Patent Fees on DVD Products

China is a major producer and consumer of DVD products and Chinese manufacturers currently face the issue of payment of patent fees to the foreign contractors that hold the core technologies of such DVD products. In question is whether this is truly an obligation of the Chinese manufacturers.

•  DVD Patents – General

Pursuant to the “ Patent Law of the PRC ”(“ Patent Law ”), the patented rights of inventions-creations (including inventions, utility models and exterior designs), which are granted by the State Intellectual Property Office of the PRC (“SIPO”), are legally protected in the PRC. Unless otherwise provided by law, no entity or individual may, without the authorization of the patentee, exploit the patent. Any entity or individual exploiting the patent of another shall conclude with the patentee a written License Contract for use and pay the owner a patent fee. The Patent Law allows any foreign entity or individual to file an application for a patent in the PRC, which will then be protected under the Patent Law after it is awarded by SIPO. It should be noted that patents granted by foreign authorities do not hold the status of “granted patent in the PRC” until such status has been examined and awarded by SIPO.

Preliminary research indicates that there are currently about 549 (unconfirmed) DVD-related patents registered in the PRC. Some of the patentees are foreign entities or individuals. Assuming that DVD products manufactured by Chinese producers are related to the patents already granted by the PRC patent administration authorities, these producers need to consider obtaining authorization from the patentee and making payment to the patentee for licensed use.

However, since foreign patents are not protected in the PRC, if the DVD products manufactured by Chinese companies are related to foreign patents that have not yet been recognized by SIPO, then the PRC manufacturers would not be legally obligated to obtain patent license from the patentee and pay patent usage fee for the use of such patent within the PRC. Such an obligation does not appear to be supported under PRC law. Still, if Chinese companies are exporting DVD products to countries where such patents are protected, then the manufacturers or the importers of the DVD products would need to obtain permission from the patentee of the importing country and make payment to that patentee.

2. Major Patentees of DVD Products and Charges on Chinese Enterprises.

DVD products (including players, discs and software) are often researched and developed by foreign companies that hold the core technologies. They also hold multiple patents on these products in other areas worldwide. Chinese companies exporting DVD products should consider whether their products are related to particular DVD patent rights in the countries they export to. There may actually be no obligation to pay.

Most DVD-related patents are owned by large, multi-national companies or associations. Some of these are well-known, such as 3C, 6C, Thomson Group, DVA, MPEG-LA, DVD CCA and Macrovision. They publish Patent License Agreements or Joint Patent License Agreements for the patent users to sign and pay patent fees. 3C, 6C and Thomson Group have concluded, through negotiations, some Patent License Agreements with the PRC Electro-Acoustics Industrial Association (“CAIA”), which consists of many Chinese DVD manufacturers. The members of CAIA then pay patent fees to 6C, 3C and Thomson Group for manufacturing DVD players and discs. The company will have to comply with the Agreement if it's a member of CAIA. The following is brief introduction to the various multinational companies or associations that are involved:

•  3C

In 1998, Philips, Sony and Pioneer jointly established a global DVD licensing group, using the shortened name “3C”. LG joined 3C on July 31, 2003. All global manufacturers in the DVD industry may use 3C's patented technology once they have paid the requested patent fees and obtained licenses from 3C. Manufacturers may also choose to negotiate with 3C's members individually for each patent license. For instance, according to 3C's published program of patent licensing for DVD Disc Manufacturers, each patent user is asked to pay USD10,000 to 3C as an entrance fee. Half of that fee gets applied toward offsetting future patent fees, which are based on a schedule of USD0.05 per disc, with an additional USD0.003 charged if AC-3 technology is used. A 2002 media announcement stated that 3C reached an agreement with CAIA to also include exported DVD products.

•  6C

On June 11, 1999, Hitachi, Panasonic, Mitsubishi, Toshiba, AOL Time Warner and JVC jointly formed a union, with the shortened name “6C”. They also published a global joint patent license program concerning patents on DVD technologies. Patterned somewhat after 3C, 6C announced that every manufacturer in the DVD industry whose products use 6C's technology will be charged patent fees, and that a patent license shall be required. With 6C also, manufacturers are allowed to negotiate with 6C's members individually for each patent license. On June 20, 2002, IBM jointed 6C and there are now a total of 7 members in 6C. 6C's patent fee schedule holds that each DVD-Video player will be charged 4% of sales price (with a minimum of US$4.00) and each DVD audio/video disc will be assessed USD 0.05 as a patent fee. 6C also reached an agreement with CAIA in 2002, extending patent fee schedules to exported DVD products, as well.

•  Thomson Group

Thomson Group is also said to have reached a preliminary agreement with CAIA in April 2004 providing for CAIA members to pay patent fees to the Thomsen Group. Details of the agreement and fee schedules were unavailable.

•  DVA, MPEG_LA, DVD CCA and Marcrovision

The Discovision Association (DVA) holds many DVD patents, and is now focusing on patent licensing. The DVD Copy Control Association (DVD CCA) primarily grants patent licenses for content scramble systems (“CSS”). Macrovision also engages in granting licenses for patented technologies related to copy protection. MPEG-LA is mainly dedicated to patent licensing of MPEG-4 technology and said to presently be in negotiations with the CAIA on the issue of patent fees. Particular fee schedule details were unavailable.

Where patent rights (foreign-owned or domestic) have been properly granted protection by SIPO, Chinese users should be obligated to pay a patent fee. Similarly, PRC manufacturers making product for export would be obligated to obtain permission and pay patent fees to the patent holder in the importing country. However, the owners of inventions or creations that are not granted protection by SIPO (even if they are protected elsewhere outside of the PRC) lack the basis to claim patent fees from users within the PRC. It should be noted that those PRC enterprises or individuals (such as CAIA members) who have already signed a Patent License Agreement or Joint Patent License Agreement with foreign companies or associations should comply with the concerned agreement and pay patent fees thereof. They are obligated on the basis of having signed an agreement; not on the basis of the patent holder's protection in another country.

3. Countermeasures for Chinese DVD Producers

In my opinion, Chinese DVD producers should adopt appropriate business strategies to avoid the requirement to pay high patent fees requested by foreign companies or associations. If the patent holder does not have SIPO approval in the PRC, then that is all their fee assessment is – a request. PRC law does not otherwise support them. Such strategies to avoid these payments can be as simple as verifying whether the party requesting the payment has SIPO-approved patent rights. Another simple strategy might include carefully considering membership in an organization such as CAIA that binds the producer into payment schedules that the law does not support. Other steps could include:

(1) Establishment of Chinese Standards of DVD Products

At present, the biggest problem encountered by Chinese producers is that they have to comply with the standards established by foreign companies and utilize their inventions. In order to solve this problem, Chinese producers are strongly advised to establish their own association and create their own standards. It can be assumed that there would be high costs and resistance from the large multinational manufacturers (such as those described above), but in the long term, Chinese DVD producers can only able to embrace the sustainable development with their own technologies and patents. It should be noted that the Chinese government would play an indispensable role in the process, such as through the provision of necessary funds to Chinese research institutions and through the promulgation of preferable policies to support Chinese producers.

(2) Export to the Countries without the Patented Technologies

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