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Analysis: the Nippon Steel dispute and Japanese IP Strategy

David Makman considers what a decision by Nippon Steel to sue a Korean business for ¥100 billion ($1.2 billion) in a trade secrets case says about the way Japanese companies deal with IP

For the past few decades, Japanese companies have been expanding their business in Asia, while their own domestic economy has not been growing. The yen, though down recently, is relatively strong, and margins are getting tighter. In this context, Japanese companies have encountered a problem: when doing business in Asia, they would like to be able to maintain high margins as compensation for the expensive and risky R&D costs that they have incurred, but when they try to take advantage of the lower costs available from moving their manufacturing to other parts of Asia, they wind up transferring technology abroad and training their best competitors. In effect, they are creating strong long-term competitors in return for increased short-term profits.

For decades now, the Japanese have relied on technology transfer fees and joint venture deals to capitalise on their technological advantages. In addition, since patent protection is relatively weak in Asia and Japan, Japanese companies have relied heavily on trade secret protection domestically and internationally to protect their IP rights. There are two major long-term problems with relying on trade secret protection. First, once the secret is out, the competition knows it and there is no way to make it secret again. Second, one needs to rely on contract law for protection. Yet in Asia contract law is sometimes not so rigorous, and it is difficult to rely on contract law alone to protect intangible property rights. One can’t help thinking that Japanese companies need to do something differently if they want to capitalise on their strength and leadership position in technology.

In contrast, many Korean companies have chosen to rely on patent law and on patent litigation to protect their competitive edge. Indeed, Korean companies have been willing to litigate patent cases all over the world; from the US and Europe to Korea and even Japan. These companies have big patent portfolios and insist on collecting patent royalties when they can. The system seems to be working fairly well for the Koreans, and their technology companies seem to be strong and growing even stronger.

Unprecedented case

In this context, the recent disputethat broke out between Nippon Steel and its South Korean partner, Posco is very interesting. Nippon Steel has filed a trade secret misappropriation suit in Japan, asking for ¥100 billion ($1.2 billion) in damages. Nippon Steel filed this suit even though Japanese companies are, purportedly, culturally averse to litigation. Moreover, Nippon Steel filed suit even though Posco was a business partner. And, most importantly, the claimed damages are simply unprecedented. This writer is not aware of any precedent for winning and collecting even a $100 million IP infringement award in Japan. Therefore, Nippon Steel’s decision to seek over a billion dollars – in a country that where the courts award attorney fees to the winner of litigation and where they charge variable filing fees based on the amount of damages sought – is simply remarkable.

Many questions immediately arise, such as: why did they file this suit? What are they trying to get from it, and do they honestly think that they can obtain relief on this scale from the Japanese courts? Only time will tell. Thus far, there have not been many strong successes by Japanese IP holders that one can point to in support of the argument that Japanese are able to use litigation as a tool to monetise their IP. Indeed, Sony settled its worldwide patent war against Korea’s LGE. In addition, Funai, which filed a high-profile patent litigation in the ITC was later sued by its lawyers, Morrison & Foerster, for failing to pay the bill for the litigation. (Apparently, although the company won a ruling of infringement, the defendants were then able to successfully design around the patent.) Indeed, the most successful strategy for Japanese companies may be selling their patents to US non-practicing entities (a strategy that seems to be increasingly common).

At this point, we can only speculate as to Nippon Steel’s motivation and objectives. But, over time, this high-profile dispute will be resolved and we will get a better glimpse into the 21st century IP strategy of this important Japanese company.

David Makman of The Law Offices of David A. Makman is based in San Francisco. He speaks fluent Japanese. Before becoming a lawyer he worked for Matrix Kabushiki Kaisha in Tokyo marketing US software products to Japanese companies.

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