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In the IP world equivalent of Daenerys Targaryen launching her long-awaited assault on King’s Landing on the backs of her dragons, the leader of the world’s economic dragon, China, recently gave a major speech on the importance of IP rights to his country’s future. The significance of China President Xi Jinping’s address can’t be overstated, especially to the extent it reflects an embrace of a more robust IP regime in one of the world’s leading economies. Just as Daenerys makes plain her oft-repeated threat to burn her enemies, so did Xi send a message that rampant IP infringement will no longer be tolerated in China: “Wrongdoing should be punished more severely so that IP infringers will pay a heavy price.” The consequences of this shift in policy will be widespread, with some of the possible reforms already being discussed in the IP media.
China has long had a reputation as an IP wasteland, where government authorities and the factories under their control at best turned a blind eye to the IP rights of others, and at worst willingly engaged in rampant infringement. What is important to remember is that China remains a top-down economic power, with the ultimate direction coming from the Communist Party. One level down the food chain are the large regional factory owners, who are often directly overseen and linked to the Party members responsible for their performance. That is why a potential quantum shift in IP policy is actually realistic in China. If the government compels the factories to adopt different business models, they will.
The existing conditions, however, have led to a sense of helplessness amongst IP owners, with only the largest and most deep-pocketed companies able to even try and stop counterfeit luxury goods originating in China from flooding the rest of the world, for example. True, there are measures available for trying to stop Chinese companies from importing infringing products into the U.S., such as filing cases in the International Trade Commission, or seeking to hale them into District Court through overseas service of process. But these approaches have proved cumbersome, expensive, and of limited value. In fact, skilled patent defense lawyers encourage their Chinese clients to take steps towards making it more difficult for patent owners to sue them. To that end, Chinese companies will often avoid opening a physical office in the U.S., or use a network of distributors that can easily be folded up in the event of a negative litigation result.
What I personally found most interesting in President Xi’s statements was his recognition that strong IP rights are a net positive for the Chinese economy going forward. We can contrast this approach with the anti-IP climate that has existed in this country for at least the last decade, and debate about who is in the right. While different people will have different views on the topic, there is no doubt in my mind that China has sensed U.S. weakness in the area of IP, and is looking to press an advantage before the window of opportunity closes. There are actually a number of concrete benefits available to China’s economy if it reverses course and adopts an even stronger IP protection regime. For the remainder of this column, I will focus on the benefits that arise from China taking a stronger approach to IP protection in its own country. Next week, I will try and address ways that Chinese companies can exploit the IP weaknesses that have arisen in the U.S. and other countries.
There is no doubt that Chinese companies face competitive threats from the rise of manufacturing capabilities in other countries. The Chinese know that manufacturing is their bread-and-butter, outward-facing industry, and while they are hopeful of raising their market share in IP-heavy sectors like pharmaceuticals, they are also aware that they need to protect their base capabilities in the production of apparel and consumer electronics, for example. The competition in those areas comes from other low-cost of production countries, as well as the rise of boutique, quality-driven manufacturers in countries like the U.S. In fact, the gradual expansion of e-commerce and the elimination of the retail middleman in many areas has allowed customers in the U.S. to purchase higher-quality products at ever-lower price points. Anyone who listens to popular podcasts knows that you can now buy a higher quality piece of underwear, or a mattress, that is made in the U.S.A. at a competitive price to imported Chinese products of lesser quality — as long as you buy it online, ideally with the promo code offered by your favorite podcast host.
So how will a stronger domestic IP regime potentially help Chinese factories fend off competition? In at least two ways. First, stronger domestic IP rights will help some factories raise prices and focus more on producing higher-quality goods. More importantly in the long run, strong IP rights will encourage more Chinese companies to innovate, rather than replicate, and work on investing in things like marketing and sales to foreign markets, tasks that they have been content to outsource until now. It will take time, but a robust IP regime will help China from being a country that primarily makes items, to also selling those items under Chinese brand names to foreign markets. It is not hard to imagine a Chinese pharma company arising that takes advantage of stronger IP rights in the country to gradually build a reputation as a trusted supplier of life-saving medications. That simply can’t happen if the factory down the proverbial street is allowed to produce cheaper or less-safe copies of a drug. If China wants to compete in IP-heavy industries that require consumer trust as well, it needs to police copycats and lower-quality purveyors in its own jurisdiction. China’s government apparently understands this.
Even at the lower end of the market, one of the frustrations that many U.S.-based companies sourcing their products from China have had is the unwillingness of Chinese factories to indemnify them from claims of infringement arising in the U.S. While this may seem unfair, considering it is the Chinese factories who are actually designing the infringing products in many instances, it has long been considered a cost-of-doing business for U.S.-based importers. One of the reasons that Chinese factories have refused to indemnify, however, is the lack of options available to them if the U.S.-based importer decides to source production of the same product from different Chinese factories. In a China with a more robust domestic IP regime, factories may increasingly become IP owners themselves, and be more likely to stand behind their products in order to gain a competitive advantage over their domestic and foreign competitors.
Ultimately, none of these changes will happen overnight, but the direction that China is setting with respect to IP policy seems clear. At the same time, China would be making a mistake by simply adopting a defensive posture with respect to exploiting IP. Yes, the country can and will take steps to develop an innovation-based domestic economy, driven by an increased focus on deterring destructive infringing behavior. But the true opportunity also lies in exploiting the IP weaknesses currently present in other countries. Either way, one would be wise to bet that the Chinese dragon will continue to roar.