As the second largest economy in the world, China is emerging to the center of the world’s economic stage. This emergence has been accompanied by constant changes in its legal and economic sectors. The intellectual property sector also has witnessed numerous recent changes. There have been significant new advances in China’s national innovation policies. New trends in Chinese patent filings have emerged. A growing number of Chinese companies are creating their own IP and increasingly filing infringement suits against foreign companies and their local competitors in China. China’s third patent law amendment has materially changed patent practice and procedures in that country.
These changes and trends will have profound impacts on foreign companies doing business in China, especially in intellectual property areas. What are the best ways to deal with these important changes? The following several considerations should be evaluated in determining a company’s patent strategies in China. I will also discuss these and other considerations in my upcoming Practising Law Institute presentation IP in China: Strategies for Doing Business While Maximizing and Protecting Your IP, which will take place on Wednesday, November 16, 2011 from 1pm to 2pm ET.
China National Innovation Policy and National Patent Development Strategy 2011-2020
In 2006, the National Medium- and Long-Term Plan for Science and Technology Development (2006-2020) (the “Plan”) was published by the State Council. In this Plan, the central government created a clear vision to foster innovation in China in the future by promoting science and technology development in selected key fields and enhancing innovation capacity. By 2020, it is predicted that the R&D investment of the nation will be more than 2.5% of the total GPD. The Plan also projects that by 2020, China will become an innovative nation. The Plan further recommends the adoption of several important polices and measurements, including encouraging indigenous innovation and implementing national intellectual property strategies.
In 2010, the PRC State Intellectual Property Office published the National Patent Development Strategy (2011-2020) (the “Strategy”). The Strategy’s goal is that by 2015, the annual patent filings in China will reach 2 million. If achieved, China will rank among the top two in the world in terms of the annual number of patents for inventions granted to the domestic applicants. The Strategy projects that the number of overseas patent applications filed by Chinese applicants will double.
In parallel to its rapid economic development, there has been phenomenal growth in patent filing activity in China. From 2005 to 2010 the annual patent filing growth has been approximately 20%. (Source: SIPO). In 2010, the total number of patent filings in China has reached over 1.2 million. About 90.7 % of patent applications were filed by Chinese domestic applicants. The Chinese government also subsidies Chinese companies for filing filing in a foreign country. In 2010, two Chinese companies, ZTE Corporation and Huawei Technologies, now place among the top five applicants using Patent Cooperation Treaty. (Source: WIPO)
In consideration of Chinese intellectual property policy environment, the lifetime of a patent (20 years from filing date), and its potential market today and in the future, a solid patent strategy is needed for any business in China, including both international companies and local Chinese companies.
Administrative Channel and Judicial System to Protect IP rights
In China, intellectual property rights can be protected by the so-called double track system, i.e. administrative channels and judicial system. This “double-track system” is intended to prevent infringements in a timely and effective manner and to protect the legitimate rights and interests of the right holders.
Administrative channels can provide a quick and cost effective way to protect an owner’s intellectual property rights, such as patent, trademark, copyright and trade secret, etc. Even if it does not provide a damage remedy to an intellectual property holder, it is a simple way to get relief, such as raid, destruction of the infringed product, fines and an order to stop. An intellectual property holder should not ignore this channel.
The Chinese judicial system also can provide an intellectual property right holder with injunction relief and a damage remedy. Today, China is probably one of the most litigious countries in the world in term of the number of intellectual property litigation cases. In 2010, more than 42,000 IP cases were filed in Chinese courts. (source: White Paper of Intellectual Property Protection by Chinese
Courts in 2010). Among these IP cases, most of them involve domestic Chinese companies suing each other. Only 3.2% of these cases involve a foreign party. Chinese companies use IP litigation as a business tool to protect their technology, trademark, brand name and other intangible assets.
A foreign company conducting business in China not only competes with local Chinese companies, but also with other international competitors. To be successful in China, it must be prepared to go to the court and proactively protect its patents in China, either offensively using its patent portfolios as a sword to prevent others from using its patent technologies, or defensively by using a patent portfolio as a shield to prevent local and international competitors from bringing a lawsuit or a counterclaim against them.
Third Amendments to Chinese Patent Law
China made a third amendment to its patent law in 2009. There are several significant changes to the Patent Law. It will have a profound impact on patent protection in China. Several key changes should be considered in a company’s Chinese patent strategy.
Absolute novelty standard adopted
The old Chinese patent law adopted a hybrid novelty standard. In accordance with the old Patent Law, a publication published anywhere in world before the Chinese patent filing date is deemed as prior art in terms of novelty assessment. However, prior public uses or knowledge such as trade show, manufacturing, sales outside China is not prior art. Under the new patent law, prior art is now defined as publicly know art or technology known to the public before the filing date in China or abroad.
Since China adopts the first to file system, in order to obtain a patent in China, a foreign applicant must keep an invention from being disclosed in any way anywhere in the world before the filing date.
This new change not only creates a different standard for granting a patent, it also has an impact on the way to invalidate a patent in China. All evidence produced outside of China, including public use, public knowledge can now be used to challenge a patent.
This new change also closes the loophole whereby a third-party seeks patent protection in China for another party’s invention, i.e. patent hijacking. Based on the new law, no one can obtain a patent for another party’s invention even if it was first disclosed at a trade show, or publicly used outside of China.
Foreign Filing License
The Chinese old patent law required that a Chinese entity and individuals, for an invention completed in China, must first file a patent application in China before filed elsewhere. It does not mention whether it also applied to a foreign owned lab or a company. Thus, in order to avoid this first to file requirement, it is a common practice for a foreign owned company in China to assign its patent applications for inventions invented in China to its foreign parent company or other related entity outside of China. Then the patent application can be first filed outside of China in the name of a foreign entity.
Under the new law, a patent application for invention made in China may be filed first outside of China after obtaining a foreign filing license from the State Intellectual Property Office. This is also called as a security check. Without a foreign filing license or failure to request the security check, the corresponding patent right in China will be forfeited.
There are three types of patents in China: invention patent, utility model patent and design patent. A Chinese invention patent is similar to a US utility patent with 20 year term from its filing date. A utility model patent provides protection for a product’s shape or structure or combination of thereof with a 10 year term from its filing date. Since there is no substantive examination for utility model patent as that for the invention patent, a utility model patent is normally granted within one year from the filing date. The utility model is widely used by Chinese applicants as it is cost effective and can be quickly granted.
One of the most significant patent infringement cases in China involved several utility model patents granted to a Chinese company Chint Group Corp. Chint Group Corp (Chint) v. Schneider Electric Low-Voltage (Tianjin) Co., Ltd. (Schneider). The Chinese company sued the French company for patent infringements on its circuit breaker utility model patents. The award of damages granted at first instance by a court in Wenzhou, China is about $45 million. The case was settled in 2009 and Schneider agreed to pay over $20 million for the infringement. This is one example of where Chinese patent applicants won their cases, built up their own IP portfolios and use them as a tool to compete with other competitors.
In accordance with the new patent law, a patent applicant can file an invention patent and a utility model patent for the same inventions at the same time. Normally, a utility model patent will be granted first. Before the invention patent can be granted, the utility model patent must be abandoned.
A foreign company should take the advantage of a utility model patent, especially for an important product. A utility model patent can be asserted as that of invention patent if having an infringement.
In accordance with the new patent law, for a service invention, the employer is required to give an inventor a patent award after a patent is granted. After the exploitation of the patent, the employer must also provide remuneration to the inventor.
This provision applies to all entities in China including joint ventures and wholly-owned foreign enterprises. Without an agreement between the employer and the employee or a corporate policy on the amount of patent award and remuneration and its payment method, the employer must pay no less than approximately $500 for an invention patent as a patent reward, and no less than 2% of the profits earned from the exploitation of the invention.
The inventor compensation requirements present a potential risk to any business operating in China. In order to avoid the potential risks, an employer should sign an agreement with the employee regarding the patent reward and remuneration. Based on the patent law, the employer may also establish a corporate rule defining clearly the specifics regarding the patent reward and remuneration.
The Chinese intellectual property system is young and still has a lot of rooms to improve. It presents both opportunities and challenges to any business operating in or having business in that nation. A utility model patent can last ten years and an invention patent can last for 20 years. For the next 10 to 20 year, China and its intellectual property system will be tremendously developed and changed. For a solid patent strategy, a company should not only consider China’s current intellectual property situation, it should also keep in mind about its future needs.
Join the Discussion
4 comments so far.
Gene QuinnNovember 8, 2011 02:33 pm
You say: “lowering the bar on patentability… has not been to the benefit of society.”
Can you give an example that demonstrates any lowering of the bar on patentability? I’d like to know what you are referring to so I can address it because the objective truth is that over the last 5 to 10 years it has become harder to obtain a patent. So the clear and objectively verifiable trend is in the opposite direction than you suspect. So what exactly are you referring to?
You say: “Smaller developers can never enforce or license out a patent..”
That isn’t quite true either. There are more and more attorneys that take patent infringement cases on a contingency basis, and there are entities that will take an ownership interest and share litigation and licensing revenues with the patent owner. There is a market for selling patents as well, so a broker can sell patent rights regardless of whether the owner is small, medium, large or an individual.
Sounds like you are in the software business. Those who don’t obtain patents in the software industry are targets, which is really not a good place to be.
Vegard EngenNovember 8, 2011 01:19 pm
I was only half joking.
I believe that the intention behind patents where good. When it actually took time and capital to implement get a decent return from an invention, it sort of worked.
But, lowering the bar on patentability, especially in the US system, has *not* been to the benefit of society. I believe innovation in for example IT is suffering.
There are only two types of organizations in IT that can actually enforce patents:
1) Those who have a *lot* of them already, i.e. the mega-corporations (MS, IBM, Apple, ….)
2) Companies that doesn’t develop anything at all, but that just buy up “idle” patents. These are generally called “patent trolls” in the free software world.
Smaller developers can never enforce or license out a patent and still continue to develop and compete with those he licenses out to. He’d face patent claims against him the very second he released anything.
Yes, I believe it’s almost impossible to write any code whatsoever today without breaking a granted patent.
And that makes it a detriment, not a benefit for the society.
In China, however, development is largely free from such hinders. But I guess you *are* right in that China does quite a bit of copying of IP also.
Some of it deserves protection, some not so much.
Gene QuinnNovember 8, 2011 12:11 pm
Are you actually of the belief that patents detract from innovation?
Another question, do you believe that China is a particularly innovate country, or do you believe they largely take the intellectual property of others?
Answers to these questions should be particularly enlightening and expose whether you have a clue.
Vegard EngenNovember 8, 2011 06:24 am
This is good news for the western world. At last, China too will have the patent drag. They will slowly lose the possibility to freely innovate, and will move on to throwing patents at each others!
This is bad news for China, but good news for businnes in the rest of the world….