Emergence of NPEs
A phenomenon that tremendously impact the landscape of intellectual property right (IPR) protection in the last two decades is the emergence of so-called "trolls” or "non-practicing entities” (NPEs). They helped propel IPR-related litigation in the US to an all-time high in recent years, causing serious alarm among not only American domestic businesses but also foreign entities large and small doing businesses with their US counterparts. For example, despite their distant physical location, numerous overseas equipment manufacturers (OEMs) in China have been targeted for litigation threats and, indeed, many of them actually are eventually dragged into American courts by NPEs. Although only a small portion of disputes wind up in full-blown litigation, and most being settled out of court, the high legal cost and time consumption nevertheless adds tremendous and sometimes unbearable burden on businesses, particularly micro, small and medium-sized enterprises.1
An occurrence primarily in the US thus far, NPE is generally understood to be typically an entity that consists of a few attorneys having good knowledge of IPR litigation (mostly in patent area, but may also in copyright or trademark), engage neither in research and development, technology transfer nor manufacturing or production of any goods or service, but manage to acquire or license IPR only as a tool (or weaponry) to threaten or actually sue others (most often manufacturers of goods) to submit, settle and pay royalties for alleged infringing the IPR, thereby making profits.2 It is what comes to be known as a chief and relative quick means of "IP Monetization” in the marketplace.
US actions and impact
Ever since the enactment of Leahy– Smith America Invents Act o f 2011,3 a massive overhaul of the US patent system in 60 years, all three branches of the US federal government have been working on how to deal with the NPE issue, and, turns out the judiciary, as often the case, may have had the strongest impact so far, with a number of decisions that may have helped reduce the over-all patent and copyright litigation since 2013.4 On top of that, many NPEs themselves have been subjected to intense scrutiny by the Federal Trade Commission and courts.5 In sum, the over-all environment for NPEs is growing more unfavorable if not even down-right hostile in the US in recent years. As a result, a new development seems to be the migration of NPE monetizing activities to other countries. China has apparently become a likely next targeted market as a result.
On November 14, 2016, Wireless Future Technologies, Inc., a subsidiary of Canadian PIPCO WiLAN, a known NPE, formally filed a patent lawsuit against Sony Mobile Communications in the Intermediate People’s Court of Nanjing, alleging the infringement of its standard and essential patent (SEP) on Long-Term Evolution (LTE) technology, key to high-speed wireless communication for mobile phones and data terminals.6 It comes on the heel of the Chinese government’s antitrust investigation and imposition of a US$975 million fine on the licensing practices of Qualcomm’s SEP in February 2015. The choice of forum in suing this Japanese company is also worth noting. Ostensibly WiLAN picks the particular venue over any one of the three specialized IP courts (including one right nearby in Shanghai) because of its local contacts and the relative light dockets, therefore hopefully a speedier trial, yet any student of the Chinese history would know that Nanjing, the capital of the Nationalist Government in the 1920s and 1930s and now the provincial capital of Jiangsu Province, is the location of a major atrocity and massacre during the Second World War that the Japanese government wouldn’t want to officially recognize to have ever taken place to this date, thus an extremely contentious and sensitive spot in the Sino-Japanese relationship. Even a spokesperson for WiLAN would not deny that the choice of forum is not coincidental.
The outcome of this case, no doubt, will be closely watched by other NPEs in assessing the feasibility and viability of carrying out their business models in China. WiLAN, by all means, is not the first foreign NPEs doing business in China. Several others have already been operating for some times now (a notable presence is Intellectual Ventures (China) since 2008).7 So far all the others have been more or less on the "acquisition” mode, acquiring more IPRs (especially patents) and collecting licensing royalties under their respective portfolios and have not yet adopted a more aggressive approach on legal enforcement. This, however, may change in light of the recent judicial reform and other developments.
Causes of NPEs: empirical studies
Studies on the US market suggest that the current NPE phenomenon concerns mostly with the quality of so-called computer software-related or "business method” patents.8 Studies also suggest that the cause cannot be attributed entirely to a single factor such as inadequate staff at the patent office and/or flaw examining procedure that results in low quality patents, as the arbitrage through patent profiteering spiked only twice in history instead of being prevalent at all times.9 Other contributing factors that tend to fuel opportunistic licensors are: (1) a lack of substitute IPRs by the defendant; (2) a technology typified by incremental improvements, thus making it difficult for the defendant to forecast the outcome of litigation; and (3) low acquisition costs.10 Despite recent court rulings and other measures perceived to be unfavorable to NPEs, the relative highmargin of damage award as opposed to litigation costs nevertheless makes the US market attractive to NPEs.
Is the Chinese market ripe for foreign NPEs?
As more NPEs a r e turning internationally, the question is, whether the above-stated factors or causes are similarly applicable in the Chinese market? Thanks to the doctrine of territoriality, the answer is a qualifying yes.
In recent years, the Chinese judiciary has undergone major reforms, such as the establishment of three specialized IP courts (and more on the way, including an IP appellate court), the issuing of a slew of judicial interpretations and opinions to strengthen the enforcement, including easing up the right-holder’s burden of proof and raising the damage award, including, among other things, attorney fees.11 On the other hand, the litigation costs remain low, and the speed of the process is relatively fast (no jury trial under civil law system). Another sign is the likely relaxation on "business method” patents in the future.12 Past experiences also suggest that a litigation involving a foreign entity, especially if should be high-profile, tends to get more careful and better handling by the courts, and perhaps more so in the four first-tier cities (Beijing, Shanghai, Guangzhou and Shenzhen) where the quality of adjudication is perceived to be better.
In sum, although the market still has not been fully tested with the implementation of several new rules and decisions, all seems to be pointing to a more favorable direction and environment for the IPR holders than ever. Perhaps that is why another known NPE, Marathon Patent Group, has indicated its interest in pursuing licensing opportunities in China, and more Chinese corporations have begun to team up with NPEs to shore up their IPR portfolio.
Home grown "IP operation” funds and entities
Apparently growing out of the excruciating pain of being constantly targeted for IP-related litigation (mostly in the US) and the lessons learned therefrom, many Chinese companies or even government entities have in recent years adopted a "tick-for-tack” strategy and engage, openly or discreetly, in the formation of NPEs of their own. For example, in the private sector, Ericsson, InterDigital, Qualcomm and ZTE Corporation jointly forged a patent pool called "Avanci” in September 2016.13 Ostensibly a patent pool, it can easily turn into the functional equivalent of NPE if and when necessary. In addition, a number of Chinese technology research institutions, private companies and/or patent agencies are either in the process of forming or have already forged different IP/patent management or operation firms which in every respect look just like their NPE counterpart in the US.
At the government level, a semi-sovereign fund (called IP Management Fund for Key Industries of Beijing (北京市重点产业知识产权 运营基金)was formed at the end of 2015 involving primarily three-way financial contributions from the State Intellectual Property Office (at the central level), the Beijing IP Office (at the provincial level) and the Administrative Committee of Zhongguancun Haidian Science Park (at the local level), respectively, along with other smaller contributions from different IP-related private firms, in an estimated total amount of RMB ￥100 million (roughly US$15.4 million). Claimed to be the first ever government-private collaboration on such matter with an initial runningduration of 10 years, it will focus on mobile Internet and bio-pharmaceutical areas. Note, however, that as early as July 11, 2014, a government-owned and contractors (professionals)-operated IP management company Beijing IP Operations Management Co., Ltd., (北京知识产权运营管理有限公司) was already established with one of its objectives being "the fortification of domestic industry’s IP portfolio against potential litigation”. Again ostensibly a defense posture, it can certainly and easily turn offensive, just like NPE, as potentially the best defense tactic within or without the Chinese market.14
Benign or Lie-in-wait?
With evidence clearly showing that foreign NPEs have long gained their footing in China, adapted to local political and socio-economic environment, and that the Chinese domestic businesses are also gearing up for more NPE-type operations, the question now apparently is not whether there will be NPE activities in China, because there they are already, but when, to what extent and in what form will they be like in the future? In other words, will they be similar to what we have witnessed in the US but only "lie-in-wait” for the right opportunity to aggressively enforce their rights or will they remain benign as the status quo? Is it likely to be an outburst of NPEs with their law suit overflowing the court dockets? And what will the courts and the government likely react when encountering the NPE?
So far the Chinese judiciary has experienced at least two waves of so-called "copyright trolls,” with hundreds, if not thousands, of cases being filed by a few plaintiffs all over the country (note that there is no class action under the Chinese civil procedure law), and racks up a few thousand RMB as damages in each case. On the patent side, only a few individuals have systematically collected patents and taken the litigious approach against alleged infringers through injunctive reliefs.
Concerns over "junk patents”
What may be particularly worrisome, and heretofore never being the case in the US, is the huge amount of so-called "junk patents” being littered all over the Chinese market. Thanks to the government subsidy policy by which the mere filing of each patent can even be profitable, the number of patent filings and granting since 2000 has exploded. Based on a recent World Intellectual Property Organization (WIPO) study, SIPO receives the most applications in 2015 and becomes the first office to receive more than a million applications in a single year, incredulously more than the amount of the US Patent and Trademark Office and Japan Patent Office combined.15 Although the examination and the subsidy policy is tightened up in 2016 to emphasize more on quality, thereby creating a dip, the total number of patent filings (all three types) nevertheless exceeds 3.46 million, of which 1.34 million are invention patents (a year-to-year growth of 21.5%).16
This inflated and prevalent patent filing practice, in a way, helps generate another kind of "growth bubble” and a false illusion of strong innovation in the society. The self feeding frenzy results in more people and/or companies joining the bandwagon to prosecute frivolous patents purely for the sake of getting a bite of the government hand-out and window dressing for public relations or marketing purpose, among other things. It has also, unfortunately, been identified as a contour for bribery in graft schemes of public officials. 17
While mostly decorative in nature at the moment, many of those "junk patents” do have the potential of morphing into a completely different kind of beast, causing patent hold up or stagnation to start with. In other words, these patents can serve a completely counter-productive purpose than what they are designed for. All it takes is for the average court-granted damage award and litigation cost to rise to a certain level before they will be ripe for strike. If and when the calculation assures a certain windfall, instead of concentrating mostly on "business method” patents as seen in the US, the Chinese version NPEs may entail patent category or other IPRs of all sorts, thereby possessing the potential to wreak serious havoc on the delicate balance of the market order, creating major problems to the economy.
In sum, the question is not if, but when will the Chinese version of NPEs burst into the radar screen and cause problems. It is time to reverse (at least in part) or the filing subsidy policy and to re-craft the National IPR Strategy Guidance, particularly towards a more lesser-faire market with much less government interventions. While the general direction of the current patent and other IPR policy is correct, one should also take note on the storm being quietly yet dangerously developed. It is urgent to act now so that the formation of a "perfect storm” can be averted.
* Executive Director, Asia Pacific Legal Institute; Visiting Professor, Peking University Law School/School of Intellectual Property. The opinions in this article are strictly that of the author’s which do not represent the position of the organization(s) the author works for.
1 Based on an empirical study, in 2011 alone, the direct costs for entities sued by NPEs amounts to approximately US$ 29 billion (including attorney fees). See James E. Bessen and Michael J. Meurer, The Direct Costs from NPE Disputes, 99 CORNELL L. REV. 387 (2014),
2 EXECUTIVE OFFICE OF THE PRESIDENT, PATENT ASSERTION AND U.S. INNOVATION (June 4, 2013), at 3-4. In reality, it is extremely difficult, if not impossible at all, to provide a clear legal definition.
3 Pub. L. No. 112-29, 125 Stat. 284 (2011).
4 The number of patent case filings spiked sharply during the 4th quarter of 2015, attributed in part to do so before the change of federal civil procedure rules (and the retirement of "Form 18”) takes effect. The new rule requires much more information before a lawsuit can be brought and makes litigation against multiple defendants much more costly. The major case that seems to have the strongest impact is the U.S. Supreme Court decision on Alice Corporation v. CLS Bank International, 573 US, 134 S. Ct. 2347 (2014), as the majority of NPE’s patent concerns computer software-related "business method” patents. For the statistical report and analysis, see Brian Howard, 2015 End-of-Year Trends, LEX MACHINA (January 7, 2016),
https://lexmachina.com/lex-machina-2015-end-of-year-trends/; see also Steve Brachmann, Lex Machina IP Litigation Report for Q3 2016 Reflects A Downward Trend in Patent, Trademark Suits, IP WATCH DOG, October 17, 2016,
5 The Federal Trade Commission has just completed a two-year in-depth inquiry on the actual operations of 28 NPEs (renamed as patent assertion entities, PAEs), this is a continuous semi-investigative efforts on NPEs since 2003. See FEDERAL TRADE COMMISSION, PATENT ASSERTION ENTITY ACTIVITY: AN FTC STUDY (October 2016),
6 Jacob Schindler, NPE Assertion Comes to China as WiLAN Subsidiary Files SEP Suit Against Sony in Nanjing, IAM (INTELLECTUAL ASSETS MANAGEMENT) BLOG, November 16, 2016, http://www.iam-media.com/blog/detail.aspx?g=cdfe23cc-d26c-411e-9766-a6e87a6d0fbf.
It concerns Chinese invention patent ZL200880022707.5 for "control panels in communication network systems”.
7 Also worth noting is the presence of several sovereign-funded NPEs in China, such as France Brevets, IP Cube Partners and Intellectual Discovery of South Korea, Life Science IP Platform Fund, a wholly owned subsidy of Innovation Network Corporation of Japan.
8 Lawsuits involving software-related patents accounted for about 89% of the increase in defendants between 2007 and 2011. See US GOVERNMENT ACCOUNTABILITY OFFICE, ASSESSING FACTORS THAT AFFECT PATENT INFRINGEMENT LITIGATION COULD HELP IMPROVE PATENT QUALITY, GAO-13-465 (August 2013), at 14, http://www.gao.gov/assets/660/657103.pdf.
9 Gerard N. Magliocca, Blackberries and Barnyards: Patent Trolls and the Perils of Innovation, 82 NORTE DAME L. REV. 1809 (2007), at http://scholarship.law.nd.edu/ndlr/vol82/iss5/2/.
10 Id., at 1832.
11 Until recently, the average damage award in a copyright infringement case is Renminbi (RMB) ￥15,000 per case, ￥70,000 per case in trademark infringement and ￥80,000 per case in patent infringement, and in the great majority of cases, the award is based on "statutory damage,” not actual proof of damages or losses. See Yin Hung (殷泓), How to Resolve the Difficulty in Determining IPR Damages?(知识产权 损害赔偿认定难，怎么解？), GUANGMING DAILY (光明日报), April 26, 2016, at
http://theory.people.com.cn/n1/2016/0426/c49154-28304921.html (quoting from ProfessorsWu Handong and Lee Mingde, two of the most senior and prominent IP scholars in China, text in Chinese).
12 State Intellectual Property Office, Patent Examination Guidelines Revision(Opinion Solicitation Draft),§4.2, November 28, 2016,
http://www.sipo.gov.cn/tz/gz/201610/t20161027_1298360.html (in Chinese, for full text of the Draft, see Appendix 2).
13 Zhongxin Communication Joining Europe and U.S. Magnates in Forming Patent Alliance (《中兴通信联合欧美巨头成立专利联盟》), Daily Economic News, September 28, 2016, at http://finance.sina.com/gb/tech/sinacn/20160928/10511504129.html.
14 The first such government-owned and contractors (professionals)-operated model may be traced to the Rui Chuang Patent Operation Fund (睿创专利运营基金，rui chuang literally means wise innovation), formed in April 2014 and operated by Zhi Gu Rui Tuo Technology Service Co., Ltd. (智谷睿拓技术服务有限公司) in Beijing, a joint venture formed in 2012 consists of Kingsoft (金山软件), Shunwei Investment (顺为, co-founded by Xiaomi’s founder and CEO, Lei Jun), TCL Group (which stands for "The Creative Life”), and Xiaomi with the goal to raise RMB ￥300