China's telecom giants are building up a war-chest of patents to help give them an edge in the legal battles raging between the world's smartphone makers, aided by Beijing's push to transform the country from workshop to innovator.

Huawei Technologies Co Ltd and ZTE Corp, China's top two telecommunications equipment makers, are stealing a march on rivals both in traditional network gear and, increasingly, high-end phones.

ZTE was the second highest filer of international patent applications in the world last year according to the World Intellectual Property Organization, making 1,863 different filings. Huawei was the fourth most active filer with 1,528 applications, having been in the top spot in 2009.

Patent filings are soaring across most sectors in China -- last year there were 313,854 patents registered in the country according to the Thomson Reuters Derwent World Patents Index, a 12 percent rise from 2009.

China was the third highest filer of patents in 2010, just behind the U.S., which registered 326,945 and Japan with 337,497. Japan has been the leading patent filer in the world for the past decade but its lead is narrowing, with its filings volume down 12 percent since 2006. China is up 83 percent.

The China telecom space in particular is seeing a lot of action as the likes of ZTE and Huawei, along with Taiwan's HTC move from being contract manufacturers for big foreign firms to making smart phones and tablets under their own brands.

A lot of know-how flows through the contract manufacturer. The next logical step for these contract manufacturers is to climb up the value chain, said Elliot Papageorgiou a partner at intellectual property law firm Rouse in Shanghai.

And as they move up the value chain, they use patents to protect some of the knowledge and ideas they've picked up as contract manufacturers in order to give them room to manoeuvre in the increasingly competitive market.

The more this market matures the more you are searching for the margins and China is now probably the biggest mobile phone market in the world, said Papageorgiou.


The flow of China filings means big business for patent lawyers in a country where trying to enforce intellectual property (IP) rights was seen by many companies as a largely pointless exercise until recently.

In the last year and especially this year, demand for IP work is growing very fast, said Anthony Chen, a patent lawyer for Jones Day in Shanghai.

Douglas Clark, a barrister specialising in intellectual property cases who has worked in China since 1993 says the size of the industry has surged in recent years.

The last 10 years have seen a huge growth in the number of IP lawyers employed in firms and in-house, he said.

At the very top level for partners there's very strong competition for talent and strong salaries.

He estimates an IP partner in an international law firm in China can now expect to earn around $1 million to $2 million depending on how well their firm does that year. Partners in some Chinese firms are likely to earn even more.


The surge in the size of patent portfolios is causing a corresponding rise in litigation.

ZTE filed a lawsuit in China in April saying Huawei infringed on its fourth generation technology. The move came a day after Huawei sued ZTE in several European countries saying its rival had infringed on a series of its patents.

Huawei and ZTE have sued each other in Europe and now are taking action in China because they both made good progress in selling their mobile communication products and now they're using patents as a competition tool, said Jones Day's Chen.

These lawsuits are hardly surprising given that their foreign counterparts such as Apple, Google and Samsung are all trying to use an armory of patents to stifle competition in the global smartphone industry.

Google Inc's biggest deal ever, the agreement to buy Motorola Mobility Holdings Inc this month for $12.5 billion, is an attempt to buy insurance against increasingly aggressive legal attacks from rivals such as Apple Inc.

So far though the likes of Apple and Samsung have stayed out of legal battles in China, wary of finding themselves at the wrong-end of a court order in a country they rely on for their manufacturing.

But for Chinese firms being sued in Europe or the United States, many are now using their home turf for retaliation.

ZTE has filed a patent infringement lawsuit against Ericsson's China unit after the Swedish telecoms giant filed patent lawsuits against ZTE in Britain, Italy and Germany.

I expect more and more Chinese firms that may have 'lost face' by finding themselves as losing defendants in foreign jurisdictions to strengthen their position in China and take retaliatory action, said Rouse's Papageorgiou.


The influx of patents not only underscores China's growing strength in the telecom sector, it also reveals a change afoot in the country's attitude toward intellectual property.

While the change is hardly air-tight, China is moving more toward recognising ideas and their origins, rather than copying and proliferating.

Intellectual property civil litigation cases filed in China rose by 37 percent to 41,718 last year according to the country's Supreme People's Court.

This is driven in part by China's plan to become a high-tech power house, with a target for 2.5 percent of its gross domestic product to come from research and development by 2020. It's trying to reach this goal by subsidising the cost of patents for Chinese companies and stricter enforcement of intellectual property rights.

While traditionally in China you are supposed to share knowledge, the government is also aware that if you don't protect IP rights you don't attract investors and the nation can't develop the high-tech industries it wants, said Isabella Liu, a partner at Baker & McKenzie in Hong Kong.

(Editing by Lincoln Feast and Michael Flaherty)