In October last year, Japan’s biggest steelmaker Nippon Steel had filed a lawsuit against its key customers, carmaker Toyota Motors and China’s Baoshan Iron & Steel, alleging infringement of a patent for production technology related to a key device for electrified vehicles. This rare legal battle also saw a previously submissive steelmaker seeking court injunction to stop Toyota from producing electrical vehicles. However, what matters is not the rebellion itself, but the IP strategy adopted by Japanese companies, lawyers say.

Q: What do you think of Nippon Steel’s patent infringement suit against China’s Baoshan Iron & Steel and Toyota Motors?

“Thinking about this lawsuit without knowledge of the automobile industry’s supply chain could lead to misunderstanding of the true nature of the suit,” says Shogo Matsunaga, partner of Sonderhoff & Einsel Law and Patent Office, who is well versed in intellectual property rights.

The conventional wisdom in the Japanese manufacturing industry has long been to develop technology in tandem with and in response to demand from large customers – a collaborative relationship within the supply chain, so to speak. This lawsuit shocked Japanese manufacturers and the legal community because it was filed against a collaborative partner. But Matsunaga says that the key issue is not the rebellion, but the future IP strategy of Japanese companies, and that this development should not be seen as just a curious exception. He believes that the survival of the Japanese economy depends on whether the Japanese manufacturing industry, including Nippon Steel and Toyota, can strengthen its IP strategy in response to this lawsuit.

Q: Will IP suits even against customers to protect one’s technologies rise in the next few years?

The patents for which Nippon Steel is claiming infringement relate to non-oriented magnetic steel sheets that are used in electric and hybrid vehicles. Demand for this product is growing rapidly worldwide, but it requires a complicated manufacturing process, and is a perfect example of a product that uses very important technology that can differentiate the user from rival companies in emerging countries.

Even if Nippon Steel wins its case in Japan, it will not be enforceable against the Chinese company Baoshan. “So, by also filing a suit against Toyota, who purchases the product from Baoshan, Nippon Steel is aiming to reduce Baoshan’s sales. Because it is now a standard practice to apply for patents across the world’s major economies including U.S. and China, thus creating a system to protect IP worldwide, IP suits against customers probably won’t increase in the future.”

Q: Legally speaking, what can companies do to protect their IPs?

As we are all aware, emerging countries where costs are low have an overwhelming advantage in the manufacturing industry, so companies in developed countries have no choice but to make profits from high value-added products that leverage IP.  But Matsunaga observes a lack of understanding of the importance of IP strategy on the part of management at Japanese companies. This leads to engineers being undervalued, and those who are dissatisfied with their treatment or the lack of opportunity to play an active role are being lost to South Korean and Chinese companies that welcome them with open arms.

Several years ago, Nippon Steel sued South Korea’s POSCO for patent infringement and obtained a settlement of 30 billion. But this was a rare lucky case in which a de facto victory was possible because the leaking of information by industrial espionage could be proved. “Generally, it is extremely difficult to prove that information was leaked,” says Matsunaga.

Matsunaga says that the entire situation is forcing Japan’s manufacturing industry to swiftly strengthen its IP strategy. “Management must start by learning more and engaging in discussion about IP strategy. It is solely due to its IP strategy that a small company like Nokia was able to regain its momentum after facing near bankruptcy. A significant portion of Nokia’s profit comes from licensing. Unless we can learn from examples like this, there will come a time when people would say ‘Japan used to make cars, once upon a time.’”