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Avoiding Chinese Intellectual Property Theft

Original Article

President Trump may have mastered the “Art of the Deal” in real estate negotiations, but his controversial trade policy with China is stalled over lack of progress in the reduction of tariff trade barriers. The good news unbeknownst to many, is that U.S. businesses can now obtain fair treatment and avoid theft of intellectual property (IP) in China.

U.S. Trade Representative Robert Lighthizer has advanced both an awareness and understanding of the Chinese theft of American IP. But so far, news out of the U.S. trade representative’s office offers little encouragement. However, existing U.S. laws and protocols provide many of the tools to reduce and minimize the opportunity for Chinese theft of American IP.

IP patent protection has been successfully enforced in almost all of the G20 for many years. China introduced its patent laws in 1985, but unfortunately, China’s culture — shaped by Mao’s communist revolution and the abolition of private property — has contributed to old ways dying slowly. In fact, many Chinese still view intellectual property as a foreign concept.

Even after China joined the World Trade Organization in December 2001, American experience with obtaining and enforcing IP rights in China remained murky and indeterminate. Early U.S. filers in the Chinese patent system faced arbitrary treatment by Chinese patent examiners. Patent claims were uniformly rejected and amendments were consistently refused. Access to enforcement in Chinese courts progressed from unknown to mysterious.

U.S. and foreign applicants who expected Chinese patents to be economically valuable — primarily because the Chinese patent law was modeled on German patent law — gave up on the idea of securing meaningful patent protection in China on all but a few highly selected inventions.

Fast forward to today, and we find a sea-change in China’s approach to patent applicants, including foreign applicants. China reportedly surpassed the U.S. in 2015 in the number of patents issued annually and just this month a Chinese court awarded U.S. telecom chipmaker Qualcomm preliminary injunctions preventing Apple’s Chinese subsidiaries from selling iPhones alleged to violate Qualcomm’s Chinese patents.

These changes, combined with the current direction of U.S. patent law, make Chinese patents both important and valuable to U.S. companies. Yet most U.S. patent filers probably remain unaware of developments in China that augur well for IP protection.

The Chinese are capitalizing on the crisis of patent protection in the United States, particularly the plague of patent “ineligibility’ findings brought about by the precedent-setting direction of the U.S. Supreme Court’s 2011 Mayo and 2014 Alice decisions, and the disfavor of injunctive relief after its 2006 eBay decision.

U.S. courts have since struggled with the application of these Supreme Court precedents, often erroneously interpreting them or blindly following the dicta rather than the legal groundings. The unintended result is a loss of confidence in the U.S. patent system and vast uncertainty in the economic value of U.S. patents, as evidenced by the downward spiral of patent licensing and litigation activities in the U.S. over the past few years.

In certain important technology categories, such as methods of treating diseases and methods of doing business, procurement at the U.S. Patent and Trademark Office (PTO) is so uncertain that many American inventors and technology companies find insufficient upside to the costs required to convince indecisive U.S. patent examiners to advance applications to granted patents — when the likely outcome will be multiple post-grant challenges to those patents in the PTO and in the district courts. Consequently, U.S. inventors have been shunning new patent filings.

At the same time, the Chinese Patent Office appears to have adjusted its examination guidelines and currently issues more patents than ever in the exact same technology categories that face disfavor in the U.S. This is hardly coincidental, and is in fact an effective and subtle means for theft of U.S. IP.

When U.S. inventors turn away from filing patent applications in the United States, they also tend to forgo the customary filing of corresponding patent applications in foreign countries. Indeed, to do so is even more difficult without a pending U.S. patent application due to U.S. restrictions on technology export. Export licenses are necessary before U.S. technology can be described or transferred to a country outside the United States, and they are statutorily granted on technology described in pending U.S. patent applications.

Without a U.S. patent application an inventor can still request a foreign filing license on his technology but it’s a relatively unknown and rarely used process. As a result many technological developments eventually become public without patent protection and are copied by savvy, aggressive Chinese competitors, who even seize such opportunities to prepare Chinese patent applications without the knowledge of the U.S. inventor.

Thus, patent rights are wrongfully taken from the U.S. inventor who simply thought it too expensive to seek patent protection. And those Chinese patents facilitate patent applications in other countries — further helping the Chinese benefit from the use, licensing or sale of intellectual property they didn’t originate. So Chinese IP theft may actually be easier and more frequent now than 10 years ago.

The good news in the midst of all the present uncertainty is that we need not wait for correcting legislation, reversal of court precedent, new regulations or drastic trade policy administrative action to protect American IP in China — soon to be the world’s largest economy. U.S. innovators should present their inventions to the U.S. PTO and obtain foreign filing licenses for a modest fee, whether or not they seek U.S. patents. Then they can and should make applications and secure patents in China and elsewhere. Thus, private sector initiative plays a vital role in providing the first defense against intellectual property theft.

• Robert Koch is former head of the intellectual property practice group at Milbank, Tweed, Hadley & McCloy LLP in Washington, D.C. Scott Powell is senior fellow at Discovery Institute in Seattle.

Powell has enjoyed a career split between theory and practice with over 25 years of experience as an entrepreneur and rainmaker in several industries. He joins the Discovery Institute after having been a fellow at Stanford’s Hoover Institution for six years and serving as a managing partner at a consulting firm, RemingtonRand. His research and writing has resulted in over 100 published articles on economics, business and regulation. Scott Powell graduated from the University of Chicago with honors (B.A. and M.A.) and received his Ph.D. in political and economic theory from Boston University in 1987, writing his dissertation on the determinants of entrepreneurial activity and economic growth.
Scott S. Powell