A comment on Chinese companies entering into the US market

When it comes to intellectual property, there are two different aspects: defense and offense.  Chinese companies as a whole are still not innovative enough to take a primarily offensive position against their competitors in developed countries such as US.  This can and should be improved in the future, as more and more Chinese companies amass their own intellectual property.  At the present time, however, the number one question for most Chinese companies is how to play defense as effectively as possible.  Most companies are not doing very well in this.

As illustrated below, it is critical for a company to (1) be innovative; and (2) timely convert the inventions into intellectual properties by applying for patents.

(1) A real example

We were recently contacted by a midsized Chinese company complaining that their US distributor stole their invention.  According to the company, the US distributor applied for a US patent based on the inventive idea, and now turned its end back on their company, trying to get them out of the US market. The CEO of the company was outraged, repetitively claiming that “justice must be done.”

One problem is that the CEO only has an emotional definition of “justice” based on his feeling, and simply refuses to listen to my explanations of the legal concept. In this particular matter, before a solution can even be sought for, the company must understand, from a legal point of view, what the patent received by the US distributor exactly means to their business in the US market. This necessarily has to do with a lot of quite specific patent law concepts, such as validity of the patent, priority date of the application, scope of the claim protection, adequacy of claim support in the specification, and finally legal infringement analysis in relation to the current products. I found it very difficult to communicate these issues with the CEO not only because of his highly charged emotional status but also his predetermined misconception.

The truth of the matter is that because US is a legal society, virtually all rights have a legal definition.  Intellectual property rights, for example, are strictly those rights that are established through normal procedures of intellectual property laws such as patent law, rather than that based on a vague sense of “rightful ownership.”

In the above example, there is little doubt that the result would be unjust if (1) the US distributor’s patent is held valid, and (2) the claims of the patents are constructed to be broad enough to reach the original product of the Chinese company.  But whether these conditions are met is a legal question that needs to be answered first by a patent attorney. The CEO of the company in the above example simply jumped into a conclusion merely upon seeing a patent being issued and the patent contains a drawing that looks like the company’s product. In reality, there is a very good chance to prove that either the patent is invalid or its claims do not affect the product of the Chinese company even if the patent itself is valid.  But such proof will need to be based on legal terms within a legal framework, instead of being spilled out from some intuitive but vague equitable terms.

More relevant to the point made here is that, regardless of the result with respect to the US distributor’s patent, the Chinese company which had initially made the invention is no longer entitled to a patent. Proving the company is the truly inventor may help to invalidate the other person’s patent, but it does not necessarily get the company a patent for itself.  It is already too late for the company to apply for one.  In this sense, something has been permanently lost due to the company’s inaction.  Taking corrective measures afterward, though helpful, would not completely solve the company’s problem in this particular case.

The lesson must be learned here is:  In order to establish patent right, one must do both of the following: (1) make an invention; and (2) convert the invention into an intellectual property by applying for a patent timely.

There are other details surrounding this particular case that would illustrate profound misunderstanding of patent rights by many companies and individuals, but such details cannot be conveniently discussed here, partly because of confidentiality concerns.

Companies facing situations like the above example could be in serious troubles.  They could be forced out of the US market, develop a hard feeling about the US legal system, and never wish to come back to compete normally and take advantage of the tremendously effective US legal system.  This is just about the saddest thing that could happen to a company that has potential to enter the US market.

(2)  What should a Chinese company do?

Consider intellectual property a necessary cost factor for business.  One common mistake made by Chinese companies is to enter into the US market based on an inadequate market analysis (often primarily motivated by how much cheaper their product will be compared to that of the competitors’), only to be shocked later by the legal threats by the competitors who own intellectual property covering the product.  Protests against unfair competition might help to some extent, but that is not the ultimate solution.

What a Chinese company should do is to sit down, ask themselves a series of questions, and start to strategize and implement a strategy.

  • Do we really want to go to US market?

This of course has to do marketability and profitability.  But because marketability and profitability have a lot to do with intellectual property rights, the question has a legal aspect in the very beginning.

  • If we are entering into the US market, do we have any intellectual property (especially patents based on innovative technologies) that could be, and should be, established in the US?

Inventions are constantly made by many companies during their early development stage.  Along with encouraging more inventions, it is of critical importance for the company to have an adequate patent strategy and patent disclosure and procurement program.

  • What existing intellectual property (especially patents) is owned by others that might affect us? Can we redesign our products to get around the existing patents? If not, should we license the patents?

All these questions must be asked before the company starts to market their products in the US.  At some point, a patent lawyer needs to be hired to provide competent legal advice.  The  patent lawyer must be able to study the company’s products, understand the business plans, and also conduct research on the existing patents and products of the competitors, before giving any concrete and competent advice. This will not be cheap, but such costs are a normal part of the calculation in the marketability and profitability.  The established companies have invested on that part of the business, and have taken those costs into account in their marketability and profitability analysis, so should the other companies that are entering the market.

If inventions and patent applications are not handled properly, it could potentially cause some irreparable troubles, especially for a developing company in its early stage.

Typically, the inception of a new technology company is accompanied by the following two characteristics: (1) a flux of technological innovations is being generated; and (2) a particular direction of the future technological developments is being determined and set during the early stages.  Both matters have an inherently inflexible timetable and unforgiving nature, which are often hidden from the eyes of those who are not patent specialists.

For example, an important invention may be made within the company and become a fundamental part of the company’s technology. Without adequate motivation and clear guidance of a competently designed invention disclosure program, the inventive ideas may not be adequately captured as patent rights, or even not captured at all.  Unlike many other resources, patent rights are permanently lost if not captured timely.  This is one distinctive nature of the patent law, and part of the “bargain” struck between the government and the inventors. Although the same problem is faced by a company of any stage at any time, it is particularly acute during the early development of a new technological company.

At the same time, a certain technical feature may be implemented and potentially become a foundation of the future development of a larger technological framework.  In the beginning, there may exist options of slightly different flavors or directions, among which a particular option may be optimal not only in a technical point of view but also in terms of minimizing potential patent conflicts with existing patent rights, particularly those owned by competitors.  Engineers would have no clue about the latter and would naturally choose a certain option based entirely on technological considerations, not knowing the particular choice steers the IP train of the company into a potentially wrecking collision with a competitor.

It is true that sometimes this type of collision is unavoidable for a technology company to grow, but often an optimal option might have been missed which would have been technologically just as sound (or almost as sound) but legally far superior (less costly). Once a direction is chosen and engaged in, it may soon become extremely costly to change in the future.

Microsoft’s $500 million loss in a single case concerning Internet Explorer is a great example.  Certain features in the popular Internet Explorer of Microsoft were found to be infringing on someone else’s patent.  Had the specific issue been brought about and dealt with in the beginning of the developments of Internet Explorer, there would be simpler ways to avoid potential infringement.  But it was only many years later when Internet Explorer was found infringing in the court.  During the time, not only did Internet Explorer accumulate a huge amount of damage (over $500 million), but the long delay also made it far more difficult to clean the Internet Explorer due to the deeper integration of the features in question and much later development stage.