China’s State-Funded Company Looks to Profit Off US Patents

Company founded to blackmail US innovators could damage US economy

White House press secretary Jay Carney holds up a folder with an image of a troll and the words "innovation, not litigation" during the daily press briefing at the White House in Washington, D.C., on June 4, 2013. AP Photo/Evan Vucci

The Chinese regime is getting into the patent trolling business, having set up a company that will start suing American companies for patent fraud. Experts believe the new Chinese company, which the regime seeded with $50 billion in fluff patents, could be detrimental to American innovation.

Patent trolls, officially called patent assertion entities, are companies that produce no goods. They make their profits by buying vague and outdated patents, then suing other companies for violating their patents. According to a press release from the nonprofit Citizen Outreach, patent trolls cost the U.S. economy $29 billion a year and destroy jobs.

China’s shiny new patent troll is a company called Ruichuan IPR Funds. The company is based in China’s main technology hub in Zhongguancun, Beijing.

“It’s bad enough we have thousands of containers arriving in Long Beach, Charleston, or wherever filled with counterfeit goods the Chinese government encourages the production of,” said William Watkins, a research fellow at the Independent Institute, in a phone interview.

Watkins added, “But on top of that, now they’re getting into the patent trolling business, seeding it with money, and going after American businesses to push them out of the global market.”

According to China’s state-run Xinhua news agency, Ruichuan IPR Funds is already working with several of China’s largest technology companies including Xiaomi, TCL, and Kingsoft.

‘Defensive’ Moves

Ruichuan IPR Funds is a beast with two horns. One side works on creating new patents, and the other works on representing China’s other patent-holding companies. The company will start with what they call “defensive” moves.

“What they call a defensive move is protecting their patented technology and claiming that some of our companies are violating their patents,” Watkins said. “It’s a fancy way of saying they’re going to start trolling.”

“They are going to be acquiring various patents with the money that the government has seeded them, as well as assisting other Chinese companies in ‘defending’ their patents,” he said. “But their main focus is patent acquisition.”

The goal of patent trolls is typically not to put innovators out of business, but instead to get a cut of their profits. If they win a trial or strike a deal, the patent troll gets a licensing fee from the company they’re going after.

“Think of it as extortion money,” Watkins said. He noted that most of the trials will likely be held in China, where the Chinese firms can use their patents to demand that Western firms pay additional fees to sell their products in China.

China’s state-funded patent troll could play a key role in the Chinese regime’s overall effort to sap American innovation through cyberattacks and spies.

Already, Watkins said, it’s not uncommon to see Chinese spies in U.S. companies steal intellectual property, send the files back to China, then have someone file the patents on Chinese soil and sue the U.S. company for patent violation.

Watkins compared the move to a country invading a neighboring country and stealing its natural resources in order to fuel its own economy. He said, “China is essentially trying to take America’s petroleum, our innovation in this case, and transfer that to China.”

The Independent Institute noted the irony of China operating a patent troll. It cites the U.S.-China Business Council stating that counterfeit products constitute 15 to 20 percent of China’s total GDP.

To be fair, however, China is not the first country to have a state-sponsored patent troll. Others include France, Japan, and South Korea.

According to Timothy Lee, a senior vice president at the Center for Individual Freedom, the differences with China’s state-funded patent trolling firm are that China is more hostile and less cooperative with the United States.

“China is also more state-controlled,” Lee said, noting both its opaque legal system, and the grey line between public and private sectors in the Chinese economy.

Companies like Ruichuan IPR Funds, Lee said, are the type that “abuse the legal system, and sue, and they’re backed by a foreign government in doing so.” The result, he notes, is that American innovators are getting “knee-capped by non-practicing entities.”

Reform

Lee said, however, that while China’s move into the patent trolling business does present a large threat to U.S. firms and the culture of innovation in the United States, “When your reliance becomes theft, you don’t develop that grassroots-level creative culture.”

“Frankly, it doesn’t benefit the country that relies on it in the long run,” he said, referring to the Chinese regime’s aggressive theft of U.S. intellectual property.

While Ruichuan IPR Funds may help Chinese firms sue innovators in the short term, the company could be one of the springboards for patent reform in the United States.

Reforms to U.S. patent laws were nearly passed last year. The Obama administration announced legislation on June 5, 2013, that specifically targeted patent trolls, yet in the end nothing came through.

The U.S. patent system, the White House blog wrote at the time, “was designed to reward Americans for their hard work, risk-taking and genius. But in recent years, there has been an explosion of abusive litigation designed not to reward innovation and enforce intellectual property, but to threaten companies in order to extract settlements based on questionable claims.”

Lee believes the debate on patent reform will be rekindled once the election season is over, and reform has not only become a possibility but also a necessity.

“It’s the sort of issue that’s going to persist,” he said. “It’s not going to go away.”