There has been a lot happening this month around China’s intellectual property (IP) position. China is clearly advancing its IP strategy. This is a natural process for any economy seeking to develop its way up the value chain, but given the world today it is easy to look at these moves in a fairly dark way.
We walked through the background on this topic yesterday, you can read that here. Put simply, China has advanced its IP ambitions across a number of industries since opening its economy in the 1980’s. Moving from learning manufacturing techniques, to software, consumer goods, and most recently to semiconductors. The tactics have varied, but the overall pattern is clear. But now the latest news shows that China has moved from creating its own IP for domestic consumption to projecting that IP globally.
Over the past several years, Chinese courts have sought to change the terms of global IP settlements issuing several rulings that seek to prevent injunctions against Chinese companies accused of IP infringement. These “anti-injunction” rules sound convoluted, but are a big move. The Chinese courts are essentially trying to exert authority outside of China, and give Chinese companies more leverage when negotiating with foreign companies.
These moves are not always successful. Take the case of InterDigital.
InterDigital is one of the leading holders of IP for the wireless standards. Their business is similar to Qualcomm’s licensing segment, without the attached chip business. However, for years InterDigital has had a big China-shaped hole in its revenue stream. China’s handset companies have been… let’s call it reluctant to pay license fees for IP from foreigners. This was the root of the dispute that bogged down Qualcomm in 2014/2015. And InterDigital has gotten very little traction. They had signed a few handset companies to their program, notably Huawei. But then Huawei went and sued them, repeatedly.
Most IP licensors use a tried and tested playbook. They first send polite letters to companies they feel are infringing on their patents, and ask them to negotiate a license. If that does not work, they then turn to the courts. In China, that is not an option. China’s courts are notoriously political and often biased against foreign firms. This does not mean that foreigners always lose, but the win rate is noticeably low. In particular, the courts in Guangdong Province, home to both Huawei and ZTE, are particularly difficult.
To counter this, InterDigital began suing Chinese handset companies in other markets – notably India and in Germany (i.e. the EU), large export markets for these companies. Most recently, InterDigital was able to obtain its own set of anti-injunction rulings, which forced Xiaomi to sign a license. We do not yet know the terms of this agreement such as the amount, the length of the agreement and crucially whether the license includes Xiaomi shipments within China.
But this is far from the end. Early in September Chinese handset maker Oppo won a ruling in Beijing against Sharp of Japan. That ruling emphasized the claim that the court had the right to set global royalty rates.
Then last week, Intel lost a ruling. This case is noteworthy because Intel was being sued by none other than the Chinese Academy of Sciences (CAS). CAS is a combination think tank and research center, that does not have an easy comparable in the US. Put simply, CAS has immense amounts of influence within China’s technology industry. To name just one example, if you are a foreign semis company that has been encouraged to open a JV in China, CAS will likely lead the process in selecting your JV partner and also negotiate the JV agreement on their behalf. Intel, who has navigated China’s politics fo close to 30 years with little overt trouble has now lost to one of the most important influencers in China’s semis industry. And CAS’s claims are not for some minor patent, they are for FinFETs, a key building block at the heart of Intel’s semis manufacturing process. Most people outside China probably assume that Intel effectively invented FinFETs. The Beijing High Court disagrees.
All of this leads to a few pressing questions with few clear answers.
First, if China is asserting IP for Intel’s core technology, will they now assert IP for GPUs? For mobile modems? For processor cores? Nvidia, Qualcomm and Arm would like to know.
Second, how far can China extend the reach of its courts? The case of InterDigital shows that reach does extend beyond China yet… China has been building up this legal framework for several years now. We first heard about it in 2018, and it is only now starting to emerge. Feels like a train has just left the station.
Third, how valuable is this IP? It turns out that there is a lot of debate on this subject. The UN’s patent agency estimated that Chinese companies filed over 40% of the world’s patents in 2019, with something like 2 million filed last year alone. That being said, China has some problems with its statistics. It is a big country, so there are a lot of people to file those patents, and we should not be surprised by the quantity. However, the quality remains an open question. To be fair, this is true of all patents. There are few easy, objective ways to measure the potency of a patent. Their true value is usually only determined over years, largely in the courts and negotiations between two companies. Given all this court activity, China looks set to push its view as far as it can go, and then keep pushing.