Implications for China Growth

China is a key country in the world of business and politics today. With its enormous population, highly educated workforce, and its manufacturing prowess, China is a country to be reckoned with. Intellectual property rights are protected in China, although most of the world seems to have a vast ignorance of Chinese IP protection mechanisms and their effectiveness in China.

The West is attempting to establish intellectual property rights enforcement structures in China similar to the way they exist in the West. However, China is unlikely to uniformly adopt the West’s techniques and mechanisms since China is “the Middle Kingdom.” A new licensing model will be developed based on China’s observation of things that work and don’t work in other places.

Many people around the world respect the way that the United States honors intellectual property, however, very few people around the world want to duplicate the litigious nature of the United States.

PatentBooks is a  model for licensing patent rights in China. This model is based on selected aspects of other successful marketplaces in the United States and around the world, including real estate, e-commerce, digital music, and big-box retail. Connecting Chinese licensees of intellectual property efficiently to the West’s intellectual property licensors is key. Getting a licensor to allow licenses to their intellectual property on a broad basis, and standardizing the evaluation methods of patents are also required, not only for China, but for the rest of the world.

Patent Trading Movement

Throughout history, new countries and societies have copied the success of other countries and societies. The United States copied Europe from its founding in 1776. It took the US about 150 years to become economically significant. At the close of World War II, Japan and Germany had to both start their economies over again. Roughly 50 years later, both of those economies were world-class. South Korea did the same thing, and reached economic significance in 30 years. Taiwan did the same in 25 years, and now China has done the same thing in 15 years. This cycle will continue, and the cycle’s period will be reduced.  Copying enables human progress.

Over the years, multinational companies have developed various tactics and programs against copying.  Timely applications with governmental authorities, market surveillance, reverse engineering, customs protection, and civil litigation are just some of the commonly used mechanism exploited for patent enforcement.  Global companies often accumulate patents to be used in IP disputes, rather than commercialize them as an income source.  Those companies regard their patents as “family jewels” instead of intangible assets that should be financially leveraged.  Trends towards patent rights for technology transfer and licensing, instead of withholding, are opening.

As global companies gain greater understanding of patents, many have started to recognize the benefits of licensing patents to provide an optimum path to success.  Patent licensing saves time and resources compared with developing alternatives.  Furthermore, the expansion and upgrading needs of China’s manufacturing industries raise demand for imported technology.  Vice versa, overseas patent owners are eager to open up new income streams through penetrating the lucrative China market.  For example, Japan’s technology exports to the Chinese mainland recorded fivefold increase from 2000 to 2007. Hewlett-Packard set up a technology licensing center in Singapore in 2006.  According to MOFCOM, China’s technology imports in 2010 valued at US$25.6 billion with a growth rate of 18.8%.  According to Ernst & Young, the US corporate income from patents licensing will increase from US$110 billion in 2000 to US$500 billion by 2015.  The opportunities are huge.

Due to the lacking of experienced intermediaries on the mainland, the Chinese government takes a leading role in encouraging patent trading.  Many technology exchange centers, patent trading platforms and IP auction sites have sprung up over the last five years thanks to the government’s support.  Besides business matching, those trading centers also provide patent valuation, consulting and testing services.  Increasingly, patent owners in China are looking for a regional platform to license their patents.  As a result, professional IP intermediaries promoting trade in and out of China are urgently needed.

A Case Study on Patent Licencing

IBM is widely acknowledged to run one of the most successful patent licensing businesses in the world.  In 1994, the IBM licensing managers realized that although the IBM licensing income was respectable at a few hundred million dollars per year, this income was being generated by licensing only a very small portion of the company’s patent portfolio, specifically those patents pertaining to PC architecture and semiconductor processing technologies. The fact that IBM owned more than 20,000 US patents made management suspect that perhaps IBM had other valuable patent assets in their portfolio. They decided to investigate further. Although IBM is the most visible, Lucent, Abbott Labs, Roche Diagnostics, Acacia Research and many other high-tech, healthcare or business methods companies execute the same basic process, because all patent licensing shares a common thread: patents are all about technology. Technology assets are best evaluated by technology professionals.

The first step is to know exactly what the company owns. After the intellectual property assets have been discovered, the patent portfolio is divided into manageable technology-centric groups. The patents are grouped because the technical investigation of a product is usually the most expensive component of the technical evaluation task. When a technical investigation has begun, the investigators should be considering all possible patents that may be contained within the target product.  After a series of screening and decision-making process and the likely technical targets have been identified, a market study should be prepared.

Management should not be intimidated by the prospect of a patent analysis investigation, possibly requiring reverse engineering. The patent is interpreted as broadly as possible by a “person of ordinary skill in the art”. The technical evaluator looks in the patent for the most unique aspects of the invention as potential knockout factors. The evaluator looks for these knockout factors first to eliminate patents from unnecessary consideration. If the knockout factors are discovered, the chance of the patent being used by the target increases significantly. Important consideration for management is the various industrial espionage acts around the world. Basically these laws discourage corporate reverse engineering by stating that if a company reverse engineers a competitor’s product, and features of the reverse engineered product are discovered in the company’s products, the company may have committed some level of industrial espionage. However, a company that uses a third-party technical investigation firm that is dedicated exclusively to enforcing intellectual property rights via technical investigations avoids this legislation. The third party technical investigator does not engage in new design activity or produce products competitive with the investigation targets.

The information gained from this technical evaluation process allowed IBM to ramp up their patent licensing activities, which resulted in a 10-fold increase in licensing income 10 years later. Other corporations around the world are following this example, looking for similar results. The technical evaluation of patents will remain the most important aspect of successful patent licensing programs worldwide.

The Revolutionary PatentBooks Model

According to the finding from a study by the University of Oxford, search and information costs, bargaining and decision costs, enforcement costs and adjustment costs all limit the value generated from licensing transactions.  These costs are particularly severe for smaller firms that lack complementary assets to develop their products, lack experience with licensing and do not have large human and financial resources to invest in negotiation outcomes. The transaction costs of licensed manufacturing increase exponentially when having to license multiple rights among disparate rightsholders in a global market.

PatentBooks aggregate large groups of patents pertinent to commercially significant products according to product requirements, enabling manufacturers to license all the necessary patents in a single transaction that is instantaneously and universally accessible. Manufacturers can subscribe to the patents implicated in their products simultaneously, without incurring litigation expenses.  PatentBooks offer significant advantages to both product manufacturers and patent owners, enabling manufacturers to subscribe to manufacturing rights to hundreds, even thousands, of product-specific patents in a single transaction at a competitive price.  PatentBooks eliminate royalty-stacking problems and prolonged bilateral negotiations among multiple stakeholders.  Manufacturers that subscribe to a PatentBook are able to avoid sales channel disruptions, management distraction, and the poor market perception of offering unlicensed technologies. And they enjoy greater freedom to operate.  TAEUS has selected Liquid Crystal Displays (LCD) as a PatentBook product category.

Patent pools offer a more efficient transaction for patent licenses. Due to their nature, patent pools are built around industry specifications and standards. Industry standards and specifications are created by competitors working together. When this occurs, antitrust regulators take note. Typically patent pools must pass antitrust and Department of Justice regulatory issues. Since PatentBooks are not built around standards or specifications, PatentBooks are not subject to DOJ or antitrust scrutiny.  One other significant limitation of patent pools is that the revenue is distributed on a 1/N basis where N is the number of patents in the pool. PatentBooks distribute revenue on the basis of patent quality.  PatentBooks patent quality evaluation criteria include legal and economic criteria, plus the technical criteria, which are far more valuable and accurate.  All criteria are open for public review and “open source” modification.  For a patent owner who does not agree with the PatentBook administrator’s decision, PatentBooks support an arbitration provision, similar to that used for patent pools.

A PatentBook example.  For an LCD television there are dozens of patent owners who are entitled to be compensated for this property.  But the bulk of LCD manufacturers have been unable to identify, contact, and negotiate acceptable terms with many of them because of the sheer number of patent owners. With PatentBooks, these manufacturers would have a simple transaction to ensure that their products are licensed to the appropriate patents.  Patent owners receive a new license revenue stream that maps both to Subscribers’ success and respective patent quality.

Summary

Patent filings in China rose sharply in the past decade, and the patent quantity is catching up with the developed countries.  Chinese companies can take references of patent management best practices from the West but could also modify it to suit domestic as well as global expansion needs.  Patents are better used for improving people’s living, creating healthy incomes and as an agent for further innovation, instead of frightening off competitors or exploited as litigation ammunition.  Statistics have shown the growing trend and potential of patent licensing worldwide.  The PatentBook model creates financial and social value and reduces transaction costs for both patent owners and users.

Edited by Vincent Leung, Chief Representative (Greater China), TAEUS International Corporation, May 2012.

 References:

1.  《The technical evaluation of patents》, written by Art Nutter, published by the Intellectual Asset Management Magazine Licensing in the Boardroom 2006
2.  《The Transaction Cost Benefits of Electronic Patent Licensing Platforms: A Discussion at the Example of the PatentBooks Model》, written by Roya Ghafele and Benjamin Bibert, University of Oxford and Oxfirst Ltd.
3.  《Hong Kong grows as a regional intellectual property market》, published by the Research Department of Hong Kong Trade Development Council, 2011