The motivation to license a patent in China is very different than in the U.S.
by: Jake Mace, Vice President of Licensing | April 28, 2018
The primary driving force of licensing a patent in the U.S. is the threat of a monetary damages award. Patent damages calculations are based on either lost profits or a reasonable royalty, both with a six-year window of retroactivity available. It often makes more sense to pay a discounted amount for a license than to defend a patent infringement case.
In the U.S., for example, the 2016 median patent infringement damages award was $6.1 million. Paying a fraction of this amount to license a patent is sometimes a more attractive choice rather than facing the risk of a seven-figure damages award (not to mention the enormous cost to defend the litigation), especially when the patent looks like it’s strong enough to survive an onslaught of invalidity and non-infringement attacks.
The appeal of a license is much less apparent when an infringer is located in a foreign country and has no direct connection to the U.S. If an infringing component is manufactured in, for example, China and incorporated into various products by other companies before being imported into the U.S., the only option is to sue the importers as the component manufacturer is out of reach… unless you have a Chinese patent.
The motivation to license a patent in China is very different than in the U.S. The threat of a damages award is a hollow threat. For example, in China, the typical patent infringement damages award is only in the five-figure range. In fact, the 2014 median award was only about ¥76,000 (approximately $12,400). The reason for this low amount is the burden placed on the patent owner to demonstrate: 1) actual losses ( none – if you only own the patent), 2) profits of the infringer resulting from the infringement (impossible – since there is no discovery in China and only the defendant’s documents could support such a calculation), 3) a reasonable royalty (difficult – since it is based on a preexisting royalty agreements), OR 4) a discretionary statutory award capped at ¥1,000,000 (approx. USD $158,000). More often than not, the patent owner must resort to the statutory award option, which is why the median damages award is so low.
Why then does a multimillion (or multibillion) dollar Chinese company still take a license when the threat of damages is so insignificant? Because a permanent injunction is usually granted when a patent owner successfully demonstrates infringement to the court.
The permanent injunction is the only real threat to infringers in China.