPE activities are in debate worldwide. Some countries are sceptical about NPEs, fearing that litigation launched by NPEs will block innovation. However, in China, NPEs do not seem to be a big threat—for now.

Based on statistics from the China National Intellectual Property Administration (CNIPA), as of the end of 2018, there are 1.6 million invention patents valid in the country. How to monetise this huge patent pool has become an unavoidable question. The dilemma stands out that although enterprises are willing to invest in technical developments to harvest patents, they are not experienced enough or do not have expertise or resources on licensing or transferring of those patents to recover the innovation costs.

This is exactly what NPEs are good at. Cooperation between NPEs and domestic patentees can provide a great opportunity to show and respect the values of “golden” patents via patent infringement litigation. NPEs may function as a “ferryman” from patents to profits.

With increasing patent values, enterprises become wealthier and will be less hesitant to invest in scientific developments, creating a virtuous cycle of encouraging innovation and boosting the economy.

Even for companies encountering NPE lawsuits, they still have the chance to design around the patent in question, possibly developing new technical ideas or routes.

On the other hand, the negative aspects of NPE patent litigation are attracting attention from courts. Patent systems are gradually designed to orient the activities of NPEs towards being beneficial to innovation.

In the current China Patent Law, no regulations consider NPEs specifically. In the pending fourth amendments to the Patent Law, which are expected to be issued in 2019, article 20 on the good faith principle for exercising patent right is incorporated in the draft version. This high-level principle may surely cover NPE litigation if bad faith or abuse of patent rights are found.

Another aspect that may control NPE activities would be a limit to additional damages in group cases, by limiting damages to reflect the patentee’s actual loss, as indicated by the Zhejiang High Court’s IP Protection Strengthening Opinions issued in 2018.

Although the Zhejiang Court’s opinions are not binding on other local courts, they demonstrate a broadly-accepted judicial spirit and approach for deciding damages. However, there are still measures for NPEs to convince courts of the need for high damages, such as proving great investment and difficulties in inventing patented technology, the inventive degree of patents over prior art and the large profits obtained by infringers.

Some other constraints do exist on NPEs. Taking injunctions in SEP cases as an example, an injunction is primarily based on “faults” in a licensing negotiation, which is not easy to demonstrate and grant. Further, the burden of proof is still on patentees.

On the invalidity side, the average invalidity rate is around 50% for inventions, and 60% for utility models and designs, based on unofficial statistics in 2018. This means that generally over half of patents in litigation are invalidated, meaning defendants
can fight back strongly against NPEs. Annuities are also a large burden for NPEs in terms of maintaining a large portfolio.

All of above constitutes a balanced patent litigation system to endow NPEs with certain strengths and also to confine the power of NPEs so as not to adversely influence innovation.

Malicious patent infringement litigation

Malicious litigation is a relatively new concept in the patent infringement field in China, evolving over the past eight years. In 2015, the Beijing IP Court explained the concept of malicious litigation in a patent infringement judgment as “a lawsuit intentionally filed without factual and legal basis to obtain illegal or improper interests, making defendants suffer therein”. NPEs should be cautious that their lawsuits are not seen as malicious litigations.

Until now, there has been no mature legislation on malicious litigation. In practice, “subjective motive” is the main factor for judicial consideration but that is rather difficult to evaluate. Although a “subjective motive” is hidden in the heart of patentees, objective behaviours can be relied on to assess it. There are four precedential representative cases on “malicious motive”.

In a ‘ball valve’ invention case, national standards were intentionally taken to apply for a utility model patent, which means that common knowledge is privately used to gain benefits.

In a ‘jumping deer’ design case, a prior trademark for ‘jumping deer’ was used in a design patent application, which in turn was used to assert a design patent right against the genuine trademark owner.

In a ‘cement’ invention case, the patentee cancelled method claims to keep the patent alive but still asserted those cancelled method claims in the infringement case, which meant the patentee intentionally expected to gain benefits based on a “void” patent right.

In a ‘bamboo carpet’ design case, the patentee requested assets preservation and freezing of exporting products by customs without urgent reason to, and as the design patent was eventually invalidated, the patentee was found against based on a lack of reasonable attention.

Based on insights distilled from such cases, NPEs should act in a more straightforward manner. First, patent rights should contribute to prior art or be amended in good time to provide a solid basis for a lawsuit.

Second, requests for assets preservation or preliminary injunctions should be undertaken carefully and preferably in urgent situations, so that the normal business of the defendant will not be unreasonably disturbed.

Third, the scope of group case filings should be limited to a reasonable number and in a reasonable number of cities.

Fourth, it is not recommended to temporarily authorise other entities or frequently change names to file lawsuits which obscure the identity of the NPE.

Fifth, all claims and arguments should be supported by solid and convincing evidence.

These are not exhaustive conditions. NPEs should bear in mind that assertion of a patent right should be respectful, decent and professional, and that they should not play with legal procedures and their opponent’s business and reputation.

Regarding malicious litigation, courts are formulating some counteracting strategies to prevent judicial resources from being wasted. Some courts are following strict criteria on adjudicating withdrawal requests. Plaintiffs without a decent intention to file lawsuits will be warned and even rejected for their withdrawal request, because such activities would suggest a lack of respect for judicial authority, and the legal rights of innocent defendant should be protected.

Moreover, at a high level, legislation is being considered to design a convenient counterclaim system to allow the counterclaim to be tried by the same infringement court and force malicious plaintiffs to compensate for loss of business, attorney fees and reputation associated with malicious litigation.

Legal trends on NPEs in China

Although there has been a lot of discussion about NPE litigation, there is no formal name or regulations relating to NPEs currently in China’s patent system. However, based on patent types, and the portfolio and behaviour of plaintiffs in patent infringement cases, whether a plaintiff is an NPE can actually be determined in the minds of legal practitioners.

With an increase in statutory damages, incorporation of punitive damages and the improvement of the evidence rule in China Patent Law, it is expected that NPEs would have a clear path in the next few years in China. However, that does not mean the rough waters will not come.

When the general socioeconomic climate changes, or legal procedures are intentionally manipulated, or unreasonably high damages are claimed with bad faith, NPEs will encounter challenges in the legal framework. Maybe that would be time for the Chinese patent legal system to give NPEs a formal name, concept and regulations.

Guanyang Yao is a partner of Liu, Shen and Associates. He can be contacted at: gyyao@liu-shen.com