Figure 1: Xiamen; Photo by Sora Mimi

Recent Developments in Patent Insurance in China

The value of patent insurance

Patent insurance is crucial in facilitating patent-related transactions as, unlike real property, a patent does not have clear boundaries. Its scope and validity are subject to interpretation and can be challenged throughout its lifetime. Very often the rights may be completely revoked through invalidation actions. As such, parties to patent transactions have cause to worry about the legal defects of patent rights.

While patent insurance cannot completely alleviate these worries, it does provide some comfort. This is because parties involved in the transaction know that a professional has examined the patent before underwriting the insurance policy. Also, losses, if any, may be covered to some extent by insurance. An OECD study has indicated that patent insurance may increase a patent’s value by 10% in certain transactions.

In China the value of patent insurance is particularly significant. As China’s patent regime is still in the process of development, patent professionals working in patent prosecution vary in quality. A granted patent’s scope and validity tends not be as stable as its counterparts in the US or the EU. The outcome of a validity challenge may be subject to unpredictable factors. Parties to transactions may not have confidence in patents granted under this system.

In this context, it’s easy to see how insurance policies help in facilitating transactions involving patents.

Is it possible to apply foreign patent insurance in China?

Patent insurance is a mature insurance product in developed markets. Well-established carriers, such as AIG, IPISC or Willis, provide various patent insurance policies, including abatement insurance, defense insurance, multi-peril intellectual property, unauthorized disclosure insurance, litigation management, and early intervention.

One may consider leveraging such polices from foreign carriers for patent-related transactions in China. No such cases have been reported, but this is theoretically feasible to some extent.

Patent rights are jurisdiction-specific rights. That means, for instance that a Chinese company may apply for a patent with China’s State Intellectual Property Office to protect its invention, but if it wants a US patent for the same invention, it has to apply for the patent with the US Patent and Trademark Office. Despite being held and enforced by a Chinese company, this patent will be a US patent, granted by the US patent office in accordance with US patent law. Therefore, a US patent insurance carrier should feel comfortable underwriting this US patent in a transaction, even though its value may be derived by a Chinese company or a transaction in China.

Coverage is still limited however. A broad range of business activities taking place in the Chinese market or involving Chinese patent holders may still lie outside of the coverage of the insurance policies offered by these reputable carriers.

Insurance policies available in China

Certain types of patent insurance are now available in China. In 2014, China began to promote patent insurance on a trial basis. The first stage of the trial covered 20 cities. The scope has now been extended to more than 50 cities. Provincial-level governments have been given autonomy to decide the structure of such trial policies. The current stage is focused on one category of IP only, i.e., patents. One may expect expansion in the number of trial cities, and kinds of IP insurance products available to the market down the road. Having such autonomy, provincial governments are promoting patent insurance with local specialities based on their respective interests. For example, Jiangsu province has focused on defense cost insurance. This is because high-tech companies in the province are reportedly suffering from nuisance lawsuits by patent trolls. The companies need to deal with these trolls with management and financial resources outside its normal business models. Therefore the goal of the trial programs in Jiangsu is to ease the burden of companies in the face of this sustained harassment.

Other provinces such as Fujian and cities such as Wuhan have focused more on patent enforcement insurance. They do so for two reasons: Firstly, the current state policy encourages IP enforcement. If provinces don’t have any particular priority in terms of intellectual property, they tend to follow national policy. Secondly, the total number of successful enforcement actions is an index of governmental performance (i.e., KPI). As such, the local government is willing to support plaintiffs who seek to enforce their patents.

Case Study - An illustrative case of patent insurance

The case study below illustrates what a patent insurance policy in China may look like. This case is an insurance policy underwritten by a carrier in Xiamen, Fujian. The carrier is a state-owned enterprise, entities which are the usual pioneers for initiatives by the government (which are often risky and not meant to be profitable). Xiamen is a sub-provincial city directly governed by the central government; this meant it qualified for the first stage of the trial.

The selected companies

In this case, the Xiamen government selected about 50 companies out of thousands to be trial partners. The Xiamen government subsidizes the insurance premiums for the selected companies.

Scope of coverage

The insurance policy in this case is patent enforcement insurance. It covers the expenses incurred by the company when seeking to enforce its patent against infringers.

Enforcement of patents is up to the patent holder’s discretion. There is no payout if the patent holder chooses not to take any action. As such, although it has the name “insurance,” its purpose appears to encourage proactive enforcement, but not to compensate losses from infringement. The insurance coverage is limited to expenses incurred in investigation, infringement analysis, or litigation against infringers.

The details of this kind of policy may cover:

• Investigation expenses: Expenses incurred before the institution of a case, including investigation, notarization of documents, communication costs, accommodation and meals.
• Litigation expenses: Legal bills, arbitration fees or court fees incurred during the first-instance of litigation, arbitration or administrative enforcement.

The insurance amount and premiums are illustrated below:

• Insurance Amount
  • Investigation expenses: Not to exceed 30 times the insurance premium per case.
  • Litigation expenses: Not to exceed 30 times the insurance premium per case.
  • Accumulated expenses: Not to exceed 30 times the insurance premium per company.
• Insurance premium: 4,000 RMB (per company) + 400 RMB x number of insurance policies underwritten (one policy per patent).

For instance, if a company purchases policies to cover 10 patents:

• Premium = 4,000 + 400 x 10 = 8,000 RMB
• Coverage = 8,000 x 30 = 240,000 RMB

New trend

To date, the insurance premiums have accumulated to more than RMB¥15 million (US$2.2 million) nationally, with the total coverage amounting to at least RMB¥358 million (US$51.7 million). More than 270 enterprises and 8,600 patents are covered. There have already been several instances in which insurance claims have been successfully lodged and payouts made. As the trial program continues, various structures of insurance policy are being designed and introduced to the market. The product lines are becoming more comprehensive and covering a broader scope of risks.

For example, a policy that covers direct losses from others’ infringement activities (in contrast to the above case study, in which the policy only covers expenses of litigation against a potential infringer) has been introduced to the market. However, as the scheme is still in the trial stage, a ceiling for coverage has been established at RMB¥400,000 (US$57,744).

Other types of insurance policies are also being developed in response to changing market needs. As many Chinese companies exploring international markets face the threat of patent infringement claims from foreign competitors, “overseas infringement liability insurance” (which insures Chinese companies against losses from patent infringement claims enforced in other countries) is being developed.

In addition, new insurance policies are also being developed to support other trial programs and innovation with respect to IP monetization. For instance, a new policy that covers risks in connection with licensing royalties is also set to come to the market. More notably, a new kind of policy that covers risks in association with IP-back loans (i.e., IP pledge, see “Foreign-invested Firms and IP for Loan Collateral in China”) is also under discussion. This is paving the way for growth in IP monetization deals in China.

About the Author

Dr. Jili Chung is a cross-cultural, interdisciplinary legal professional. He has worked in Washington D.C., Hong Kong, Beijing, Shanghai, and Taipei for global law firms and multinationals, including as a senior lawyer at Clifford Chance and as executive director of Goldman Sachs.

He obtained his J.D. from UCLA, a Ph.D. in Law from Peking University, and an MBA and BS from National Taiwan University, and is qualified as an attorney-at-law in California and China, and a patent agent in China.

Dr. Chung is enthusiastic about exploring the values of ancient Chinese culture through IP mining and technological innovation. He is the author of IP Financing for Creative and High-Tech Industries (in Chinese by Peking University Press) and Monetizing IP in China (in English by Amazon). Dr. Chung has just launched a crowdfunding campaign for Monetizing IP in China on Indiegogo where you can buy it at a reduced price.

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