China's Standard-Essential Patents Challenge
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Special Report China’s Standard-Essential Patents Challenge From Latecomer to (Almost) Equal Player? Dieter Ernst Special Report China’s Standard-Essential Patents Challenge From Latecomer to (Almost) Equal Player? Dieter Ernst Special Report China’s Standard-Essential Patents Challenge From Latecomer to (Almost) Equal Player? Dieter Ernst CIGI Masthead Executive President Rohinton P. 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Centre for International Governance Innovation and CIGI are registered trademarks. 67 Erb Street West Waterloo, ON, Canada N2L 6C2 www.cigionline.org Table of Contents vi About the Author vi About the Global Economy Program vii Acronyms and Abbreviations 1 Executive Summary 2 Introduction 4 SEP-related Market Failures and Impacts 8 The Changing Geography of SEP Markets 13 China’s SEP Challenge within Global Production and Innovation Networks 20 China’s Efforts to Improve Framework Conditions for SEP Licensing 31 Conclusion 35 Works Cited 42 About CIGI 42 À propos du CIGI About the Author About the Global CIGI Senior Fellow Dieter Ernst joined the Global Economy Program Economy Program in May 2016 as part of the program’s innovation and trade research theme. Addressing limitations in the ways nations tackle shared economic challenges, the Global At CIGI, Dieter’s research explores unresolved Economy Program at CIGI strives to inform and challenges for the global governance of trade, guide policy debates through world-leading intellectual property (IP) and innovation, research and sustained stakeholder engagement. addressing two issues in particular: finding out what adjustments are needed in the development With experts from academia, national agencies, and use of IP, especially patents and trade secrets, international institutions and the private sector, to cope with the requirements of increasingly the Global Economy Program supports research complex and diverse global corporate networks in the following areas: management of severe of production and innovation; and dealing sovereign debt crises; central banking and with the effects of the proliferation of strategic international financial regulation; China’s role patenting behaviour on the organization and in the global economy; governance and policies governance of these global networks. of the Bretton Woods institutions; the Group of Twenty; global, plurilateral and regional Based in Hawaii, Dieter is currently a senior trade agreements; and financing sustainable fellow at the East-West Center. He has served development. Each year, the Global Economy as a member of the US National Academies’ Program hosts, co-hosts and participates in Committee on Global Approaches to Advanced many events worldwide, working with trusted Computing, as a senior adviser to the Organisation international partners, which allows the program for Economic Co-operation and Development in to disseminate policy recommendations to an Paris and as a research director of the Berkeley international audience of policy makers. Roundtable on the International Economy at the University of California, Berkeley. Through its research, collaboration and publications, the Global Economy Program Previously, Dieter was a professor of international informs decision makers, fosters dialogue business at the Copenhagen Business School and and debate on policy-relevant ideas and served as a scientific adviser to governments, strengthens multilateral responses to the most private companies and international institutions, pressing international governance issues. including the World Bank, the UN Conference on Trade and Development and the UN Industrial Development Organization. He holds a Ph.D. in economics from the University of Bremen. vi Special Report • Dieter Ernst NPEs non-practising entities Acronyms and OECD Organisation for Economic Co- Abbreviations operation and Development OMA Open Mobile Allowance 3GPP 3rd Generation Partnership Project PCT Patent Cooperation Treaty ATIS Alliance for Telecommunications Industry Solutions R&D research and development BITs bilateral investment treaties SAIC State Administration for Industry and Commerce CCSA Canadian Cable Systems Alliance SD special and differential CDMA code division multiple access SDOs standards developing organizations DoJ Department of Justice SEPs standard-essential patents EPO European Patent Office SIPO State Intellectual Property Office ETSI European Telecommunications Standards Institute SMEs small and medium-sized enterprises FDI foreign direct investment SOEs state-owned enterprises FRAND fair, reasonable and non-discriminatory SPFs sovereign patent funds FTC Federal Trade Commission SSOs standard-setting organizations GINs global innovation networks TPP Trans-Pacific Partnership GPNs global production networks TRIMS Trade-Related Investment Measures IDC InterDigital Corporation USPTO United States Patent and Trademark Office IEEE Institute of Electrical and Electronics Engineers VITA VMEBus International Trade Association IoT Internet of Things WCDMA wide-band code division IP intellectual property multiple access IPR intellectual property rights WFA Wi-Fi Alliance IT information technology WIPO World Intellectual Property Organization ITU International Telecommunications Union WTO World Trade Organization LOT License on Transfer LTE Long Term Evolution MEPs market-essential patents MOFCOM Ministry of Commerce NDRC National Development and Reform Commission China’s Standard-Essential Patents Challenge vii China’s rapid growth of industrial manufacturing and exports has benefited from deep integration Executive Summary into global production networks (GPNs) and global innovation networks (GINs). A second Efficient licensing of standard-essential patents novel contribution of the study is to combine (SEPs) is crucial for achieving a rapid and broad- insights from research on SEP-related market based diffusion of innovation. Owners of large imperfections and from research on gains from SEP portfolios (and their supporters) argue trade through participation in global corporate that the governance of SEPs works reasonably networks. This unique approach is used to well and that patent holdup and other negative highlight the hierarchical nature of GPNs and GINs, effects are “purely theoretical” (Sidak 2008). distinguishing network flagships, higher-tier and In reality, however, the governance of SEPs lower-tier network suppliers. This report argues that remains highly inefficient. As an exclusionary participation in these global corporate networks property right, patents invite their use as a raises new challenges for access to SEPs for lower- strategic weapon to shape markets and to reap tier suppliers based in China, but it also may monopoly rents through patent monetization. create new opportunities for China-based network SEPs are a particularly effective approach to flagships and higher-tier network suppliers. such strategic patenting. Nobel laureate Jean This report assesses China’s efforts to reduce SEP- Tirole as well as Carl Shapiro, Mark Lemley, Josh related market imperfections in the IT industry. Lerner and many others have painstakingly Despite major improvements in China’s patent documented that the licensing of SEPs is prone system and in its market for SEP licensing, to market failures such as externalities (both China continues to lag substantially behind the positive and negative), information problems, United States, Europe and Japan in terms of market power and free riding, which can hinder SEP ownership, and it still struggles to improve the realization of the economic and societal the framework conditions for efficient licensing benefits of the affected standards. There is no of SEPs. Based on a brief review of SEP policy doubt that SEP-related market imperfections benchmarks, the analysis presents China’s new continue to constrain standard implementers approach to SEP-related competition policy. both large and small, who are increasingly opposed to this form of “technology taxation.” The report concludes with a brief discussion of three important unresolved policy issues: first, Most of the existing SEP