IPR Awakening

By TANG YUANKAI

IPR Awakening

Chinese companies’ ambition to create more patents and their desire to protect their intellectual property is growing

By TANG YUANKAI

People like Ding Xiangen, President of Huali Networks Engineering, a private software company in Jiangsu Province, are among the strongest supporters of China’s intellectual property rights (IPR) protection cause.

His company once spent nearly three years developing a new product and salaries to the development staff alone added up to more than 6 million yuan ($909,000). The product turned out to be very successful. “Without effective IPR protection for patents, brands and software copyrights, my company would have gone bankrupt,” said Ding.

Making a speech at the IP China 2010 Software & Integrated Circuit Intellectual Property Summit Forum on November 26,Yang Xueshan, Vice Minister of Industry and Information Technology, said the scale of China’s software industry is expected to grow by more than 20 percent in 2010 to reach 1.2 trillion yuan ($181.8 billion).He said it’s because of efforts China made in IPR protection and the increasing public awareness about this cause.

According to a recent report on IPR released by Thomson Reuters, between 2003 and 2009 China’s total patent numbers grew by 26.1 percent annually, the fastest in the world. The United States ranked second with an annual growth rate of 5.5 percent. The report estimated that by 2011 China’s annual patent registration number would surpass those of Japan and the United States to be the largest in the world. The report is based on data from the intellectual property authorities of the United States, Japan,the EU, South Korea and China from 2003 and 2009 collected by the Derwent World Patents Index.

Wang Jingchuan, former head of the State Intellectual Property Office, said the international community had been increasingly interested in the creation, protection and management of IPR in recent years as legally de fi ning and protecting IPR can provide incentives for society to innovate.

“The accumulation of IPR resources has become hi-tech companies’ effective weapons in competition,” said Ke Xiaopeng, IPR Director at the ZTE Corp. Founded in 1985,ZTE is the fifth largest telecom equipment supplier in the world and provides products and services to more than 500 telecom service providers in more than 140 countries. Making a speech at the award ceremony for China’s Best Corporate Citizen Award on December 3, Qiu Weizhao, Executive Vice President of ZTE,said his company had been investing 10 percent of its sales revenue in research and development every year and holds more than 30,000 domestic patents, more than 90 percent of which are invention patents, and had applied for more than 100 international patents.

“There is nothing more important for a company than IPR. ZTE has become a good role model for Chinese companies, teaching them that IPR should become a company’s fundamental strategy and an important investment,”said Wang Ningling, a partner at the Shanghai of fi ce of the American law fi rm, Finnegan, one of the largest IPR law fi rms in the world.

Growing market

Wang said China represents an expanding market for IPR services. “The government has played a signi fi cant role in promoting IPR protection through taking various measures and formulating IPR strategies,” she said. The Chinese Government issued the Outline of the National Intellectual Property Strategy in June 2009, which encourages Chinese companies to formulate their own intellectual property strategies and participate in international competition.This document reminds companies of the importance and value of IPR and teaches them how to participate internationally for the lowest risk.

Internationally, scholars like Dean Baker,Co-Director of the Washington, D.C.-based Center for Economic and Policy Research, noted not a single economic study has proved that patents and copyrights are the best mechanisms for fi nancing research and creative work. As for such arguments, Wang, whose clients include some Chinese pharmaceutical companies, also admitted some U.S. pharmaceutical companies use patent protection to charge skyrocketing drug prices, which increased patients’ fi nancial burden. However, she emphasized there has been no better system to guarantee innovation than the current IPR protection system.

Next year will mark the 10th anniversary of China’s entry to the WTO. As Chinese companies keep climbing the industrial ladder and producing more hi-tech products, China’s trade conflicts with other countries have also entered a new stage. After facing tariff barriers, administrative protection measures,anti-dumping and anti-subsidy punishment,Chinese companies are meeting with increasing technical barriers to trade. Wang said the number of cases where Chinese companies are sued for IPR violation by their competitors from developed countries, such as the United States, is rising. She said in some sense this phenomenon is “complimentary” for Chinese companies, as their competitors have recognized their capacity. Wang said when receiving their Chinese corporate clients facing litigation from foreign companies, she fi rst congratulates them for achieving considerable market shares in the international market. She said that vigorous response to litigations from foreign companies represents an excellent opportunity for Chinese companies, which could use the litigations to expand the influence of their brands and market share.

Law firm Finnegan was once hired by Actions Semiconductor Co. Ltd., a Chinese IC design company, to mount a defense against a patent suit filed by U.S.-based electronics company SigmaTel. The Defense by Finnegan attorneys forced SigmaTel to withdraw part of the patent litigations just before the patent infringement trial started and Actions Semiconductor was listed on Nasdaq. In 2007,SigmaTel settled all patent litigation and entered into a cross-license agreement with Actions Semiconductor. “This case proves that Chinese companies with high-quality products and technologies should not be afraid of patent infringement lawsuits fi led by U.S. companies.As long as they could use tactical solutions, they could achieve trial victory, as well as business successes,” said Wang.

Now more Chinese companies are buying companies overseas. Wang warned these companies of possible traps in these merger cases. “Before conducting a merger or acquisition, Chinese companies tend to focus heavily on fi nancial indicators, while ignoring the intangible indicators,” said Wang.She noted companies should investigate comprehensively the intangible assets of the company being acquired, including the IPR ownership of its products, whether its patents and trademarks are authorized, and whether it is being sued for IPR infringement.

Wang said she agreed with what Li Shufu,Chairman of Geely Automobile Holding Co.Ltd., said about Chinese companies’ merger and acquisition of foreign companies. Geely completed its acquisition of Ford’s Volvo unit in August. Li said it is easy for Chinese companies to build new manufacturing plants overseas, but a company’s intangible assets are much more important.

According to Wang, the core of today’s merger and acquisition cases is not about manufacturing plants or assembly lines, not even some concrete technologies, but a company’s research and development capacity and intellectual property ownership.