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The Rising Risk of PAEs
Threats to Chinese companies from patent assertion entities are increasing, but there are effective defenses, say Hao-Chin (Frank) Jeng and Dan Shang of Purplevine IP Group (China).
Patent assertion entities (PAEs) are companies whose business model is to acquire patents and assert them against companies, known as the operating companies, which generate revenue from making or selling products utilizing such patents.
For years now, PAEs have been troubling operating companies through lawsuits or demanding royalties by other means. What makes PAEs particularly frustrating for operating companies? On one hand, operating companies cannot fight back with their own patents because PAEs do not make or sell products, and, on the other hand, the quality of the patents that PAEs assert is often very low.
PAEs have received growing investments from venture capital firms and angel investors as a “good business,” which has only made the problem grow on a global scale.
To understand the trend and assist Chinese companies to efficiently deal with PAEs, Purplevine IP Group has analyzed litigation cases between Chinese companies and PAEs in mainland China, Europe, and the United States, based on data provided by Darts-IP. We noticed that Chinese companies have increased exposure to PAE litigation in all three of these regions.
Figure 1 (below) shows the number of Chinese companies sued by PAEs in the United States by year. The number of PAEs filing complaints against Chinese companies (including companies in mainland China, Hong Kong SAR, China, and Taiwan) jumped significantly from 2016 to 2017, and then increased to a record number in the United States in 2020.
In addition, the number of International Trade Commission (ITC) (US) complaints increased from 2016 to 2020. Several Section 337 investigations targeted quite a few Chinese companies in 2018. In the same year, the number of asserted Chinese companies appears to peak. There was a total of 96 unique Chinese companies sued by PAEs from 2016 to 2020 (that is, if affiliates of the same Chinese companies were sued by PAEs, those affiliates would be counted as a single entity).
Figure 1: Chinese companies asserted by PAEs in the United States
“Despite the relatively low number of complaints filed, Chinese companies may still experience significant business disruption.”
Hao-Chin (Frank) Jeng (pictured) and Dan Shang, Purplevine IP Group (China)
The Growth of Chinese Companies
Innovation is a continuous process starting with product innovation focusing on scientific research and development (R&D) and followed by industry innovation focusing on manufacturing and marketing.
U.S. companies are well known for investing in R&D at the product innovation stage. In contrast, Chinese companies have huge advantages in manufacturing, with effective cost control and production processes.
It is a trend that Chinese companies are penetrating more product fields in the United States and growing their market share. Consequently, they will attract the attention of the PAEs with more litigation or patent enforcement actions. However, Chinese companies face additional sources of risk that U.S. companies may not face from PAEs: Chinese companies can also be sued by PAEs at the ITC for importing products into the United States.
Figure 2 (below) shows the number of Chinese companies sued by PAEs in Europe. Although the total amount of PAE activity in Europe is lower, the number of litigations also has increased over time in Europe.
In total, 15 unique Chinese companies were sued by 13 different PAEs from 2016 to 2020. Those PAEs filed litigation in seven different countries: France, Germany, Holland, Italy, Romania, Spain, and the United Kingdom.
Figure 2: Chinese companies sued by PAEs in Europe
Despite the relatively low number of complaints filed, Chinese companies may still experience significant business disruption. In some European countries, a court can award injunctive relief in addition to an award of damages.
PAEs have been able to obtain injunction orders easily in German courts. In June 2021, the German Parliament adopted an amendment to the Patent Act. Under the new legislation, courts examining a patent claim will conduct a proportionality test to decide whether an injunction would cause “undue hardship” to the alleged infringer or any third party.
Since such a proportionality test would require several cases to form clear guidelines, the impact on PAE enforcement actions remains to be seen.
In August 2020, PAEs were strongly supported by the U.K.’s Supreme Court in global licensing rate and injunction orders against two Chinese companies, Huawei and ZTE.
Europe has fewer PAE litigation cases in comparison with the United States, in part due to the market’s limited size and because Chinese companies, with a smaller market share, have less exposure to damage in the European countries. However, the U.K. Supreme Court’s landmark decision in Unwired Planet International Ltd and another (Respondents) v. Huawei Technologies (UK) Co. Ltd. and another (Appellants) may inspire PAEs to file more litigations in the United Kingdom. Some Chinese companies may explore the European markets before exploring the U.S. markets. They may now need to reconsider their market plan in Europe.
“PAEs are likely to continue as long as they have patents at their disposal and see successful enforcement returns.”
Hao-Chin (Frank) Jeng and Dan Shang (pictured), Purplevine IP Group (China)
Local Attacks
Figure 3 shows the number of Chinese companies attacked by PAEs in mainland China. Despite some criticism of insufficient protection for intellectual property (IP) rights in China, the number of PAE complaints increased dramatically from 2016 to 2020.
Foreign PAEs are the majority of the 20 different PAEs asserting from 2016 to 2020. During this period, the number of companies asserted by PAEs quadrupled, among them 25 unique Chinese companies.
PAEs filed litigation in seven cities in China, including Beijing, Hangzhou, Nanjing, Shanghai, Shenzhen, Wuhan, and Xian.
Figure 3: Chinese companies sued by PAEs in Europe
A United States-based PAE sued a Chinese company in a Chinese intermediate court for patent infringement using six patents in 2018. A year later, the parties resolved the case, and the cost of the settlement was reportedly high. The cost of litigation in China is much lower than it is in the United States, so it could be attractive to PAEs that are planning litigations.
In addition, the Chinese market size is negligible, so a large license payment is expected for a large product shipment. Chinese and foreign companies have both been the litigation targets of PAEs in China, and PAEs are likely to continue as long as they have patents at their disposal and see successful enforcement returns.
Join the Network
As China continues to experience high growth, Chinese companies may encounter more serious PAE issues. When Chinese companies develop a global business strategy, they need to develop a global IP strategy that enables and protects that business.
Purplevine IP Group has abundant experience in assisting Chinese companies to fight against PAEs. It offers multiple defense weapons for clients, including aggressive defense in the court proceedings, invalidity actions, effective negotiations, filing counterclaims or antitrust actions in China, proactive searching, and acquisition of potential targeting patents, and it recommends that Chinese companies participate in the global License on Transfer (LOT) Network.
LOT Network has members from 36 countries and every sector of high-tech industries. Because of the diversity and size of its members, the combined LOT Network portfolio has good region and technology coverage.
Its portfolio quality can be illustrated by the sophistication of its members, which include Alibaba Group Holding Ltd., Google LLC., IBM Corp., Microsoft Corp., Tencent Holdings Ltd, Tesla, Inc., and Toyota Motor Corporation (Japan).
So far, at least six transfers of assets from a LOT member to a PAE have been identified. Those in LOT, including approximately 30 Chinese companies that have joined, received a free license in accordance with the license agreement. Those Chinese companies that have not yet joined LOT Network may be at risk of being sued.
Chinese companies are working hard to provide good products and services to the world while making profits, but PAEs are aiming to take as much as possible away from their profits. We would like to remind Chinese companies to prepare early to protect their hard work from the increasing threat from PAEs.
Hao-Chin (Frank) Jeng is the chief international marketing and development officer and vice president of Purplevine IP Group. He can be contacted at: frank.jeng@purplevineip.com
Dan Shang is the licensing director of Purplevine IP Group and responsible for introducing the LOT Network to China-based clients. She can be contacted at dan.shang@purplevineip.com
Video courtesy of Envato Elements / pikosokz
Wednesday, November 17, 2021
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