IP Ambush of Listed Companies

By Yuan Zhenfu, Vice Director of Shanghai Intellectual Property Academy,[Comprehensive Reports]

Getting listed is the dream of many enterprises and their investors. Baidu’s listing in the U.S. created 8 billionaires and 50 multimillionaires. Alibaba B2B’s listing in Hong Kong created a batch of nearly 1,000 millionaires. However, some companies have recently received a bumpy road in their listing and were disturbed by intellectual property troubles.
Most of the trouble originated from information disclosure demanded from listed companies. The soul of the securities market lies in the information disclosure system, upon which, however, like a double-edged sword, companies can boost confidence and generate benefits, but also invite trouble.
Disputes arose as early as a decade ago, when it was discovered through information disclosure that parent companies offset their debts to listed companies through huge trademark royalties. From 1998 to 2004, listed company Wuliangye submitted 662 million Yuan for trademark use to its parent company Wuliangye Group; 999 Group transferred the “999” and “三九胃泰” trademarks to the listed CR Sanjiu for 620 million Yuan to offset debt; listed Xoceco received the “Prima” series trademarks for 327 million Yuan from its substantial shareholder Prima and had to pay the remaining 175 million Yuan in cash. Through intellectual property maneuvers, parent companies turned listed companies into cash cows and wars on IP rights have been staged between them.
Besides internal struggles between parent and daughter companies, there are outside troubles resulting from information disclosure .
Suzhou Goldengreen Technologies Ltd. is one such unlucky dog. Its 2010 prospectus revealed the possession of 5 issued patents, but all of them were found to be invalid for failure to pay annual fees, as revealed by the media. Suzhou Goldengreen was therefore required by the China Securities Regulatory Commission to check and fix the problem and failed to list on time. Another company, Star-net, was equally unlucky, and had to voluntarily request suspension of its own listing after observing the example and the pressure placed on Suzhou Goldengreen.
In fact, out of the lack of institutional restraints, considerations for corporate interest, or simply ignorance about intellectual property, many listed companies are problematic in their disclosure of intellectual property information, and many cases violate the principles of being truthful, accurate, complete and prompt.
Now, at least two kinds of people have their eyes set on the disclosure of IP information: competitors and right holders.      
In February 2010, shortly after Hanvon published its prospectus, Expert Exchange Inc. which was then in a lawsuit with Hanvon, issued a statement saying Hanvon’s disclosed information conveyed a misleading message that “its right-infringement dispute has ended.” But fortunately, Hanvon’s listing process was not affected.
But Henan Xindaxin Materials Co., Ltd. was not so lucky. It suddenly declared a suspension on the eve of the originally scheduled listing on May 20, 2010, at the growth enterprise board of Shenzhen Stock Exchange. The Wall Street Journal said in a comment that “this is the first company which announced suspension on the eve of listing in the history of growth enterprise board of China. This rare phenomenon might be related with competitor’s revelation of intellectual property infringement and false statements in the prospectus.” Earlier, Henan Xingshi sent four informant’s letters to China Securities Regulatory Commission, accusing Xindaxin Materials of infringing upon its invention patent and product name of “special edge material for semi-conductor wire cutting.”
What is worth attention is that many right holders were in no hurry to bring violators to court, but waited until the moment of their listing. In 2007, Kingsoft, on the first day of public trade in Hong Kong, received IP complaints from US-based Mintel Learning Technologies, Inc. The timing of complaint or litigation might lend right holders an advantage in negotiations considering the listing companies’ worries about their stock prospects.
Some already listed companies might also fall prey. The software copyright dispute between Microsoft and Shanghai DareGlobal Technologies Co., Ltd lasted for more than four years. The point was not DareGlobal losing the case, but disclosure of the case to media by Dare Technologies, one of the shareholders of DareGlobal. It was said to be the first case of information disclosure caused by a software copyright dispute. This dropped a hint to many software copyright companies and caused them to turn their eyes to the piracy issue of companies preparing for listing or already listed.
The comparatively transparent financial data of listed companies also provided evidence or convenience for right holders in their claims, especially claims for huge amounts. In 2004, Lin Hui, owner of Shandong Honghe Drinks Shop, a private enterprise of only 20,000 Yuan registered capital and no more than 5 square meters operation area, sued listed company Honghe Guangming for violating its “Honghe” trademark. Honghe Guangming then was ordered by the court to pay the plaintiff a compensation of 10 million Yuan in the first instance judgment. Lin based his claim precisely on Honghe Guangming’s publicly released annual report. Despite the fact that, until now, some listed companies (such as the Industrial and Commercial Bank of China) still refuse to mention a word on intellectual property in their annual reports, listed technology companies, especially CGEM ones, often pay great attention to information disclosure in this regard, as intellectual property is increasingly becoming an important demonstration of central competitiveness and a critical part of intangible assets.

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