U.S. companies filing suit against Chinese defendants in U.S. district courts, alleging counterfeiting and IP infringement, is not a new phenomenon. But recently, hundreds of Chinese sellers and online distributors have been targeted with infringement allegations initiated by Chinese competitors.

What is behind the increase in Chinese IP litigation, and why are Chinese entities choosing to litigate their disputes in the U.S.?

Previously, Chinese business strategy included economically outperforming U.S. counterparts by capitalizing on competitive advantages through access to cheap resources such as labor and raw materials. Chinese entities did not pay much attention to IP protection because what they often provided was a commodity, and the primary driver of competition in a commoditized market is price. The businesses had tremendous success and dominated markets, but now they face a new challenge: competition from Chinese counterparts who have the same competitive advantages. In other words, Chinese-against-Chinese competition on U.S. turf.

For many of these entities, the result is a shift in business strategy to emphasize IP protection through creation and acquisition of all forms of IP. Indeed, Chinese-owned IP is surging in the U.S. and worldwide, and China is quickly becoming the world’s largest source of IP filings. In 2022, China held the most applications globally for patent, trademark, copyright, and industrial design. Thus, Chinese entities are also increasingly becoming IP plaintiffs — in a change from their historical reputation as IP offenders — attacking quite quickly and broadly.

U.S. companies filing suit against Chinese defendants in U.S. district courts, alleging counterfeiting and IP infringement, is not a new phenomenon. But recently, hundreds of Chinese sellers and online distributors have been targeted with infringement allegations initiated by Chinese competitors.

What is behind the increase in Chinese IP litigation, and why are Chinese entities choosing to litigate their disputes in the U.S.?

Previously, Chinese business strategy included economically outperforming U.S. counterparts by capitalizing on competitive advantages through access to cheap resources such as labor and raw materials. Chinese entities did not pay much attention to IP protection because what they often provided was a commodity, and the primary driver of competition in a commoditized market is price. The businesses had tremendous success and dominated markets, but now they face a new challenge: competition from Chinese counterparts who have the same competitive advantages. In other words, Chinese-against-Chinese competition on U.S. turf.

For many of these entities, the result is a shift in business strategy to emphasize IP protection through creation and acquisition of all forms of IP. Indeed, Chinese-owned IP is surging in the U.S. and worldwide, and China is quickly becoming the world’s largest source of IP filings. In 2022, China held the most applications globally for patent, trademark, copyright, and industrial design. Thus, Chinese entities are also increasingly becoming IP plaintiffs — in a change from their historical reputation as IP offenders — attacking quite quickly and broadly.

The boost in Chinese IP holdings has had a cascading effect in the U.S. legal system. Chinese IP litigation in the U.S. has grown significantly since 2019. As of June 29, 2022, the China Intellectual Property Society (CIPS)’s report on Intellectual Property Disputes of Chinese Enterprises in the United States recorded a total of 986 new IP lawsuits filed against Chinese enterprises in the U.S., representing a 14.39% increase from 2021.

Chinese entities litigating in the U.S. may be able to oust competition and increase damages at the same time. In 2023, Chinese companies collected several billion U.S. dollars in IP damages. The primary targets for IP infringement suits are largely online Chinese businesses, i.e. Chinese competitors selling products on third-party retailer websites (online marketplaces) are suing one another to curtail competition and drive up prices.

Many of the disputes are turf wars that start with the informal IP proceedings offered by online marketplaces. Often, one Chinese entity files a claim against another seller on one of these marketplaces, seeking to delist a product. If the filer is unsatisfied, the fight will continue in U.S. district court. Similarly, many of these claims are declaratory judgment claims of non-infringement because of an adverse ruling by the marketplace against one party or to stop future requests for delisting.

For example, in April, two Chinese entities sued each other for infringements pertaining to competing merchandise sold on one such website. Wuhanqiuzhaokejiyouxiangongsi v. Fushan Shunhe Tongda Network Technology Co., et al., 1:24-cv-00604 (S.D.N.Y. 2024). Wuhanqiuzhaokejiyouxiangongsi sells cutting tools and is suing a competitor for allegedly obtaining an invalid patent and using it to monopolize the cutting tool market in the U.S. The case is effectively a fight to oust competition.

Another case brought this past June involves two Chinese-owned retail companies selling merchandise online, resulting in an unfair competition dispute regarding online marketplace practices. Shenzhen Aji Fashion Tech. Co. v. WhaleCo Inc., No. 23 CV 14043, 2024 WL 2845974 (N.D. Ill. June 5, 2024). Shenzhen sued WhaleCo for allegedly infringing its trademark and copyright by selling counterfeit products bearing Shenzhen’s company name and logo on its website. When Shenzhen notified WhaleCo of such infringement, WhaleCo attempted retaliation by delisting all products and distributors selling genuine Shenzhen merchandise on its website. The matter is still pending, with consequences to be determined.

While it is difficult to predict the future direction of this new phenomenon, Chinese entities may ultimately pursue design creativity as a key competitive advantage. Chinese businesses are steadily capitalizing on their abundant IP in an attempt to become market leaders in innovation. According to Forbes, Chinese entrepreneurship has grown significantly within the past decade. In turn, with the increased cost basis for Chinese businesses, U.S. companies can become more competitive on pricing. Ironically, these turf wars may ultimately bring innovation and better pricing to consumers worldwide.

Alexis Stoll was a summer associate in Hunton Andrews Kurth’s New York office and a J.D. candidate at the University of Southern California’s Gould School of Law.

This article originally appeared in Retail TouchPoints at retail touchpoints. Reproduced with permission from Copyright Ⓒ 2024 Emerald X, LLC.