Chinese Patent Litigation – Practice Tips for US Companies (Part 4)

Practice Tips for US Companies

Because China is one of the world’s largest consumer markets, US companies doing business in China will continue to profit from its large consumer base. In light of this new patent litigation landscape in China, however, how should US companies prepare for patent litigation in China? There is no simple answer, and US companies must develop a holistic approach to patent litigation in China.

This article provides four practice tips below. Note, however, that there is no “one size fits all” approach, and US companies will need to customize solutions most suited for their individual needs.

First, be aware of cultural differences. Both Schneider and Samsung misjudged Chinese companies’ reactions. Schneider’s strategy of using lawsuits to force CHINT into acquisition backfired. Probably blinded by a sense of arrogance and self-entitlement, and more likely because of a misjudgment in cultural differences, Schneider has not chosen other means that would be much more effective.

CHINT is a privately-held family enterprise, and its CEO is very wealthy. Therefore, he likely values his reputation more than money itself. He would lose his “face” and social status if he were to be forced into acquisition. On the contrary, he capitalized this opportunity to become a national hero in his “fight” against the perceived foreign “aggression.” CHINT’s PR efforts were commendable, but Schneider could play along with this PR scene after its first several lawsuits in Europe did not help it gain any business leverage. At that point, Schneider should find a way to allow CHINT’s CEO, who is a business person at his core, to save his face while still inking a business deal.

Similarly, Samsung was shocked to see the large judgment. From the hindsight, Samsung grossly underestimated Hollycomm’s strength. In the beginning, however, Samsung retained one of the largest national law firms in China, and overlooked the fact that the strongest law firms in Zhejiang province are not national law firms. Some Zhejiang firms have excellent knowledge of local practice and local political/business environment – an intangible asset that could help Samsung better evaluate the case. Therefore, understanding cultural differences does not mean the differences at an international level, but also at an intra-China level.

Second, create win-win situations. The Chinese culture promotes win-win situations and avoids conflicts. The fact that Schneider’s appeal has not been decided shows that the court is creating a window for Schneider and CHINT to settle their differences.

Granted, however, it is difficult for Schneider or Samsung to salvage a win-win situation after such negative media coverage. For other companies, however, there are a plenty of opportunities during litigation to create and capitalize win-win situations. Remember, saving “face” is the most important thing in China.

Third, execute a short-term plan. As patents and patent lawsuits become more and more important in China, US companies doing business in China must have and execute a short-term plan to deal with potential patent litigation in China.

To avoid becoming the next Schneider or Samsung, one effective way is to have your own Chinese patents. To balance the “perceived” favor for Chinese patent holders in Chinese courts, US companies could counter-sue Chinese companies for patent infringement, using their own Chinese patents. It is one thing if a court issues a large judgment against a non-Chinese infringer. It is quite another if the same court issues a small judgment against a Chinese infringer at the same time. This way, US companies would create a level playing field.

Accordingly, in the short term, US companies must identify their Chinese patents that can be used for defensive purposes. If US companies do not have such patents, they should consider purchasing patents from other entities.

Fourth, develop a long-term strategy. US companies must also develop a long-term patent strategy for the Chinese market in order to enjoy continued business success. The strategy is not only limited to R&D efforts and applying for Chinese patents. It should take into account US companies’ global patent and business strategy and understand the inter-relation between the Chinese market and other markets. US companies must first identify the long-term business goals in China and globally, then develop a long-term patent strategy accordingly.

For example, Schneider attempted to leverage its European patents for business advantages in China by suing CHINT in Europe. It lacked the strong European patents that could defeat CHINT in Europe. If Schneider had a better global strategy, however, it might have succeeded.

The old saying is “when in Rome do as the Romans do.” Likewise, when US companies conduct business in China, they must follow Chinese culture and rules. The changing landscape in China’s patent litigation can benefit both Chinese and US companies. To capitalize on potential opportunities, US companies must get prepared now!