37 PATENT LITIGATION IN CHINA [Vol. 10
Licensing Intellectual Property in China
Lei Mei
1
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A.! Two-Types-of-IP-Licensing-...........................................................................-40!
B.! Patent-Licensing-Models-..............................................................................-42!
C.! Deficiencies-in-Current-Licensing-Models-.............................................-42!
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A.! Develop-Chinese-Patent-Portfolios-..........................................................-44!
B.! Understand-the-Chinese-IP-System-..........................................................-45!
C.! Structure-Licensing-Deals-Creatively-.....................................................-46!
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I. INTRODUCTION
Licensing is a viable method for many intellectual property
(“IP”) owners to monetize their IP rights. While IP licensing
practice is well developed in the United States, China remains a
mysterious frontier for many IP owners. Even for large
corporations that have developed successful licensing programs in
1
Lei Mei is the managing partner of Mei & Mark LLP, a Washington, DC-based
IP, Business, and Litigation law firm. Mr. Mei is also the author of Conducting
Business in China: An Intellectual Property Perspective (Oxford University Press
2012). A Chinese native and magna cum laude graduate of Duke University
School of Law, Mr. Mei counsels large and emerging companies in the U.S. and
China regarding IP issues and strategies, drawing from his unique experience in
business, technology, and law.
38 U. OF PENNSYLVANIA EAST ASIA LAW REVIEW [Vol. 10
China, changes in China’s legal and political landscape may catch
them off guard.
For example, Qualcomm Inc., a San Diego, California-based
company, designs and develops wireless communications products
and services relating to wireless communication standards such as
CDMA, GSM/GPRS/EDGE, 3G, 4G, and LTE, and then licenses
portions of its IP portfolio to other companies.
2
In the 2014 fiscal
year, Qualcomm’s worldwide revenue was about $26.5 billion,
3
half
of which came from China.
4
Qualcomm reportedly makes about
two-thirds of its profits from licensing fees.
5
On February 9, 2015, Qualcomm announced that it would
pay a $975 million fine after the Chinese government found that
Qualcomm’s IP licensing program violated China’s anti-monopoly
law.
6
As a part of the deal, Qualcomm agrees to license its IP to the
companies selling products in China only at a discount.
7
Despite
the setback, observers believe that “the Chinese market — and the
potential for profit — is just too big for companies to ignore.”
8
This article will first explain why the Chinese market is
important, even for the IP owners who have no intention to make or
sell products in China. It will then discuss current IP licensing
models in China and describe the types of licensing programs that
are successful in China. Finally, this article will provide
recommendations for developing IP licensing strategies in China.
2
Yahoo Finance, Qualcomm Inc., Profile,
http://finance.yahoo.com/q/pr?s=QCOM+Profile (last visited Mar. 14, 2015).
3
Qualcomm Inc., Annual Report (Form 10-K) (Nov. 5, 2014) .
4
Id. at 9.
5
Jonathan Sidener, Qualcomm, Broadcom Settle Patent Lawsuit, U-T SAN
DIEGO( Apr. 27, 2009), available at
http://www.utsandiego.com/news/2009/apr/27/1b27qcom23113-qualcomm-
broadcom-settle-patent-laws/.
6
Paul Mozur & Quentin Hardy, China Hits Qualcomm with Fine, NY TIMES (Feb.
9, 2015), available at
http://www.nytimes.com/2015/02/10/business/international/qualcomm-fine-
china-antitrust-investigation.html?_r=0.
7
Id.
8
Id.
2014] LICENSING INTELLECTUAL PROPERTY IN CHINA 39
II. WHY CHINA?
IP practice has evolved in recent years from both
legal and business perspectives. As the businesses become more
globalized, economies in different countries become more inter-
dependent on each other. The global economic landscape has been
reshaped by China’s breakneck economic growth in the past three
decades.
Since China joined the World Trade Organization (“WTO”)
in 2001, China has become one of the world’s most important
growth markets.
9
With a population of more than 1.35 billion
people, China has become an important source of economic
opportunity for U.S. businesses.
10
In 2010, China overtook Japan as
the world’s second largest economy behind the United States,
expanding its GDP by about 10 percent despite the global
recession.
11
The rise of the Chinese economy, along with the
world’s largest consumer base, will continue to generate countless
opportunities for U.S. companies doing business in China.
While China continues to battle isolated piracy and
counterfeit problems, the Chinese government has taken steps to
protect IP rights, recognizing the importance of IP protection in
order to promote the Chinese economy. For example, on June 5,
2008, China’s State Council issued an outline of the national IP
strategy “for the purpose of improving China’s capacity to create,
utilize, protect and administer intellectual property, making China
an innovative country and attaining the goal of building a
moderately prosperous society in all respects.”
12
Recognizing that
“intellectual property system is a basic system for developing and
utilizing knowledge-based resources,” China has been gradually
9
U.S. Int’l Trade Comm’n, Investigation No. 332-514, CHINA: INTELLECTUAL
PROPERTY INFRINGEMENT, INDIGENOUS INNOVATION POLICIES, AND
FRAMEWORKS FOR MEASURING THE EFFECTS ON THE U.S. ECONOMY (USITC
Pub. 4199, 2010) )
10
Id.
11
Theunis Bates, China Surpasses Japan as World's No. 2 Economy, AOL NEWS,
(Feb. 14, 2011), available at http://www.aolnews.com/2011/02/14/china-
surpasses-japan-as-worlds-no-2-economy/.
12
STATE COUNCIL OF THE PEOPLE’S REPUBLIC OF CHINA, OUTLINE OF THE
NATIONAL INTELLECTUAL PROPERTY STRATEGY (June 5, 2008).
40 U. OF PENNSYLVANIA EAST ASIA LAW REVIEW [Vol. 10
improving its IP laws and regulations and setting up enforcement
efforts.
13
According to the Chinese government, implementing the
national IP strategy “will facilitate China's opening up further to the
outside world, thereby leading to a win-win situation between China
and the rest of the world.”
14
The strategic goal is to make China a country with a
comparatively high level of the creation, utilization, protection, and
administration of IP rights by 2020.
15
The Chinese government has
also pledged to step up its efforts to protect IP rights by cracking
down on IP infringement such as piracy and counterfeiting.
16
Therefore, the current legal and political
environment in China creates prime opportunities for IP licensing in
China. Even for U.S. patent owners who have no intention to make
and/or sell products in China, China could still be an important
source of IP royalties. For example, regarding patent rights, since
U.S. patent owners presumably already spent resources to develop
inventions, it certainly makes sense for them to apply for Chinese
patents considering the importance of the Chinese market. U.S.
patent owners then would have an option to license the Chinese
patent rights to Chinese companies to extract additional values out
of these inventions. Naturally, developing IP without a China-
oriented strategy is essentially leaving money on the table.
III. CURRENT IP LICENSING MODELS
A. Two Types of IP Licensing
Generally speaking, IP licensing may be categorized in two
types: ex ante and ex post licensing. Ex ante licensing refers to IP
transactions that occur as part of a technology transfer agreement
before the licensee has obtained the technology through other
means.
17
Ex post licensing refers to IP transactions where licensees
have developed or obtained independently of the patent owner.
18
13
Id.
14
Id.
15
Id.
16
Id.
17
The Evolving IP Marketplace: Aligning Patent Notices and Remedies with
Competition, FED. TRADE COMM’N, 7-8 (Mar. 2011).
18
Id. at 8.
2014] LICENSING INTELLECTUAL PROPERTY IN CHINA 41
The policy behind the IP system, especially the patent
system, is that innovation benefits the society in general through the
development of new products, processes and services that improve
lives and address unmet needs.
19
Thus, the goal of the patent
system, is to promote innovation by giving patent owners the right
to exclude others from making, using, or selling a patented
invention for a certain number of years (e.g., 20 years in the U.S.).
20
By preventing copying by others who might drive down prices, the
patent system allows innovators to recoup their investment in
research and development (“R&D”) during the patent term.
21
Therefore, ex post licensing can distort competition in
technology markets and deter innovation.
22
The lack of an ex ante
license including technology transfer may result in duplicated R&D
effort.
23
If a company has invested in products using the technology,
the patent owner can use that investment as negotiating leverage for
a higher royalty than it could have commanded ex ante when the
alternatives still are an option.
24
The increased uncertainty and
higher costs associated with ex post licensing can deter innovation
by others.
25
Understandably, Chinese companies typically resist efforts
of ex post licensing, while encourage ex ante licensing. Therefore,
IP owners should consider ex ante licensing, taking advantage of
China’s national priority of converting China’s manufacturing-
based economy into an innovation-based economy by 2020.
26
Indeed, all levels of the governments in China, from the central
government to the provincial governments to the municipal
governments, have policies and plans in place, from favorable tax
19
Id. at 1.
20
Id.
21
Id.
22
Id. at 8.
23
Id.
24
Id.
25
Id.
26
LEI MEI, CONDUCTING BUSINESS IN CHINA: AN INTELLECTUAL PROPERTY
PERSPECTIVE 171 (2012).
42 U. OF PENNSYLVANIA EAST ASIA LAW REVIEW [Vol. 10
incentives to government subsidies, to attract hi-tech companies
with right technology to set up operations in China.
27
B. Patent Licensing Models
In terms of patent licensing, patent owners have used various
licensing models in China. Typically, patent owners either license
their patents through patent pools or individually. Generally
speaking, a patent pool refers to a patent portfolio consisting patents
(typically standard essential patents) from multiple patent owners.
Alternatively, a patent owner may license its own patent or patent
portfolio individually outside of a patent pool.
Some well-known patent pools actively licensing patents in
China include MPEG LA,
28
which runs patent pools relating to
standards such as MPEG-2 (for imaging processing) and ATSC (for
digital TVs) standards, and One Blue,
29
which runs a patent pool
relating to the Blu-ray technology. Individual patent owners
actively licensing patents in China include Thomson, Philips,
InterDigital, Qualcomm, and Dolby. Some patent owners may
choose to participate in a patent pool for one technology and at the
same time license their own patent portfolios individually for
another technology.
C. Deficiencies in Current Licensing Models
The current licensing models have some deficiencies. To be
successful in China, IP owners must recognize the problem with the
current licensing models in light of unique aspects of China’s
economic model and legal system.
First, most of the licensing programs originated in the
United States or Europe, not in China. Therefore, while IP owners
may be able to force a licensee to take a license using well-
developed litigation systems in the United States or through border-
27
Id.
28
See generally MPEG LA, http://www.mpegla.com/main/default.aspx
(providing an overview of MPEG LA’s patent pool and intellectual property
licensing operations).
29
See generally ONE BLUE, http://www.one-blue.com/ (discussing blu-ray and
similar IP licensing).
2014] LICENSING INTELLECTUAL PROPERTY IN CHINA 43
seizure procedures in Europe, it is more difficult for IP owners to
use litigation to force a licensing deal in China. For example,
damage awards from Chinese courts are typically very low, and
litigation costs in China are much lower than the costs in the United
States. Therefore, litigants have less incentive to settle early and
take a license in patent lawsuits in China. As a result, many IP
owners are unable to effectively license their IP to Chinese
companies in China.
Second, since many Chinese companies are merely
manufacturers of products and have low profit margins, they may
not be able to afford IP royalty rates that were set for the U.S. or
European market. In fact, high IP royalties have destroyed some
Chinese industries. Conversely, it also hurts IP owners because
they lose out on potential royalties when potential licensees are
either out of business or refuse to take a license.
For example, when a worldwide DVD standard was adopted
in the 1990s, the initial consortium split into two groups: the 3C
group consisting of Philips, Sony and Pioneer (and later LG) and the
6C group consisting of Toshiba, Hitachi, JVC, Time Warner,
Matsushita and Mitsubishi.
30
The 3C and 6C groups negotiated
with the China Audio Industry Association (CAIA), which
represented about 400 DVD and video CD player manufacturers, for
two years and reached licensing agreements in 2002.
31
Chinese
DVD manufacturers started to pay royalties of $5 or 3.5% per DVD
player, whichever was higher, to the 3C group; and $4 or 4% per
DVD player, whichever was higher, to the 6C group.
32
Along with
other assorted loyalties paid to MPEG LA, Dolby, Thomson and
other patent owners, total license payments added up to a hefty $15
to $20 per unit.
33
30
Powerdatarecovery.com, DVD FORUM, http://www.powerdatarecovery.com/cd-
dvd-resources/dvd-forum.html (last visited May 14, 2015).
31
Yizhen Feng & Jialu Li, Agreement Between Chinese DVD Companies and the
6C Group After Two Years Negotiation, XINHUA NEWS (May 8, 2002). .
32
Mike Clendenin, Taiwan Joins Chinese Effort on Proprietary DVD Format, EE
TIMES (May 24, 2002).
33
Id.
44 U. OF PENNSYLVANIA EAST ASIA LAW REVIEW [Vol. 10
The Chinese DVD manufacturers complained that a fixed
royalty was no longer justified as prices continued to fall.
34
At that
time, DVD players made in China usually sold under $100 overseas,
generating almost no profits for Chinese manufacturers with the
added royalty payment.
35
Many mainland Chinese DVD player
manufacturers stopped exporting to the United States as a result,
and China’s DVD player exports dropped significantly.
36
The demise of the Chinese DVD industry is a cautionary tale
for IP owners who try to license their IP to Chinese companies. To
have sustainable success, IP owners must carefully design and
implement their IP licensing programs in China.
IV. DEVELOP A CHINA-ORIENTED STRATEGY
A. Develop Chinese Patent Portfolios
As explained earlier, the Chinese government encourages ex
ante technology transfer. To enhance the value of an IP portfolio,
patent owners should acquire Chinese patents either through filing
Chinese patent applications or acquiring Chinese patents or
companies having desirable Chinese patents.
Generally speaking, the costs for drafting and filing patent
applications in China are merely a fraction of the costs in the United
States. Therefore, if a U.S. company or inventor already incurred
expenses in R&D for an invention and in for filing U.S. patent
application, it would make sense to also file a patent application in
China. For example, the Patent Cooperation Treaty (“PCT”), an
international treaty administered by the World Intellectual Property
Organization (“WIPO”), makes it possible to seek patent protection
for an invention simultaneously in different countries, including
China, in a cost-effective manner, by filing an “international” patent
application.
37
34
See id.
35
6C Seeks Patent License Fees from Chinese DVD Companies, ECONOMIC
REVIEW (Mar. 21, 2002) .
36
China Q3 DVD Player Exports Down Nearly 30%, PACIFIC EPOCH (Nov. 10,
2004).
37
World Intellectual Property Organization, Patent Cooperation Treaty (“PCT”)
(1970), Vailable at http://www.wipo.int/pct/en/treaty/about.html (last accessed
July 18, 2010).
2014] LICENSING INTELLECTUAL PROPERTY IN CHINA 45
B. Understand the Chinese IP System
Since China’s strategic goal is to make China a country with
a comparatively high level of the creation, utilization, protection
and administration of IP rights by 2020, China has pledged to step
up its efforts to protect IP rights by cracking down on IP
infringement.
38
Presently, copyright and trademark enforcement is
relatively effective, but crackdown on patent infringement and trade
secret theft are still challenging in China.
Specifically regarding the Chinese patent law, the major
obstacle, from a patent licensing perspective, is that damages for
patent infringement are simply too low and/or too difficult to prove.
The Chinese patent law provides that damages for patent
infringement “shall be determined according to the patentee’s actual
losses caused by the infringement.”
39
If the actual losses cannot be
ascertained, damages “may be determined according to the benefits
acquired by the infringer through the infringement.”
40
If the court
cannot determine actual losses of the patentee or the benefits
acquired by the infringer, damages may be determined according to
reasonable royalties.
41
In the event that neither the losses of the
patentee, nor benefits of the infringer, nor reasonable royalties can
be ascertained, a court may consider multiple factors and determine
the amount of compensation within the range from 10,000 RMB
(about $1,600) to 1,000,000 RMB (about $160,000).
42
The Chinese patent law, however, does allow injunctive
relief against infringing entities.
43
A patent owner may use
injunctive relief as leverage to force an infringer to take a patent
license.
Another encouraging sign is that China established three
specialized IP courts in Beijing, Shanghai and Guangzhou in
38
STATE COUNCIL OF THE PEOPLE’S REPUBLIC OF CHINA, OUTLINE OF THE
NATIONAL INTELLECTUAL PROPERTY STRATEGY (Jun. 5, 2008).
39
Patent Law of the People's Republic of China, art. 65 (2008).
40
Id.
41
Id.
42
Id.
43
See id. at art. 11.
46 U. OF PENNSYLVANIA EAST ASIA LAW REVIEW [Vol. 10
November 2014.
44
The newly created specialized IP courts should
further improve the Chinese IP system and create a better legal
environment for IP licensing and enforcement in China.
C. Structure Licensing Deals Creatively
To create a successful IP licensing program in China, IP
owners must structure IP licensing deals creatively. As discussed
early, ex ante licensing are welcomed and encouraged by the
Chinese government and Chinese companies. The more successful
licensors are those IP owners who have a long term vision and are
willing to offer a low upfront fee and then take more royalties when
the products are commercialized.
Ex post IP licensing, however, continues to be problematic.
One key obstacle, as explained earlier, is the royalty rate. There
should be a balance in terms of setting an appropriate royalty rate
for Chinese companies.
45
On the one hand, if the royalty rate is too
low, the patent owner is not getting reasonable value for the
invention.
46
On the other hand, if the royalty rate is too high, it
carries risks of potentially destroying the entire manufacturing
industry in China and indirectly encouraging counterfeiting
activities.
47
Due to antitrust concerns, many IP owners use reasonable
and non-discriminatory (RAND) terms, which often has a fixed
royalty rate schedule for all licensees.
48
Chinese companies,
however, resist the fixed royalty rates as applied to them, due to the
large volume of the products subject to the license, which leads to
large royalty payments.
49
Coupled with the relatively low profit
margins as manufacturers, Chinese companies’ profits could be
44
See Skip Fisher & Deanna Wong, Specialized IP Courts in China are open for
business, HOGAN LOVELLS LIMEGREEN IP NEWS (Jan. 15, 2015),
http://www.limegreenipnews.com/2015/01/specialized-ip-courts-in-china-are-
open-for-business/.
45
LEI MEI, supra note (25*), at 122. 122 (consider supra) (2012).
46
Id.
47
Id.
48
Id. at 122-13.
49
Id. at 123.
2014] LICENSING INTELLECTUAL PROPERTY IN CHINA 47
erased if they pay high royalty rates.
50
As a result, licensing
negotiations with Chinese companies can be a lengthy and
frustrating process.
51
To address this problem, IP owners should be more flexible
in terms of structuring licensing deals. For example, royalty rates
could decrease as the volume goes up. This still may comply with
the RAND terms, since the licensees in the same category are
treated the same.
52
IP owners may even consider lowering the
royalty rates for all worldwide licensees in order to bring the
Chinese companies into the licensing program.
53
This could
actually increase overall licensing revenues because the volume of
the licensed products would be much larger by including Chinese
companies’ products.
54
Additionally, it may be helpful for foreign IP owners to
partner with a relevant Chinese government agency or a relevant
trade association or organization to assess the licensing market in
China and to address potential concerns.
55
Chinese government
agencies and trade associations know the best way to approach
individual companies in China and they have the knowledge that is
often critical for foreign IP owners to close licensing deals in
China.
56
In the long term, foreign IP owners may also need to enlist
the help from Chinese government agencies and trade associations
to ensure compliance of the licensing terms by the Chinese
companies.
57
Overall, constructive approaches, rather than confrontations,
should be the first option for IP owners who try to monetize their IP
in China.
50
Id.
51
Id.
52
Id.
53
Id.
54
Id.
55
Id.
56
Id.
57
Id.
48 U. OF PENNSYLVANIA EAST ASIA LAW REVIEW [Vol. 10
V. CONCLUSION
Despite the challenges U.S. companies face in licensing IP
rights in China, the Chinese market is too important and too
lucrative to ignore. With careful planning and execution, U.S.
companies can and will achieve success in their IP licensing
programs in China. In turn, it will benefit companies and
consumers — both Chinese and American — by reducing costs
through improved technology and streamlined R&D efforts. There
is “a win-win situation between China and the rest of the world.”
58
58
STATE COUNCIL OF THE PEOPLE’S REPUBLIC OF CHINA, OUTLINE OF THE
NATIONAL INTELLECTUAL PROPERTY STRATEGY (June 5, 2008) (consider supra).
