China’s Growing Confidence in Domestic Patent Enforcement

When we hear about China and intellectual property we like to think China is predominantly a source of counterfeit. China is still among the 5 countries where most seized counterfeited goods originate from[1]. More than 80 per cent of seizures originated from only ten countries: China 32 per cent, Thailand 13 per cent, Korea 9 per cent, Hong Kong (China) 8 per cent, Chinese Taipei 4 per cent, then Turkey, Malaysia, Vietnam, Philippines and Pakistan.  China continues to have some of the highest piracy rates in the world, while representing one of the largest and most rapidly growing markets for the copyright industries. Copyright infringement concerns range from pervasive use of unlicensed software by businesses to widespread digital piracy and piracy of hard goods. As the new global leader in Internet, broadband and mobile device penetration, China remains a major safe haven for digital pirates. Addressing Internet piracy is a critical priority for many copyright sectors. The Chinese government has stood by while the online and mobile markets have become overrun with pirated materials via an array of illegal websites, “cyber lockers,” user-generated content sites and “deep linking” search engines which connect users directly to infringing websites[2]

However, Chinese companies show more confidence than ever that using active enforcement strategies like stick licensing and patent litigation if licensing is no option, will lead to maintaining market share and showing western companies of their mature IP status, as is shown by the recent patent enforcement action by Beijing Huaqi Information Digital Technology, better known by its brand name Aigo. Aigo filed patent infringement complaints against HP in Beijing No.1 Intermediate People’s Court. Toshiba will be next, sued for patent infringement in the court in Xi’an City, Shanxi Province.  AIGO owns a series patent rights of eSATA/USB 2-in-1 connector (known as “USB Plus”), and chose the patents of SATA connector to sue HP, Toshiba and their distributors. AIGO demands the infringements t stop and to get compensated for its (alleged) losses. USB Plus covers  8 Chinese IPRs (2 Chinese patents and 6 industrial designs). Mr. Jingdong Qu, CEO of AIGO: “AIGO will not give up the right to sue other international producers like Samsung and Dell in the future“. According to AIGO there are 60,000 computers adopting USB Plus technology.  AIGO also demands royalty payments from Sony, Samsung and Dell.

A 2009 study by NERA, Intellectual Property Rights Protection in China: Trends in Litigation and Economic Damages provides a rather complete overview of current enforcement activities in China. Some of their key findings as to damages in Chinese courts:

• More than 90 percent of all IPR damages awarded in China are under $100,000.

• The median damage award across all IPR cases in China in 2006-2007 was approximately $15,000.

• The median damages award is approximately 15 percent of the IP owner’s damages claim.

• In cases involving a Chinese plaintiff and a Chinese defendant, the plaintiff received a lower median award than when the plaintiff was foreign.

• Companies based in the US, France, Japan, and Germany make up 50 percent of plaintiffs in the cases reviewed, but less than 5 percent of defendants.

• Courts in Beijing and Shanghai hear the most IP cases tried in China.

• The highest damage award in each of the last five calendar years are:

• 2004: $50,000

• 2005: $1,100,000

• 2006: $210,226

• 2007: $44,300,000

• 2008: $2,780,000 (to date)

Compensation for infringement in China is usually determined with simple calculations. For example, the plaintiff may be awarded an amount large enough to replace profits under the apparently straightforward assumption that plaintiff’s sales would have continued at the same rate as occurred before infringement began [3].

While such calculations may be easy to implement, they often take inadequate account of how the market would have evolved in the absence of the infringement. For instance, the IP owner’s products may have been in an early stage of its life cycle at the time that a key patent was first infringed. In such a situation, the IP owner’s sales and market share may likely have grown in the future in the absence of the infringement. However, the infringement might have disrupted this potential growth. Thus, the pre-infringement sales levels might be a poor predictor of the sales the IP owner would have achieved had there been no infringement. On the other hand, assuming that the entire loss is the result of infringement might be an overestimation. It could be the case that the infringer might have been able to compete effectively and take away some sales from the patent owner without infringing.23 Such issues of market responses to infringing activity often require expert economic, business, and market analyses to calculate accurate and appropriate damage awards [4].

For a Chinese translation of the NERA report (诉讼与经济损失赔偿方面的趋势)

[1] John Dryden. OECD Paris, Counting the Cost: The Economic Impacts of Counterfeiting and Piracy

Preliminary Findings of the OECD Study”, presentation International Conference on combating counterfeiting, Jan. 2007

[2] See: People’s Republic of China (PRC) International Intellectual Property Alliance (IIPA)

2010 Special 301 Report on Copyright Protection and Enforcement

[3] From: Kristina Sepetys, Alan Cox, Topics in Law and Economics in China, “Intellectual Property Rights Protection in China:  Trends in Litigation and Economic Damages”, NERA Consulting (2009)

[4] NERA, see footnote 3, p. 5