Archive for China
A book on World War II teaches a lesson for today on innovation. In Churchill and Orwell: The Fight for Freedom by Pulitzer-prize winning author Thomas E. Ricks (New York: Penguin, 2017), we learn about some of the reasons England struggled to defend itself effectively in dealing with Germany. A key problem discussed by Ricks was England’s poor state of preparation with inadequate machinery, feeble industrialization, weak supply chains, etc., that made it hard to fight a serious war and led to embarrassing disasters like the rapid loss of Singapore, their supposed fortress in southeast Asia. Close to home in Europe, Britain had a hard time just moving troops around — they often had to walk — and the Brits were amazed at how quickly their American cousins could mobilize when they came to the rescue. Why was England so poorly prepared?
England, as you will recall, was the birthplace of the Industrial Revolution, yet by the time of the War, they were awkwardly behind in many of the basic technologies they would need. How could this happen? Ricks comments are insightful:
Managed by family members more interested in reaping dividends than investing in new machinery and other gear, “British firms were unable to adopt modern, best-practice technology,” concluded business historian Alfred D. Chandler Jr. As a consequence, Britain’s brilliant university research generally did not make the transition into factories. Britain had led the first Industrial Revolution of coal and steam power, but generally sat out the “Second Industrial Revolution” of the late nineteenth and early twentieth centuries, built around oil, chemicals, metals, electricity, electronics, and light machinery, such as automobiles. By the end of the 1940s, it would have neither an empire nor an economy capable of competing with those of other major powers. As Correlli Barnett put it, the reality was that by the time World War II ended, the British “had already written the broad scenario for Britain’s postwar descent to the place of fifth in the free world as an industrial power, with manufacturing output only two fifths of West Germany’s.” Interestingly, Barnett was the keeper of the Churchill Archives at Cambridge University from 1977 to 1995. [Ricks, pp. 203-204]
Something similar happened in China, which once led the world in innovation and GDP, but from the Qing Dynasty until the late 20th Century, in part due to apathetic leaders unwilling to invest in or even open the doors to innovation and technology, China missed out on much of the Industrial Revolution. Only through massive reform and exerted effort in recent decades has China begun its return to a position of global leadership in innovation, IP creation, and economic growth.
In the paper industry, which I’ve been close to for many years, it’s clear that the American paper industry has largely fallen into the same trap that nearly cost Britain its freedom and did cost many lives unnecessarily. The American paper industry has largely failed to invest in new technology and relies heavily on antiquated paper machines and pulp mills that are decades behind what we have in Asia (China and Japan in particular). Their slower, less efficient machines and less efficient plantations put them at a distinct cost disadvantage. Instead of taking steps to compete better, the US industry too often tries to rely on protective legislation to raise tariffs on imported paper and make everyone in the nation pay much more for their paper than they should. The real problem is not Chinese competition, but American businessmen falling into the same pattern that nearly cost Britain the war: focusing on immediate profit and dividends while neglecting the future.
Each industry, whatever it is, needs to build for the future with investment in innovation and a willingness to boldly cope with the threats and opportunities of disruptive innovation. If your industry is dominated with leaders who feel like they can just milk their business as a cache cow with no need to invest in the future, that industry will fail.
China’s housing market is in a bubble, in my opinion, for it seems to display some of the same excesses and questionable behavior that the United States had in real estate shortly before the big subprime mortgage crash in 2007. We have a flood of newly created cash flowing into the market at low interest rates for easy loans. We find unusual business models popping up to exploit the cheap credit and drive up housing prices and housing demand. And we will see rapid changes occur as the bubble pops in some way.
Easy credit from the banks of China and abundant new cash from China’s equivalent of “quantitative easing” have been used in an attempt to stimulate the markets, just as has been done with little success in the U.S., Japan, the European Union and Zimbabwe (before their cataclysmic crash with hyperinflation and economic chaos). Initially much of the new money being created was being used to drive the Chinese stock market. As that bubble popped, rich Chinese looked again to real estate as the traditional safe way to make lots of money. In popular cities, home prices have shot up. In Shenzhen, housing prices show a 57% increase over last year. That’s a ridiculous rate showing something is wrong.
Owners of apartments until recently were not too concerned about rent since they real money were making was coming from rapidly appreciating property values in cities like Shanghai. But with fear that recent rises were no longer going to be sustainable, rental prices are now getting more emphasis. This appears to be driven in part by the very large-scale actions of a giant force, the real estate company Lianjia (United Homes), according to a friend of ours who is a real estate agent. Lianjia has managed to obtained huge capital reserves that it has used to buy up many former competitors, giving them a stranglehold on the real estate market. They are also using large amounts of capital to make loans to customers who otherwise might not be able to afford the down payment of a new property. Further, they are actively working with property owners to push for significantly higher rental values. This increases their commissions and also make landlords happy.
In spite of China’s slowing economy, many renters are reporting significant jumps in rent this year. Our landlord, for example, wanted to increase our rent by 33%. Since we take good care of the place and don’t make many demands, though negotiation, she was willing to sacrifice to help us by just asking for a 24% raise in rent instead. But she has agents from Lianjia calling her and saying she could be getting 33% or even 40% more. This seems to be happening all over the city.
In looking for new, more affordable apartments, my wife found that when she went to the nearby Lianjia office and asked for places with a price similar to what we have been paying the past year, they said it wasn’t possible and that we would have to pay a lot more to get a place with the features we now have. When we went to one of the increasingly hard-to-find non-Lianjia dealers, we learned that there certainly were places in our price range that could meet our needs. While my wife and a non-Lianjia agent were looking at one apartment priced at 14,000 RMB, a Lianjia agent came to the same place with a Chinese girl who was looking to rent. She liked the place and asked how much it was. My wife heard the Lianjia agent say it was listed at 18,000, a full 4,000 RMB above the actual asking price. The girl was shocked and wondered how it could be so expensive. She turned to the agent my wife was with and asked what price he had been told. Not wanting to make another agent lose face, our agents just nodded his head and said it was 18,000. But this apparently was Lianjia’s attempt to drive up the price, deceiving a customer. Ugly.
By offering easy loans to customers who might not otherwise be able to get one, and by collaborating with landlords to drive prices up, the rental market in Shanghai has been booming at a crazy pace, the kind of pace that looks like a classic bubble. The housing bubble is already popping in Hong Kong, with a significant drop now in housing prices since the Sept. 2015 peak, said to currently be in “free fall.” That cold front may soon sweep northward to cities like Shanghai.
In bubble economies, it’s hard to tell precisely when the insanity will stop. With abundant injections of cash and other policy actions, the government could keep driving up prices for a while, but eventually (what, two more months? maybe six? a year?) economic reality has to kick in, and when it does, it can be painful and sudden. The bigger the steps taken to keep the bubble going, the worse the pain will be and the longer the correction will take.
When cheap mortgages to unqualified buyers begin to fail and threaten the banks, we could be in for a repeat of the subprime mortgage crisis the US faced a few years ago. When property owners begin to see that real estate values can drop significantly, they may look to the ultimate way of preserving capital in risky times: precious metals, particularly gold and silver. A dramatic pop of any kind in China could send shock waves throughout the world.
This is a good time to be prepared. Get out of debt. Have cash on hand to keep you going for two or three months in case there is a run on the banks (the available currency in the US is a tiny fraction of the vast amount of digital money that has been created, and if banks fail or are hacked, turning those digits into something you can spend may be a challenge that faces many delays, not to mention massive threats of hacking. Physical cash on hand may be an important part of your survival kit. Food and other supplies, and some gold and silver coins or bullion, may be a good idea.
At an IP Conference in Shanghai yesterday, I discussed the current decline in IP rights in the United States with a US attorney who was speaking on recent changes in US patent law. Like many in the IP profession, he recognizes how painful the loss is in the U.S. and how bad this will be for the future of innovation there. As he’s learned more about China, he also recognizes, as many of us here do, how strong China’s current IP trajectory is. As IP law and practice is strengthened here, innovation will be strengthened and further incentivized. End result: China wins. In the innovation battle and future IP battles between East and West, China will take the lead. That’s my prediction.
Here’s one little example. Look at the incredible machines China can build. Here you see a brilliant example of innovation and the spirit of the new China as a Chinese company tackles the ancient problem of building bridges, an area where China has ancient strengths and now a modern lead:
On October 15, 2015, Appleton, Wisconsin’s Paper Industry International Hall of Fame will be inducting six people into the Hall of Fame. One of them is an innovator and leader from ancient China who can be considered as China’s answer to Gutenberg. Gutenberg is frequently honored in the West as one of the most important inventors ever for giving us the world’s first book printed with movable type, a remarkable achievement from around 1455. As with many inventions long thought to have had European origins, there’s a touch of Eastern flavor in this one, for Gutenberg’s Bible came 142 years after the world’s first mass-produced printed book made with movable type, the large Book of Farming (Nong Shu) from China, printed in 1313 by Wang Zhen.
Wang Zhen was a Chinese official who recognized that vast amounts of agricultural technology scattered across China needed to be preserved to help all of China reduce famine and be more productive. He took a Chinese invention, movable type, and improved upon it to make a practical way to print an entire book. He used carved wooden blocks for each character, and developed a sophisticated way of arranging them on two rotating tables to allow typesetters to quickly find needed characters to place them in his press. The Nong Shu was printed and preserved many notable inventions in China, including an early form of a blast furnace driven with a reciprocating piston attached to water works, something long that to be a later European invention.
Recognizing Wang Zhen for his important role in the advance of printing is a fitting step for the Hall of Fame, and I look forward to many more Asian inventors, scientists, and business leaders being recognized in the Hall of Fame in future years. The historical contributions of China in numerous fields have received far too little attention, and I’m delighted to see folks in Appleton taking the lead in rectifying this problem. Kudos to the Paper Industry International Hall of Fame!
Abraham Lincoln said that the patent system “added the fuel of interest to the fires of genius.” Today the fires of genius and the fire of innovation itself is getting doused with something less helpful than fuel. These fires are being cooled and, in some cases, extinguished with harsh attacks on the IP rights that once enabled and motivated lone inventors and small businesses to take the fruits of their genius to the market.
The owners of small businesses, the people who generate most of the innovation and business growth in the United States have good reason to be worried. Their ability to attract funding through valuable intellectual property is being compromised. Their ability to protect their products and innovations from the power of corporate giants is being whittled away. This has come from many quarters, but there is a widespread anti-patent movement driven by politics and misinformation. It’s the bitter fruit of a bitter anti-property rights movement that exaggerates the threat of a few bad actors to justify widespread weakening of property rights in ways that will hurt the economy and our society for years to come.
We have seen a recent series of Supreme Court cases that have made it much harder to obtain patents and enforce them. We have seen massive changes in US patent law that make it easier to invalidate patents after they are granted and make it harder and more costly to stop infringers if your patent survives. Now the bogeyman of “patent trolls” is held up as a threat to America that requires more sweeping “patent reform” to make it even harder to enforce a patent, and it looks like both parties are united in a quest to do “something big” to shake up the IP rights that helped drive the American economy for so many decades. Corporate giants benefit from this reform as it clears away the annoyance of other people’s IP rights standing in the way of their marketing muscle. But the economy as a whole and the rights of many are hurt in this process this amplifies innovation fatigue .
Several recent articles highlight just how serious the problem has become. Louis Carbonneau in “Toxic Asset: The Gradual Demise of the American Patent” (IPWatchdog.com, December 10, 2014), surveys the radical changes in the past two or three years:
On the judicial front, in 2014 we saw no fewer than 5 Supreme Court decisions going against patent holders on the various subjects of obviousness (a key test for patent validity), what constitutes “abstract ideas” (which now undergo a more stringent test for patentability), business method patentability, indefiniteness (how you construe claims), reasonable royalty (how you calculate damages), willful infringement (how you punish the “bad actors”) and fee shifting (making losers pay for winners legal fees). All of these decisions have collectively made it harder for patent owners to: i) maintain the validity of duly issued patents (previously presumed by law), ii) pursue infringement claims, ii) prove damages (let alone treble damages), iv) have open discussions with potential infringers prior to litigating, and have left the unsuccessful patent owner at risks of paying millions in legal fees to the other side if the judges so decides.
Parallel to judicial reform at the federal courts, recent US patent reform with the American Invent Act (AIA) introduced a new post grant review mechanism called Inter Partes Review (IPR) which allows a party to challenge the validity of any issued patent before the Patent Trial & Appeals Board (PTAB). Strangely, despite the PTAB being an emanation of the same USPTO that delivered all these patents in the first place, there is no longer a presumption of validity before the PTAB for the patents being challenged while other rules make it easier to invalidate patents based on prior art.
Finally, on the political front, in 2013 the US House of Reps. passed the Goodlatte bill, which would erode rights conveyed to all patent holders despite being primarily directed at NPEs. It is now expected that the new Republican led Senate will revive the bill -currently on hold- in early 2015 and, with a rare showing of bipartisanship from the White House, it is expected to be signed into law. At the same time, 27 US States have passed or are in the process of passing laws that make it harder for people to assert the patents they own.
Carbonneau goes on to explain that in recent Federal Circuit cases, patent owners are being crushed, and in Inter Partes Review (IPR) cases before the USPTO, nearly 80% of the owners of challenged patents are being told by the USPTO that their patents are not valid over the prior art that the USPTO itself supposedly considered before granting the patent in the first place. Carbonneau puts it rather wryly:
The most interesting statistics come from the PTAB [the USPTO’s Patent Trial and Appeal Board, which processes IPR cases] because it only focuses on validity issues based on prior art; the very same prior art patent examiners are supposed to have found and analyze prior to issuing a patent. Since patents going through IPRs are usually the same ones that being litigated, you would assume that owners did a lot of due diligence before investing in a costly patent lawsuit. Well, the PTAB is declaring 77.5% of reviewed patents invalid! And this is not limited to “abstract” software; patents related to biotech and pharmaceuticals, medical and mechanical devices, are being invalidated at an even higher rate! Remember, this is an offspring of the very same agency that inventors paid thousands of dollars in the first place to review applications and issue their patents. Now, after having to pay a quarter to a half million dollars in legal fees (average cost of an IPR procedure for a patent holder), the same agency is telling patentees nearly 80% of the time: “Very sorry we made a mistake; we would not have allowed your application had we looked more carefully for existing prior art. And no, there is no refund available.”
Personally, I cannot think of any industry that could survive more than a month with a nearly 80% defective rate, let alone by forcing you to spend a fortune for the “privilege” to confirm that indeed your title was invalid in the first place! Only a government can come up with such a broken system and get away with it.
The impact of these anti-patent efforts has been a surprisingly sudden break from the trend of increasing IP litigation, with litigation in 2014 down about 13% from the previous year according to a new 2015 PwC report on patent litigation. The problem of explosively increasing patent litigation, a common excuse to justify the slashing of patent rights, is not supported by the data.
Richard Lloyd, writing for the IAM Blog, draws this observation from the PwC report:
Of these three classes [of patent litigants considered], NPE [non-practicing entity] companies have been successful 31% of the time in patent cases brought since 1995; this compares with a success rate for universities and non-profits of 48% and a lowly 18% for individual inventors. Individual patent owners also do far worse with damages pay-outs, getting a median award of $3 million compared with $11.5 million for company NPEs and $16.2 million for universities/non-profits.
There could be many reasons for individual inventors doing relatively badly. Although the PWC study doesn’t provide any, it’s easy to speculate that small inventors may have lower average quality patents to begin with, while they probably don’t have the same kind of litigation savvy as other NPEs and are much less likely to have access to the same kind of litigation expertise that larger, better funded patent owners can turn to.
But what PWC’s numbers also strongly suggest is that the US patent litigation system is strongly stacked against small, patent owning entities. Bearing this in mind, it is worrying that the main packages of reform proposed in the House of Representatives (the Innovation Act) and the Senate (the PATENT Act) are only going to penalise them further.
Lloyd notes that potential irony now that many lone inventors, recognizing that they have little chance of winning and have almost no chance of affording the punitive legal bills they may face if they sue and lose, may be more likely to turn to NPEs (“patent trolls”) for help as the most practical way to realize any benefit from their work.
There is a need to rebuild an innovation climate in the United States, starting with educating our leaders about the need for IP rights and the value of patents. If we don’t teach this lesson from within, it will eventually be taught rather loudly from without, for Europe and China are both moving to strengthen IP rights and strengthen IP enforcement. Europe’s Unitary Patent system could be a boon to IP there, though much remains to be seen, but the changes in China are strong and dramatic. That nation has gone from no patents and no IP system in the early 1980s to the world’s biggest source of IP generation and IP litigation, with many changes steadily strengthening the nation’s IP system. There is a long ways to go for China still and there have been some setbacks, but at current rates we can see China becoming a leading source of global innovation while the US loses its lead.
Will the flames of innovation be largely quenched in that nation? Much depends on what we do with IP rights now, the rights that will shape our culture and economy for decades to come. May the fires of genius be encouraged with something other than the cold water Congress and Courts have been sloshing.
In a few days, I’ll be speaking about IP and innovation in China at the RISE 2015 conference in Miami, Florida, sponsored by INDA (a professional organization for the nonwoven fabrics industry). In my presentation, I’ll be sharing my “Dangerfield Theory” of IP and innovation in China. The Dangerfield Theory is based on comedian Rodney Dangerfield, who famously and repeatedly complained that he got no respect. China, in spite of remarkable advances in IP and innovation, continues to get no respect. Like Rodney himself, China is also a heavyweight, now leading the world in patents and IP litigation, and leading in the pursuit of many key technologies. Their innovation and IP is no laughing matter, but continues to just get no respect. This make China like Dangerfield, and for those companies and nations that ignore the threats and opportunities China creates, Chinese IP and innovation will also become “danger field.” Ignoring this field of danger and opportunity is foolhardy. It’s the kind of sleepy, lazy response we seen when a company or nation is beset by innovation fatigue.
The tendency of Chinese IP and innovation to be invisible to the West is an issue I raised in 2011 right after the Thompson Reuter Top 100 Global Innovators report for 2011 included nothing from China, Taiwan, or Hong Kong in its list of 100 top innovators based on international patent filings over the past three years. I was astonished at how Chinese IP could be so invisible and overlooked, given that Foxconn/Honghai Precision, the Taiwanese and Chinese partner of Apple, compared to Apple itself actually had 3 times as many US patents in the time period of interest. Honghai had roughly 50 times as many US patents field as some companies that made the list. Other heavy international filers like Huawei, ZTE, and Lenovo were also neglected.
I contacted Thompson Reuters to complain, wondering also if they had made errors in their search or forget to include Honhai Precision in their search terms. I was told that they had done the analysis accurately, relying on a proprietary algorithm that requires a company to file in the US, the EPO (Europe), and Japan for a patent to count as an “international” patent. This definition tends to discriminate against Chinese IP, in my opinion, for Chinese companies, when they seek international protection, are usually content with IP in China and the US, plus some other specific nations, but tend to do relatively few filings with the EPO or with Japan. Japanese companies naturally file their first, just as Chinese companies file first in China. Given the high political tensions between Japan and China, and the relatively small market it is for Chinese companies, the motivation to file in Japan is small, regardless of the quality of the invention. Insisting on filing in Japan rather than China puts China at a great disadvantage and favors the many Japanese companies that make the list. Requiring that a patent be filed in the EPO and Japan in addition to the US sets a very high bar that does not properly reflect whether an invention is good enough to be pursued with international IP.
In 2012, the Thompson Reuters Top 100 Global Innovators report still had nothing from China. Its 2013 report finally mentioned Taiwan, but not Honghai/Foxconn. Only the Taiwanese semiconductor giant TMSC broke into the top 100. But the latest report from the end of 2014 finally mentioned a mainlaind Chinese company: Huawei. It’s about time. It’s not like Huawei just barely broke into the ranks of companies pursuing international IP. For several years they, like ZTE, have been in the top 5 international filers, according to the World IP Organization which administers PCT (Patent Cooperation Treaty) filings. Huawei is actually the world’s #1 international filer and has been for some time. Looks like they managed to barely break past whatever algorithmic blinders Thompson Reuters has, and for that tiny bit of progress, I guess we have to congratulate the folks at TR.
My soft and hesitant congratulations, though, may not be heard amid the roar of complaints that TR is facing for its related report, China’s IQ (Innovation Quotient), which praises China for its rapid rise in innovation and patent filings (in spite of meagre recognition on the Top 100 report). Some loud voices immediately complained, reminding us that Chinese innovation is weak and most of its patents are low quality. On Dec. 13, 2014, the influential magazine, The Economist, ran an editorial, “Patent fiction: Are Ambitious Bureaucrats Fomenting or Feigning Innovation?,” criticizing TR for their positive report on China and reminding us that China’ does not file as high a percentage of international patents as Japan, and suggesting that Chinese innovation and IP is “feigned” by bureaucrats and not driven by real inventions from real innovators. Still no respect!
Yes, there is a problem with poor quality patents in China driven by tax breaks. But that is changing as companies increasingly look to patents as strategic tools for the future, and are striving to increase quality. The quality problems in China may more severe than they are in the US, but the quality is improving, and expensive international filings are increasing, with China now #3 in the world, ahead of Germany, and likely to overtake Japan in a few years.
It’s true that Japanese patents are much more likely to be filed overseas than Chinese patents (something like 30% for Japan versus 5% for China), but this is not necessarily a reflection on the quality of the patent. The economic value is also an important issue. Japan is a small market. Its businesses prosper by selling products to many large foreign markets like the US, Europe, and China. There are strong economic reasons why Japanese companies would seek foreign patent protection. China, on the other hand, represents a huge and growing market. Apart from manufacturing for foreign companies using foreign IP, Chinese companies producing and creating their own products tend to find the Chinese market to be a big enough opportunity to keep them busy for years to come, and rely much less on exporting these to the confusing and uncertain overseas markets in the US and Europe. The economic incentives to seek IP overseas is less for many Chinese innovators than it is for Japanese innovators, and naturally we can expect foreign filings to be somewhat diminished, even when the invention is of high quality.
There is a tsunami of quality IP and advanced innovation coming from China. China is learning and rapidly improving its approach to IP. Those who continue to ignore the threats and opportunities coming from this very change will find that the “Dangerfield Theory of Chinese IP and innovation” ultimately means the joke will be on them.
In a previous post here, I reported a huge loan to a Chinese paper company backed by its mostly Chinese IP as collateral. The 8 billion RMB obtained by China’s Tralin Paper (Quanlin Paper in Chinese, though they use www.tralin.com for their website), one of the biggest IP-backed loans in the world, not only shows that Chinese IP is coming of age, but is now being used to bring some of their technology to the US and to create over 2,000 US jobs. Tralin Paper, renaming themselves as Tranlin Paper for some reason, has just signed a deal with the State of Virginia, obtaining state support as Tralin/Tranlin/Quanlin invests $2 billion to create a new environmentally friendly paper mill and create over 2,000 US jobs. Recent news from the office of Governor Terry McAuliffe of Virginia proudly announces the plans of “Tranlin Paper.” Also see reports at TAPPI.org and MFRTech.com.
As the West continues to decry Chinese IP and innovation, always viewing China as a source of IP theft and job loss for the US, this story may come as a pleasant surprise. Here is an innovative Chinese company that has created and protected their own IP in a green technology, used innovative financial tools (and plenty of solid Chinese guanxi) to obtain massive financing based on that IP, and then brought their money and their technology to the US to create many jobs. At least some parts of this story are going to be repeated in many ways in days to come. The old paradigm of China lacking IP or lacking valuable IP is fading.
After the announcement at ChinaPaper.net, the first report on this story to the English-speaking world, as far as I know, was my original March 6, 2014 report here at InnovationFatigue.com followed by an update here on the Shake Well blog that gave a translation of the Chinese story. It was picked up by Intellectual Asset Magazine and by World Trademark Review, but is still a generally unrecognized but important story.
China still has a long ways to go in overcoming its problems and strengthening innovation and IP, but the trends here are remarkable and should not be discounted. Meanwhile, we should welcome stories like Tranlin’s, and watch for many more to come. But for some US companies, this will mean even tougher competition that won’t be easily avoided with restrictive, protective tariffs or antidumping legislation.
(Similar account cross-posted on the Shake Well Blog.)
My latest post here at Innovation Fatigue lamented the actions of the USPTO in their apparent war on patents involving natural products. New information makes the story even more troubling than before, indicating that more than just judicial error and bureaucratic blindness was involved. The steps taken appear much more deliberate and political than that, and reflect an increasingly revolutionary attitude toward patent rights holders, where IP is viewed as the problem, not as a vital tool to benefit society.
First, new insight into the actions of the USPTO comes from a leaked USPTO PowerPoint used to train patent examiners on the radical new USPTO guidelines implementing their extreme response to the Myriad decision. A PDF of the PowerPoint slides, coupled with the USPTO guidelines and some vital commentary have been compiled by Hal Wegner and are kindly provided by a great champion of IP (quality IP, that is), Greg Aharonian, Director, Center for Global Innovation/Patent Metrics. Wegner observes that the new guidelines, which require inventions involving natural products to be “significantly different” than what may be found in nature provide no concrete, objective test to determine when a claimed invention is “significantly different” from ineligible subject matter. Is a creative device made out of wood significantly different from naturally occurring wood? Is a new anti-cancer drug extracted from a newly discovered fungus significantly different? Who knows? The uncertainty created by the test can be disastrous for property rights holders. Wegner points out that a much more useful and concrete test already exists: the Papesch test for determining whether the claimed invention as a whole is nonobvious from the prior art. But this was never mentioned by the Supreme Court in the infamous Myriad decision and has been neglected by the USPTO as well.
In a recent email to his subscribers, Greg Aharonian shares an email sent to him by a biotech patent examiner within the USPTO. It helps explain some of the motivation behind the seemingly crazy USPTO action, which isn’t so crazy at all from the perspective of politics:
1610 examiner here again. We examiners in biotech at the PTO also would like to know ourselves who wrote those ridiculous guidelines. We are being told to stretch 101 as much as possible. The guidelines say that, for example, if claim 1 is an assay method, with steps such as centrifugation, column chromatography, mixing reagents in a test tube, spectrophotometric measurements, if each category of technique was known at the time of the invention (is routine/well known/conventional), forget about whether the step was ever done with the molecules in the claim, we have to write how each step is 103-obvious w/o using 103’s word “obvious”. We have to write somehow how the combination is 103-obvious, w/o the using 103 word “obvious”. Then we have to reject the claim under 101. We don’t know if the PTO requires art cited for each step that is obvious.
Now, Funk Bros. v. Kalo Inoculant, one example in the guidelines, is a decision in which the patented composition, which I think is amazingly clever, was considered not to be inventive. The decision involves 103, not 101. How could the PTO so thoroughly confuse 101 with 103?…
Myriad was politically motivated, filed by the ACLU, because poor people can’t afford the BRCA1 gene test. OK, this is the Obama era, max political correctness. Current politics ruled. The test, however, is expensive and difficult to do. It’s not in the test strip category, like a pregnancy test.
But Mayo v. Prometheus takes the cake. The drug and its metabolites are not natural products. So what is the natural phenomenon that the justices never mentioned? And the clever part is looking for a target concentration of one synthetic metabolite in red blood cells.
What seems to be forgotten is that patents are intellectual property and that patented inventions are new and useful. When intellectual activity is maligned rather than rewarded, the economy goes with it. The PTO seems to be under pressure from the White House, because biotech patents don’t jive with Obamacare, which is backfiring.
Yes, it is high time for patent attorneys to fight back (don’t laugh Greg). David Kappos cut our time for examination, but he increased customer service. Time for the customers to demand more service.
The biotech community seems afraid to speak out too loudly on these outrages, but I think savvy investors see a dimmed future and have begun pulling some of their money out of the field (my guess about the recent plunge). The patent community and the business community is remaining far too silent, perhaps afraid of attracting political wrath, but the losses of IP rights could seriously set back innovation in the US and beyond.
China is ramping up its IP system and strengthening protection, while America is declaring IP to be the problem and weakening IP rights. Who’s going to own the future? I’m living in beautiful Shanghai now, where a lot of the future seems to be sprouting in an increasingly pro-IP environment. Meanwhile, I hope America will come to its senses and return to vigorously protecting IP rights and promoting innovation, not innovation fatigue.
Breaking news from the Province of Shandong in northern China: A Chinese paper company, Quanlin Paper (also called “Tralin Paper”) has successfully used its portfolio of patents and trademarks to secure a huge loan of 7.9 billion RMB (about $1.3 billion). Potentially significant story for those tracking IP and innovation in China. The story was just reported on March 3, 2014 at China Paper (the story is in Mandarin). This is quite a big deal and may be a record for China in terms of how much value IP brought in seeking a corporate loan. To emphasize the significance of this development, the normally dry China Paper publication begins with a somewhat flowery statement based on an interview with the Chairman, who expresses surprise and delight at how much money they were able to obtain with their IP. Here’s my loose translation, followed by the actual Chinese:
“I never thought that intellectual property could have such a big effect in obtaining this loan. IP was a big part of it,” according to Quanlin Paper Company’s Chairman of the Board, President Li Hongfa, speaking today to a reporter about the 7.9 billion yuan from bank lenders that began this week. He said that this money will help them rapidly expand and seize market opportunities. For an enterprise where funds have been tight, this new addition is gladly welcomed just as the mist-covered earth rejoices in the spring rains from the night before.
OK, a bit flowery, but again, this is big news for China and things get flowery when the big news is good. This development shows that IP in China can be valuable (though the portfolio includes some international patents, though it is mostly Chinese IP). It also shows that Chinese companies, even in seemingly dull industries like the paper industry, can be innovative and create valuable IP. I haven’t reviewed their IP to assess its value, but I understand they have over 100 Chinese patents in areas such as technology for using straw and other renewable or recycled materials for making paper, with alleged benefits of enhanced environmental friendliness and cost effectiveness. Shandong Province’s IP Office has also created some publicity about Quanlin’s IP estate (see the Chinese article here), though this was before the news of the massive loan secured with the help of IP. Expect more publicity from them shortly.
Further background comes from Baidu’s wiki-like entry on Quanlin Paper.
When nations develop strong IP systems, companies can use their IP to protect their innovations. This also motivates them to take the risk and spend the money need to drive further innovation, and gives investors courage to fund growth and innovation. In this case, it helped give a lending partner (a Chinese financial organization) the courage to loan a giant sum of money to help Tralin grow. Tralin has been pursuing IP not just for tax breaks it seems but also for strategic purposes, and information coming out about this story shows that they have been developing expertise in their staff to develop their IP estate. Sure looks like that has paid off for them.
This is one of many signs that China is becoming serious about IP and innovation, and not just low quality IP, but IP that can provide significant value. For IP to apparently be a crucial part of such a large loan in this challenging economic times is a remarkably positive sign for China, in my opinion.
A hat tip to Ian Feng (Yan Feng) of Goldeast Paper in Zhenjiang, China for bringing this news to my attention.
Update: On my mostly China-related blog, Shake Well Before Serving, I offer my full translation of the China Paper article, if you are interested. The translation is in the post, “A Sign of China’s Growth in Intellectual Property: Chinese Company Relies on IP to Gain Giant Loan,” where I have cross-posted the breaking news on Tralin Paper (a.k.a. Quanlin Paper).
A culture that can protect trade secrets is vital for innovative companies. Such a culture becomes especially important in collaborative innovation efforts where failure to protect trade secrets can severely damage partners and the offending company’s reputation.
Chinese companies are increasingly recognizing the value of what the West calls “open innovation.” In fact, forms of open innovation were the basis of a great deal of innovation in China long before the term was coined in the West. Innovation in China tends to be fueled by guanxi with trust between partners being far more important than the legal details drafter by lawyers for a joint venture or other collaborative effort. Innovation in China, though still largely overlooked by the West, frequently occurs as trusted friends or acquaintances discuss their needs and challenges and find new solutions by crossing disciplinary borders. The many partnerships and allies involved with leading innovators like Ten Cent, Alibaba, Foxconn, and Huawei testify to the fluidity and rapidity of innovation in China achieved via collaboration and shared vision among partners.
However, when companies in China or anywhere collaborate to find innovation, the inevitable sharing of trade secrets between partners puts the players at risk should there be inappropriate disclosure. Two leaders may fully trust each other, but if one of them leads a company with a weak IP culture where individuals fail to respect trade secrets, the partnership can be destroyed and severe damage can be done. Those engaging in a collaborative venture should be aware of the risks and consider their own culture and processes, as well as the culture, processes, and track record of partners. Zealous efforts are needed to avoid harm, even when there is no intent to harm or defraud. Simple slips can disclose information inappropriately and hurt a partner and one’s own reputation. Those pursuing open innovation need to pay particular attention to trade secret protection and ensure that only a few well trained employees will be exposed to the trade secrets involved in the partnership.
Unfortunately, university culture in China and throughout the world, generally speaking, is inherently geared toward sharing and publishing information, so partnerships with universities should be carefully pursued with the realistic expectation that information may be leaked. Containing the scope of the partnership and minimizing any sharing of corporate secrets can reduce risks, while still allowing a company to tap the many riches of knowledge and innovation in China’s academic community, where many companies are finding success in advancing innovation.