Zoe Bollinger
Apr 14, 2015

China's IP Challenges, Not Only an Issue for International Businesses

Created at Apr 14, 2015, 12:29pm PDT

Every year numerous articles are written about intellectual property protection in China. Usually coverage is from the perspective of the damage done to foreign businesses who are having their IP rights infringed upon in China.  However, it is not only international companies that are hurt by weak intellectual property protections in China, domestic firms are also significantly damaged.

The Chinese IP system currently lacks sophistication despite ongoing efforts at improvement.  According to the World Economic Forum, China ranks 53rd out of 144 studied countries in terms of IPR protections.  While that rank is not terrible, looking at it in terms of the second largest economy in terms of GDP with aspirations to engage as a global economic power, it is a serious issue.

There is no doubt about the incredible IP growth occurring in china.  In 2011 China surpassed both the US and Japan in terms of number of published patent applications, and that number has continued to rise.  But doubts linger regarding the quality of those patents.  China has been holding steady at just over 5% on the percentage of Chinese patents filed abroad.  In contrast around 51% of US patents and 36% of Japanese patents were filed abroad in 2014. Analysts agree that this is both a concerning indicator of patent quality, and will also be a longer term issue for Chinese companies wishing to do business internationally if they do not set themselves up to capitalize globally on their intellectual assets.

Another measure worth noting when analyzing patent quality is the average number of citations that a patent receives after it is published.  This can serve as a proxy showing that further innovation depending on the patented technology is occurring, and that the patent is important to innovation in its field. Thomson Reuters published a report on IP in China which looked at patent citations.  They found that out of 13,000 Chinese patent applications published in 2008 in the field of ”data processing” the average citation rate in later published inventions was 1.17 times as compared to 6.72 times for US inventions.

Surveys conducted of Chinese businesses and individuals involved in IP have yielded bleak results.  One study in 2013 that attempted to analyze opinions on Chinese IP protection found that the rate of public satisfaction was around 65%, an improvement from prior years, but still a low vote of confidence.  The same study found that satisfaction with the enforcement of intellectual property law in China was around 58%.  In line with those findings a different study estimated that around 30% of patent holders in China had encountered infringement issues, but that due to low confidence in the system, only about 10% actually took action.

Growing numbers of patents in China have been accompanied by growth in litigation.  The People’s Courts have more than tripled the number of patent infringement cases they accept between 2006 and 2013. One issue with the Chinese IP system that can be a source of frustration to engaged parties are the current regulations covering damages.  While damages awarded in US patent litigation can seem astronomically large at times, in China the maximum allowable damages is set at 1 million RMB (around $160,000).  Many analysts estimate that this restriction is far below what is appropriate for the assets and market at stake. The system also lacks mechanisms for imposing punitive damages or for fee shifting in cases of willful infringement. On April 14th officials at Shanghai’s Intellectual Property Office announced their intentions to raise that cap, which is a step in the right direction, but leaves a long way to go.  

There have been numerous cases involving Chinese companies in recent years that highlight the cost to domestic producers of insufficient investment in IP, both in China and for the global market.  The telecom market has been a particular target. Xiaomi’s entry into the Indian market was blocked when they were sued by Ericsson, and as a result the Dheli High Court stopped the sale of Xiaomi phones in India. Xiaomi ran into further trouble in February 2015 when they were accused of continuing to sell devices using processors from Taiwanese chipmaker MediaTek against the orders of India’s court.  By the end of 2014 Xiaomi had filed over 2,000 patent applications, but that still leaves them far behind the major players in the industry.  Another new entrant, OnePlus, faced similar difficulties when trying to enter the Indian market.  Domestic consumer electronics company Micromax was able to stop sales of OnePlus phones based on an IP issue surrounding Cyanogen software licensed by both producers.

For years Qualcomm acted as a shield for telecom companies in the Chinese market. Many domestic producers licensed Qualcomm technology, and as part of the licensing deals, they were included in cross-licensing agreements giving them free access to patents in the more developed portfolios of other Qualcomm customers. However, the terms of Qualcomm’s antitrust settlement in China have brought an end to that protection.  On one hand, bigger and more established companies such as Huawei and ZTE will now be able to demand royalties, but on the other, new entrants into the market will no longer be able to get started without paying hefty licensing fees, and relatively younger players might face litigation.

While telecom cases have been at the heart of much of the IP press coverage, smartphones are not the only industry affected. Xiaomi has been questioned over more than it’s phones.  Upon the launch of its Mi Air Purifier, the company was almost immediately confronted by Balmuda, a Japanese firm claiming that there were marked similarities to one of its own products.

It should be noted that some Chinese companies have begun to take initiative and are trying to assert their IP rights in their home market. Perhaps the most publicised case has been the suit filed against Apple by ZhiZhen Network Technology claiming that Siri infringed on its patent for the Xiao-i Robot software. Apple retaliated by trying to invalidate ZhiZhen’s patent before SIPO’s Patent Re-Examination Board but was unsuccessful.

Progress towards improved IPR protections and an emphasis on patent quality rather than patent volume will be beneficial for all involved in the Chinese market, from foreign firms seeking to serve Chinese consumers to Chinese firms trying to produce global products.  Domestic firms need to continue to focus on translating R&D into strong IP assets, with an emphasis on quality over quantity.  As Chinese firms look to go global an increased emphasis should be placed on international filing as licensing any industry standard patents needed to enter global markets.  By continuing to strengthen it IP system, China will be able to better attracting foreign business as well as better equipping its domestic firms to do business on the global level.