During his campaign for office, Donald Trump was outspoken about his intentions to reset the trading relationship with China.
He pledged to use every lawful presidential power to remedy trade disputes and cited, “[a]ccording to the US International Trade Commission, improved protection of America’s intellectual property in China would produce more than two million more jobs right here in the United States.”
These campaign positions undoubtedly left Chinese businesses nervous about the risk of punitive measures, but the cause for concern may be overstated.
Chinese companies remain subject to the same laws governing intellectual property as US companies. That said, there are a few issues that any Chinese company should carefully consider if they plan to purchase patents or acquire patent licenses.
Be aware of licenses with cut-offs – a.k.a. guillotine licenses. Anything less than “life of the patents” can be a “set-up” by the patent owner for the next patent infringement lawsuit in a US court. When the license expires, the patent owner has even more leverage to negotiate for higher royalties than in the first negotiation. In any US jury trial, the expired license will be admitted into evidence, and this prior license will appear to the jury to be an admission of infringement by the licensee.
Insist on arbitration clauses to avoid US courts. Chinese companies should generally avoid US courts due to jury biases, so they should insist that all future disputes related to patents be arbitrated. ICC arbitrations are also recommended for foreign companies because ICC arbitrators are inoculated against US-style discovery. Furthermore, the ICC rules impose time limits which can prevent the arbitration from going out of control.
Be aware of the evolving law on post-sale restrictions. Chinese companies should closely follow the US Supreme Court’s decision in the Lexmark case, a lawsuit brought by the printer manufacturer Lexmark International against a small company called Impression Products which buys, refurbishes and sells on Lexmark toner cartridges. The Supreme Court will decide whether Lexmark has a right to limit the resale or modification of its cartridges, which could set a precedent for other companies, such as automotive or tech companies, to impose their own after-sales restrictions. On the one hand, this could help protect customers by guaranteeing quality. However, critics argue that it could have unintended consequences for resale markets or consumer freedom. The ruling is expected in June.
Companies should look to purchase US assets that have Chinese counterparts.
As China’s enforcement on patents increases, IP in China is becoming more valuable. The Chinese government has opened a series of intellectual property courts, and China is becoming an increasingly reasonable and fair place to resolve patent disputes.
As a result, China has become the third most favorite jurisdiction for non-practising entities and this trend is likely to continue.
While certain aspects of handling US property law may be more difficult for Chinese companies under the current American administration, the aforementioned considerations are relevant to most global corporations — and not solely targeted at Chinese corporations.
Haiyan Tang, partner in the Litigation practice of Paul Hastings is a coauthor of this article.
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