Coming To America: IP Challenges Faced by Inbound Investment

Monday, December 1, 2008 - 00:00

Editor: Would each of you gentlemen tell our readers something about your professional experience?

Lu: I grew up in China. After completing my undergraduate degree and then a master's at Huazhong Agricultural University, I came to the U.S. to pursue further graduate studies. My Ph.D. is in molecular biology from Auburn University. Following research studies at Yale, I decided to go to law school. I attended Quinnipiac University School of Law at night, while working in research at Yale Medical School. During my final year of law school I served as a student intern for the Hon. Peter Dorsey of the Federal District Court for Connecticut.

With my scientific educational background, a focus on intellectual property law, and patents in particular, was natural. I joined Connolly Bove in 2002 and have served in the firm's Intellectual Property Group since my arrival.

Brady: I graduated from the University of Delaware with a degree in biology, so I share something of a scientific background with Dr. Lu. I went on to the Widener University School of Law, where I graduated from the joint JD-MBA program. Following law school, I clerked for the Hon. James Latchum, Chief Judge of the U.S. District Court, District of Delaware for two years. After my judicial clerkship, I joined the Delaware office of Skadden Arps, where I handled complex corporate and commercial litigation, mergers and acquisitions, transactional work and class actions. After almost 20 years at Skadden Arps. I joined Connolly Bove in 2005. I am currently a partner in the firm's Business Law Group.

Editor: Would each of you tell us about your practice, specifically, how it has evolved over the course of your career?

Lu: I came to Connolly Bove to do patent law. That began with patent prosecution and, in time, involved opinion, counseling and patent litigation. After several years, the firm organized an Asia-Pacific Practice Group, of which I am now the lead person. I spend most of my time in this practice area, which includes helping our U.S. and international clients' operations in China and elsewhere in the region and increasingly Chinese clients seeking to enter a variety of U.S. markets. In my case, this concerns IP protection. I am engaged in obtaining IP rights, and in enforcing those rights, for U.S. and international clients in China and in dealing with the same issues on behalf of Chinese clients in the U.S. Needless to say, I spend a great deal of my time in China.

Brady: My practice has evolved substantially over the course of my career. Although I have remained something of a generalist within a field that includes corporate and commercial litigation with a technology feature and, increasingly, a class action component, my practice has been significantly influenced in recent years by the changes in the way large enterprises, particularly technology companies, do business internationally. And the rate of change seems to be accelerating. Three things in particular come to mind when I think of how the practice of law has evolved: the increase in recourse to class actions, the increase in the pace of globalization and by extension, the increase in the speed and cost of litigation in a global environment.

Editor: Dr. Lu, you have spoken and written about the recent United States Supreme Court decision in KSR v. Teleflex. Would you give us an overview of the case?

Lu: KSR v. Teleflex is one of those patent law cases that has had an impact on U.S. patent law far beyond the scope of the case itself. In light of inbound investment - Chinese and other foreign enterprises bringing their IP into the U.S. and seeking to conduct their activities here - its implications are of considerable importance for general counsel of foreign companies when reviewing strategies to break into markets in the U.S.

The facts of the case are pretty straightforward. Teleflex sued KSR claiming that one of KSR's products infringed Teleflex's patent on vehicle gas pedals. KSR responded by saying that combining two elements in Teleflex's product - the adjustable gas pedal with an electronic sensor - was an obvious step and not patentable. KSR prevailed at the district court level but was overturned by the Federal Circuit Court of Appeals.

The United States Supreme Court upheld KSR's argument, stating that the Federal Circuit had erred in rigidly applying the "teaching-suggestion-motivation" (TSM) test to determine obviousness. The TSM test is a method of evaluating the legitimacy of combining multiple prior references during the obviousness inquiry and serves to avoid the problem of hindsight reconstruction. The Court did adhere to the requirement that obviousness entailed a finding of teaching, suggestion or motivation, but that the teaching, suggestion or motivation to combine might be drawn from sources other than the cited references, including design trends or knowledge in related fields. The Court observed, in addition, that common sense is useful in determining obviousness, but that hindsight cannot be used to reconstruct the invention from the prior art using the patent as the roadmap.

Editor: What are the implications of KSR for the practitioner?

Lu: The case provided the Supreme Court with an opportunity to rule on the central issues of obviousness and to reverse the patent-friendly direction the Federal Circuit has taken in recent years. The Court's ruling is balanced and has raised the obviousness standard, which means there are now greater barriers to upholding the validity of existing patents and to granting new ones. For practitioners dependent on the Federal Circuit's patent-friendly rulings, we are in somewhat uncharted waters and a more challenging environment in obtaining and enforcing U.S. patent rights. The other side of the coin, of course, is that this environment provides practitioners with a variety of opportunities. Many agree that too many patents of poor quality were being granted and then enforced in the courts prior to KSR . As a consequence of the changes mandated by KSR, however, it is likely over time that U.S. patents will become stronger and more valuable.

Editor: And the implications for the Chinese owner of IP rights considering entry into U.S. markets?

Lu: As I've indicated, change very often fosters opportunities. Foreign enterprises, including those based in China, that are considering the initiation of sales of new products and services in U.S. markets might find the current environment more hospitable in which to negotiate patent licenses or test the waters of potential infringement. Existing patents that might be barriers to entry can be challenged in court and through reexamination at the U.S. Patent and Trademark Office, based on KSR. It is to be noted that decisions of U.S. courts such as KSR are applied retroactively to all patents regardless of when they were granted. By contrast, new legislation or new rules of the U.S. Patent and Trademark Office are generally applied prospectively.

New products in biotechnology, electronics, pharmaceuticals, and so on, are likely to be covered by patents and pending applications in the U.S. As a practical matter, it is essential to conduct right-to-use searches and infringement evaluations in advance of bringing these products into the country. The searches and opinions can be done with greater cost efficiency by coordination of experienced Chinese and U.S. patent counsel.

Editor: Mr. Brady, you recently spoke in China on judicial protection of IP rights. Would you give us an overview of this program?

Brady: The principal conference I attended was the 2008 International Conference on Judicial Protection of Intellectual Property Rights hosted by the Supreme Peoples Court of China. One of the co-sponsors was the U.S. Chamber of Commerce, and, in addition to judges from China, there were representatives of the judiciary from all over the world, including France, England, Germany, Japan, India and the U.S. I was a panelist along with a federal district court judge from the Southern District of Indiana, Judge Larry McKinney, and a judge from the Third Circuit Court of Appeals, Judge Kent Jordan.

The audience consisted of numerous Chinese judges as well as law professors and practitioners from China. The conference focused on the changing practice in the U.S. concerning the protection of IP rights and the enforcement of judicial decisions concerning such rights. Needless to say, Chinese companies are now becoming major players in the globalization of business and because they are bringing their IP into the international business arena, they are concerned about how to protect it. When I say that the pace of globalization is picking up, one of the things that immediately comes to mind is the concern of Chinese companies for the protection of their intellectual property in the international arena, something that simply did not exist even a few years ago.

Judge Jordan and I addressed litigation issues, in particular evidentiary problems, in today's electronic-based business world as opposed to yesterday's paper-based world. We attempted to give the audience an overview of what has occurred over the past ten years in the U.S. from a judicial perspective and from that of the practitioner. Electronic information, managing corporate records in electronic format, and the ways in which a company utilizes its resources - both internal, such as the legal department, and external, such as outside counsel - to maximize the efficiency of operations while enhancing the avoidance of risk were among the major issues we attempted to cover. We also discussed the changes in the Federal Rules of Civil Procedure, and parallel changes in the procedural rules in many of the leading corporate law states, and the ways in which these changes were affecting not only the ways in which we litigate but also the ways in which companies do business. The question of who controls technology - and the underlying theme of data security, confidentiality and privacy - was central to the discussion. In addition, we reviewed at some length the very significant problem of how, in the context of IP litigation, a company can release proprietary information to a competitor without, at the same time, releasing trade secrets.

The process by which, and by whom, information is managed is significantly more complex than it was even five years ago. One has only to think about sitting in an office in Delaware and accessing information on a server in China and attempting to exercise some degree of control over who has the right to connect with that information to see how far we have traveled in just a few years. This particular audience was very mindful of that fact.

Editor: And the cost of litigation in the U.S? I should have thought that would be a major concern for Chinese enterprises investing here.

Brady: Absolutely. In the context of litigation, expense is in direct proportion to discovery, and the process of discovery can be as daunting for a large and sophisticated enterprise as for a modest one. It is costly because it consumes an extraordinary amount of time, there are a great many moving parts and a variety of issues in play all at the same time, and it demands expertise and professional skill of the very highest order. Many Chinese companies - many foreign enterprises, for that matter - do not anticipate how consuming the discovery process in an American lawsuit can be, nor how expensive.

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