Author：ZeMing M. Gao, business strategist; IP attorney (USA); Company-as-a-Product (CaaP) expert; IP builder/strategist/economist; blockchain strategist/economist; tokenization and smart contracts expert; SEC/FINRA Investment Banking representative, Chief Advisor at Caapable.com advising multiple companies; email: gao@caapable.com
When it comes to intellectual property, there are two different aspects: defense and offense. Most Chinese companies 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 IP savvy and know your competitors’ IP position; (2) establish its own IP position by becoming innovative and timely converting the inventions into intellectual properties by applying for patents.
(1) A real example
I was 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 the company, trying to get the company 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, which is not necessarily the same as a moral 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, simply because it did not timely apply for one. 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. 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.
There are other details surrounding this particular case that would illustrate additional profound misunderstanding of patent rights by many companies and individuals.
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 and to take advantage of the tremendously effective US legal system. This is a sad thing that could happen to a company that has potential to enter the US market.
The lesson to be learned here is: In order to be successful in the US market, the company must (1) be IP savvy and know your competitors’ IP position; (2) establish its own IP position by becoming innovative and timely converting the inventions into intellectual properties by applying for patents.
(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 made 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 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 the potential competitors 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 or patent needs to be hired to provide competent legal advice. The patent lawyer must be able to understand the company’s products, understand the business plans, and also able to conduct research on the existing patents and products of the competitors, before giving any concrete and competent advice. This will not be cheap, but it is much cheaper than spending millions to defend the company in a US courtroom. The companies must realize that 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 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 to become 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 be 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 infringement 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 choice steers 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 as sound (or nearly as sound) yet legally far superior (e.g., less risky). Once a direction is chosen and engaged in, it may soon become extremely costly to change in the future.
