How U.S. IP Regulations Impact Chinese Companies

There have been several recent key developments in U.S. intellectual property (IP) regulations that Chinese companies – and foreign investors in general – should keep in mind as they pursue their strategies for growth. In our Q&A, Yar Chaikovsky, co-chair of our Global IP practice, and Litigation partner Haiyan Tang address these developments and further changes expected in 2017.

What IP issues in the United States should Chinese companies pay the most attention to when they plan to purchase patents or acquire patent licenses?

There are four key issues we suggest our Chinese clients pay close attention to:

1.   Consider Patents/Patent Portfolios with China Counterparts

While Europe and the U.S. have been primary jurisdictions for IP disputes, other countries where IP litigation has been less common may be on the rise, such that IP in those countries becomes more valuable. As Chinese enforcement on patents increases, IP in China is becoming more valuable, whereas maybe 5-10 years ago, people would have said that having patents in China was not worth much because enforcement was very difficult.

As a result, China has become the third most favorite jurisdiction for non-practicing entities (NPEs). For example, in November 2016, Canadian IP licensing firm WiLAN filed a patent infringement suit against Japan-based electronics developer Sony Corp in China. Since November 2014, the Chinese government has opened a series of IP courts, and China is becoming a reasonable and fair place to resolve patent disputes. Accordingly, it would be good to consider purchasing U.S. assets that have Chinese counterparts.

2.    Be Aware of Licenses with Cut Offs other than “Life of Patents”(also known as Guillotine Licenses)

Anything less than “life of the patents” is a “set-up” by the patent owner for the next patent infringement lawsuit in a U.S. court. When the license expires, the patent owner has even more leverage to negotiate for higher royalties than it had in the first negotiation. In any U.S. jury trial, the prior license that is expired or coming to an end will be admitted into evidence for the jury to review, and this prior license will appear to the jury to be an admission of infringement by the Chinese licensee.

3.   Insist on Arbitration Clauses to Avoid U.S. Courts

Chinese companies should generally avoid U.S. courts due to jury biases. Accordingly, such companies should insist on an arbitration clause in the license that requires all future disputes related to patents controlled by either party, the license contract itself, renewal of the license, post-license conduct, or the licensed or accused products, regardless of the type of claim (whether for patent infringement, unfair competition, or any other claim under any state or federal law, including Section 337, the basis for International Trade Commission [ITC] litigation), be arbitrated and not pursued in court. In addition, International Chamber of Commerce (ICC) arbitrations are recommended for foreign companies because ICC arbitrators are inoculated against U.S. style discovery, and the time limits in the ICC rules (while often extended by short time periods) are generally useful in keeping the arbitration from spinning out of control.

4.   Be Aware of the Evolving Law on Post-Sale Restrictions

In the Lexmark case, the U.S. Supreme Court is reviewing whether the patent holder can impose a post-sale restriction. In the Federal Circuit case, the Court decided that the patent exhaustion doctrine did not apply to conditional sales specifying post-sale restrictions on the article’s use or resale when transferring title of the patented item. If the Supreme Court upholds the Federal Circuit’s position that “conditional sales” do not exhaust patent rights, then a patent holder may be able to limit or even eliminate the secondary market in its patented goods by including a post-sale restriction on use or resale in its sales contracts. On the other hand, if the Supreme Court decides to go the other way, then downstream purchasers and end users will be able to freely resell or use products that they purchased via an authorized sale. Either way, the Supreme Court’s final say will have significant implications on how patent holders either bring their products to market or license their rights to others. Therefore, Chinese companies should closely follow the U.S. Supreme Court’s decision in the Lexmark case and its aftermath.

What can Chinese companies learn from noteworthy China-related IP disputes in the U.S.?

There are several IP disputes worth recognizing to help Chinese companies avoid potential patent wars in the U.S. Two examples are:

1. Huawei v. T-Mobile

In July 2016, Huawei sued T-Mobile for infringement of its "standard essential" patents in the Eastern District of Texas, which has long been used by American companies—whether big corporations or patent trolls—to extract money from Asian tech companies. Now Chinese companies are quickly learning to use IP law to gain an edge over their competitors by using plaintiff-friendly forums such as E.D. Tex. In addition, Chinese companies should consider establishing patent portfolios with standard essential patents to be able to consider more offensive strategies in the upcoming patent wars.

2. Creative v. Lenovo & ZTE (ITC)

On March 24, 2016, Creative filed a complaint requesting that the ITC commence an investigation pursuant to Section 337 against smartphone makers, including Lenovo and ZTE. In this case, ALJ Shaw, in his initial determination, held that 16 asserted claims of Creative, which cover technology that allows users to browse through songs based on their category, artists, album, and other criteria, are unpatentable under the Supreme Court’s landmark Alice decision. It should be noted that even the ITC is, or at least some administrative law judges (ALJs) are, open to invalidate a patent on § 101, if the arguments are persuasive.

What key developments in U.S. IP regulations should Chinese companies – and all foreign investors – be aware of?

The following three developments in IP regulations are key to keep abreast of:

1. Federal Jurisdiction for Trade Secret Litigation (DTSA)

On May 11, 2016, the Defend Trade Secrets Act of 2016 (DTSA) was signed into law and became effective immediately for all trade secret misappropriation occurring after the bill’s enactment. This new statute empowers an owner of a trade secret to sue in federal court when its trade secrets have been allegedly misappropriated. Although a new federal jurisdiction has been created by the DTSA, owners can still rely on state laws to enforce their trade secrets.

2. Economic Espionage Act (EEA)

In 2012, the extent to which trade secrets are covered under the Economic Espionage Act (EEA) was expanded, so that it now applies to trade secrets related to products or services that are used or intended for use in interstate or foreign commerce rather than the former limited scope of trade secrets related to a product that is produced for or placed in interstate or foreign commerce.

3. ITC: The Federal Circuit Denies En Banc Review, Affirming Lack of ITC Jurisdiction over Electronically Transmitted Digital Data

On November 10, 2015, a Federal Circuit panel in ClearCorrect Operating, LLC v. ITC held that the jurisdiction of the U.S. ITC to remedy unfair international trade practices involving the importation of articles did not extend to transmissions of electronic digital data into the U.S. created allegedly through patent infringement. The Court decided that the articles subject to jurisdiction under Section 337 of the Tariff Act of 1930 meant only material things and did not include electronically-transmitted digital data. If the Federal Circuit had gone the other way, the ITC could have played a big role in policing piracy and knockoffs.