Foreign Governments Increasingly Turning To Patent Assertion As Trade Influence Weakens

Timothy Lee Senior Vice President, Center for Individual Freedom
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Many observers justifiably applauded when China recently criticized its colossal e-commerce company Alibaba for failing to crack down on counterfeit goods.

The Chinese government’s criticism was unprecedented, and may finally help American companies, including the likes of Apple, Dell and Microsoft, who have lamented Alibaba’s inefficient and inconsistent process for removing suspect goods. Any movement targeting China’s infamous counterfeit trade will benefit American businesses, since China accounts for the vast majority of the nearly $2 billion bogus products seized each year by U.S. Customs and Border Protection. But recent reports  showing Chinese exports were down 15% this March compared to a year ago. This news is likely sending shock waves through senior Chinese officials, and past actions suggest that China will employ new strategies to seek economic advantages over perceived trade rivals like the U.S., in the wake of this lost ground.

Even as China takes baby steps to address illicit knock-offs, that nation remains engaged in potentially more nefarious behavior inflicting much greater impact on American companies, namely, its state sponsorship of “patent assertion entities” (PAEs).

Many are by now familiar with PAEs, which are frequently (and sometimes unfairly) referred to as “patent trolls.” Such enterprises hold and enforce patent rights, even though they do not themselves manufacture, market or sell goods created from those patents. Although many PAEs legitimately possess and legally enforce their patents, which are simply a form of property rights, all too often other PAEs use lawsuits and demand letters as a cudgel to extract licensing fees and settlements from companies they dubiously accuse of infringing against patents they hold.

But even those everyday domestic patent trolls amount to a comparatively minor concern relative to the economic threat posed by government-sponsored patent trolls (GSPTs).

That’s because GSPTs don’t just operate as patent trolls, they do so with the entire weight of a foreign government and its resources behind them. Some estimate that patent trolls cost the U.S. economy $29 billion a year, killing jobs and diminishing American competitiveness globally.

So if you consider private PAEs cause for concern, just imagine what harm a PAE armed with an entire nation’s resources can inflict.

As one prominent example of a GSPT, Ruichuan IPR Funds is backed by the Chinese government with an outlay of $50 billion and a mission of acquiring patents to be used in litigation against foreign competitors like many U.S. companies.

But China isn’t the only culprit. France, Japan, South Korea and Taiwan have also formed state-sponsored PAEs. It is therefore unsurprising that other governments would consider creating similar entities, since nations that haven’t established GSPTs may find themselves at a competitive disadvantage against countries that bolster their native business through the financial and regulatory subsidization GSPTs provide.

In addition to intellectual property concerns, GSPTs amount to destructive manipulation of global trade. Specifically, government involvement in patent trolling is akin to the isolationist industrial policies and 19th century mercantilist foreign governments. But whereas traditional tariffs are primarily defensive in nature – a tool to keep domestic companies competitive against merchandise from abroad – GSPTs are almost entirely offensive. Thus amounting to the worst kind of protectionism, GSPTs are the opposite of diplomacy. They effectively wage economic warfare via vexatious litigation. A new paper by the Heartland Institute details the growing threat of patent abuse by GSPTs and how they can be addressed via free-trade agreements.

In addition to the economic and policy concerns addressed above, GSPTs run counter to several World Trade Organization requirements: the Trade-Related Aspects of Intellectual Property Rights (“TRIPS Agreement”), the General Agreement on Tariffs and Trade (“GATT”) and the Agreement on Subsidies and Countervailing Measures (“SCM Agreement”). GSPTs also create untenable conflicts of interest for the governance of the countries operating them. After all, how can foreign administrations that control GSPTs effectively regulate intellectual property rights when they face that conflict of interest?

Fortunately, there’s something the American government can do about it.

As Congress considers important patent litigation reform, and as the White House negotiates trade agreements, they should pay particular attention to foreign GSPTs. As the world’s greatest economic power, most lucrative consumer market and leading technological innovator, the U.S. maintains unparalleled ability to persuade other nations to address their IP violations and GSPT abuses.

Accordingly, Congress and the White House should identify ways to prevent foreign GSPTs from undermining global free trade and improperly targeting American interests via frivolous litigation and subsidies supported by offending host governments.

Failure to act amounts to a unilateral disarmament as other nations target our businesses and markets with aggressive GSPTs.

Timothy H. Lee is Senior Vice President of Legal and Public Affairs at the Center for Individual Freedom, an Alexandria, Virginia-based nonprofit organization founded in 1998 to advocate the principles of free markets, limited government and international liberty.