At the beginning of 2013, two Chinese enterprises Huawei Technologies Co Ltd (Huawei) and ZTE Corp (ZTE), which once topped the list of international patent applications under the Patent Cooperation Treaty (PCT), encountered troubles in the US.

On February 1st, the US International Trade Commission (USITC) initiated a Section 337 investigation into Huawei and ZTE on the ground of patent infringement. This is the 3rd time for the two companies which have broken into the top 5 of the global telecommunication equipment suppliers to encounter Section 337 investigations in a single year.

"Obviously, products from high and new technology enterprises have been the new targets of section 337 investigations." As far as Chinese experts are concerned, intellectual property (IP) has become a tool for American enterprises to set up a barriers in the market and make competitions. In the face of the new situation, Chinese enterprises should attach more importance to patent layout and speed up to enhance its IP capability.

Events: continuous investigations

"We have been aware of the investigation and are preparing to respond to the suit lawfully." On February 2, both Huawei and ZTE made response to the investigation, which is based on a complaint lodged by Huawei and ZTE's rival InterDigital Communications Inc., an American local enterprise on wireless network software and chip development, and other 3 US companies for patent infringement. The four companies asked the USITC to start the Section 337 investigation to issue an exclusion order as well as cease and desist orders on Huawei and ZTE's wireless devices with 3G and 4G capabilities including smartphones and laptops, etc.

Sino-US trade has flourished since the establishment of diplomatic ties between China and the US. For several years, they have been the largest trading partners for each other. Along with the rapid growth of the bilateral trade over the past 20 years, Section 337 investigations into Chinese enterprises have been gradually increase. According to statistics from the USITC, the number of investigations that China is involved in has been the largest for ten years.

According to the data released by the USITC, it instituted forty Section 337 investigations in 2012, thirteen of which involved Chinese enterprises, accounting for 1/3. More than thirty enterprises from Guangdong, Shanghai, Zhejiang, Fujian, Shandong, Jiangsu, Anhui, ect. including well-known Chinese enterprises Huawei, ZTE, Haier were concerned in the investigations. Huawei was involved in three investigations, and ZTE twice.

Twelve in the thirteen investigations were initiated on the ground of patent infringement. The products involved were mainly electronic products, including integrated circuits and chips, physical therapy equipments, Blu-ray players, electronic imaging devices, wireless consumer electronics devices, protective cases for portable electronic devices, etc.

Analysis: upgrading targets

"Patent infringement, high and new technology as well as emerging enterprises are three new targets for Section 337 investigations." said CaoXinming, executive deputy director of the IPR research center of Zhongnan University of Economics and Law. Instead of the low end products, processed products, and daily consumer goods, 96% of the thirty-four investigations now happened in the high and new technology sectors, with China's top high-tech enterprises Huawei, ZTE, Haier, Lenovo, etc. being their targets.

"From the change of targets, it is obviously to see the achievements of Chinese enterprises' transformation and upgrading." A representative in business expressed that the export to the US were mostly middle and low clothing, labor protection supplies, textiles, toys, daily necessities and other low-tech primary and processed products more than a decade ago. However, such high-tech products as consumer electronics, advanced wireless devices with 3G and 4G capabilities, medical devices, integrated circuits, computer technology, image display now become the mainstream of export. This reflects the achievements of Chinese enterprises' transformation as well as upgrading. Encountering competitors in the US market demonstrates that Chinese high-tech enterprises are moving closer to their US peer. According to the public opinion, the fast growth of Huawei, ZTE and other Chinese companies in the international market start to impose pressure on American local tech companies.

Doing business in the market does not only need to compete for the market position, but also for IP. In 2009, four Chinese sucralose manufacturers won the Section 337 investigation. Sucralose involved in the case is a food sweetener, which is at the highest level in the world. With patents in the production process, the four makers responded to the complaint filed by Tate & Lyle without fear, one of the world's largest sugar companies dominating the marketplace, and finally won. Accordingly, their products were allowed to enter the U.S. market. Both Huawei and ZTE are new Chinese enterprises in the U.S. market. According to the statistics, the overseas revenue of Huawei which enters American earlier accounted for approximately 66% of the total in 2012; ZTE also plans to gain profit in the first quarter of 2013.

Countermeasures: enhancing capacity

"Chinese enterprises have suffered a lot from inadequate patent layout and IP capacity", an expert from China Chamber of Commerce for Import and Export of Machinery and Electronic Products said that Chinese enterprises were not familiar with international competition rules and were lack of the awareness of patent layout and IP dozen years ago. Once encountering the Section 337 investigation, they dare not make response and often lost foreign markets, with some small and medium-size enterprises (SMEs) closed down.

The investigation was rooted from Section 337 of the Tariff Law of 1930, which was amended for several times. According to the article, the USITC has the authority to institute investigations based upon allegations of infringement of patent, registered trademark, trade secret, packaging, etc. If the USITC finds a violation of Section 337, it will issue an exclusion order and cease and desist orders, which mean the exclusion of articles from the US market. Meanwhile, the statute prescribes that the respondent will definitely lose the lawsuit if he does not response to it, an ace in the hole for America to prevent competitors from entering the US market. In the aforementioned sucralose case, eleven Chinese SMEs were sentenced to "infringement" with products banned from the US market because they chose not to respond to the investigation.

Patent layout and IP capability are foundation for Chinese enterprises to explore the international market, both of which reflect the competitiveness of enterprises. Ten years after China's access to the WTO, connecting the world, economic integration and openness brought Chinese enterprises challenges and opportunities. Against the background, their IP capability and awareness of patent layout were rapidly and significantly enhanced. Huawei leaped to first in PCT filings with 1737 patent applications in 2008 and ZTE reached world's No.1 with 2826 PCT applications in 2011. Moreover, Haier has been actively establishing overseas research and development centers; Lenovo successfully acquired IBM's personal computer business in 2005. All these have laid a solid foundation for Chinese patent layout.

"With Chinese enterprises exploring the international market increasing year by year, enhancing IP capability is essential." Cao Xinming stressed that IP was a good means for Chinese enterprises to cope with Section 337 investigations and other international IP disputes.

Link

1. On Jan.4, ITC initiated a Section 337 investigation into certain integrated circuits and chips from China.

2. On Jan.4, ITC launched a Section 337 investigation into certain physical therapy equipments from china.

3. On Jan.5, ITC instituted a Section 337 investigation into certain Blu-ray players from China.

4. On Jan.13, ITC started a Section 337 investigation into certain electric fireplaces from China.

5. On Feb.22, ITC initiated a Section 337 investigation into certain toner cartridges from China.

6. On Feb.22, ITC instituted a Section 337 investigation into certain dimmable compact fluorescent lamps from China.　

7. On Feb.29, ITC started a Section 337 investigation into certain ink application devices from China.

8. On May 18, ITC launched a Section 337 investigation into electronic devices having a retractable USB connector from China.

9. On June 20, ITC instituted a Section 337 investigation into certain rubber resin from China.

10. On June 25, ITC initiated a Section 337 investigation into certain electronic imaging devices from China.

11. On Aug.21, ITC started a Section 337 investigation into certain wireless consumer electronics devices from China.　

12. On Sep.18, ITC launched a Section 337 investigation into certain sintered rare earth magnets from China.　

13. On Nov.9, ITC initiated a Section 337 investigation into certain protective cases for portable electronic devices from China.　

(China IP News)

2013-07-17