USPTO Report Puts Chinese Innovation Growth in Context

On January 13, the United States Patent and Trademark Office (USPTO) published a new report on the impact of patent and trademark filing trends in China. The report, titled Trademarks and Patents in China: The Impact of Non-Market Factors on Filing Trends and IP Systems, discusses how the high rate of Chinese patent and trademark filings may well be influenced by government subsidies and other non-market factors, rather than inventiveness and organic economic activity within China.

Measuring the Problem

According to the USPTO, evidence to support the theory that there is more than meets the eye with respect to large numbers of Chinese patent and trademark applications is evidence of the low rate at which domestic Chinese inventors file for patent protection overseas, the low rate in which inventors commercialize patented inventions in general, and the high rate of bad-faith trademark filings and fraudulent trademark specimens.

Indeed, in 2018 only 5% of Chinese applicants filed foreign counterpart applications. By comparison, 80% of U.S. applicants filed foreign counterpart applications.

With respect to licensing, the United States ranks first in IP receipts as a percentage of total trade, while China ranks 44^th. In 2019, the United States accounted for 32.5% of total global licensing receipts.

The issue is one that has gained attention now no doubt because of the tumultuous relationship between the United States and China relating to economic activity, and due to heightened tensions as the result of the COVID-19 pandemic. While this report has no doubt been a work in progress for some time, it is likely being issued now, in the days leading up to President Elect Biden being sworn into Office, in order to have the report placed into the stream of knowledge, before it may be buried by an Administration that is expected to have a more friendly approach to China and which may not want to ruffle feathers.

Putting politics aside, if that is even possible anymore, this issue has gained attention over the last several years because of the volume of trademark and patent applications filed in China and how the raw numbers of those filings have dramatically outpaced the number of trademark and patent applications by global competitors. Indeed, the volume of trademark and patent applications in China is the highest in history. In 2019, authorities in China received 7.8 million trademark applications and 1.5 million utility patent applications, accounting for nearly half of the global total of all trademark and patent applications filed.

Chinese Innovation in Context

While the number of patent applications filed is often used as a proxy for the intensity of innovation within a particular country or ecosystem, and the number of trademark applications filed is often used as a proxy for the intensity of creativity and burgeoning economic activity, the USPTO cautions that the raw numbers do not tell the entire story. “Although numerical comparisons involving China may relate in some measure to its [creative and innovative intensity], conclusions in this regard should not be reached without additional context.”

The “context”, as the USPTO puts it, when speaking of China, is the uncomfortable (and unfair) reality that the Chinese government subsidizes the filing of both patent and trademark applications. These subsidies greatly contribute to inflated filings that would not otherwise occur but for the subsidy, and which lead to very low-quality patent applications on thin or non-existent innovations. When dealing with trademarks, the same government incentive structure has often led to fraudulent trademark filings, or bad faith filings that outright copy the marks of others.

The report provides some examples:

• In 2013, Shenzhen issued operating procedures that allowed applicants to seek a subsidy of RMB 5,000 (approximately USD 750) for trademark registrations in eligible foreign countries, including the United States.
• In 2019, the Shanghai government raised the per applicant maximum annual subsidy for international patent filings from RMB 1 million (about USD 142,000) to RMB 10 million (USD 1.42 million), and the per patent subsidy from RMB 30,000 (USD 4,500) to RMB 50,000 (USD 7,500). The per patent subsidy for domestic patents was reduced to RMB 2,500 (USD 370).
• In December 2019, the Beijing government adopted a similar approach to the Shanghai government, with an applicant now entitled to as much as RMB 20 million (USD 3 mil- lion) in foreign patent subsidies per year (up from USD 150,000). The USD 3 million cap is higher than the RMB 2 million (USD 300,000) cap for domes- tic patents.
• Also in December, 2019 the Beijing municipal government also raised the per foreign patent subsidy from RMB 20,000 (USD 3,000) to RMB 50,000 (USD 7,500). The USD 7,500 per foreign patent subsidy is higher than the RMB 1,000 (USD 150) offered per domestic patent.

“Absent consideration of the role of non-market factors, cross-border comparisons based on the raw number of trademark and patent applications risk overstating brand creation and innovation activity in China,” the USPTO concludes. “These non-market factors are also undermining domestic and foreign registries, stretching the capacity of China’s patent and trademark examiners and review authorities, and narrowing the scope of available protection for legitimate rights holders.”

It is because of the burden caused by bad faith and fraudulent trademark applications coming from China that the USPTO has enacted a variety of rules to thwart Chinese applicants from flooding the Office with what are sometimes deceitful, sham filings. In August 2019, the USPTO started to require foreign domiciled applicants to employ a U.S. trademark attorney for filings in an attempt to cut down on the volumes of fraudulent and bad faith applications coming from China primarily. Then in February 2020, the USPTO began requiring applicants to provide an e-mail address in addition to the e-mail address of their registered practitioner, another measure aimed at fighting fraud and bad faith.

A Strategy that Incentivizes Poor Quality and Bad Faith

What does this all mean? That is a good question. Those in the industry have known for some time that a great many of the patent applications filed in China are extremely low quality. These applications— referred to as China only applications— demonstrate little innovative prowess and will never be the subject of commercialization by anyone. If the goal is to teach the Chinese people how to file a patent application and to send the message that the government favors patents and innovators, there is nothing wrong with China only applications, which could be a very effective long-term strategy. If the goal is to portray to the world that China has outpaced the United States and Europe with respect to innovation, shaving time off jail sentences for filing a patent application seems a foolish strategy.

As for incentivizing a trademark mill that just fraudulently files applications, in bad faith, which could never be allowed, that strategy probably seemed like a good idea to someone somewhere, but seems to do nothing more than encourage fraudsters; and if there is any group of people who don’t need encouragement it is those who operate on the fringes, manipulating the system and walking on the edge of criminal behavior.