Reshaping the Patents Game

8/14/2019 Reshaping the Patents Game

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Reshaping the patents gameNew implementing rules for the PRC Patent Law will have a significant impact onforeign companies China IP strategies. Issues relating to security review procedures and

first-filing have been clarified, but penalties are tougher and uncertainties remainabundant

Issue: March 2010

Having surprised an audience of billions with a stunning Beijing Olympic Games, China madeinternational headlines again by its approach to tackling the global financial crisis and itsleadership of world economic growth. A new, stronger and more confident China has steppedonto the world stage. Its emerging market has become another playing field on which corporateplayers hope to win big. And this time, intellectual property will be the game upon which every corporate focuses. It is only natural, therefore, that international companies should pay such

close attention to the recent Implementing Rules for the PRC Patent Law (2nd Revision)( ( )).

Background to the legislationIn 1984, the first patent law was introduced in China. Since then it has been revised every eightyears. The most recent and most comprehensive revision was the PRC Patent Law (3rd Revision) ( ( )) (Revised Law), which has been in force since October1 2009.

The Revised Law called for a substantial amendment to the old Implementing Rules. OnFebruary 23 2009, a draft of the amendment was submitted by the State Intellectual Property Office (SIPO) to the State Council for consideration and approval. However, to much surprise,concern and disappointment, the new Implementing Rules were not published together with theRevised Law as previously promised by the government. Insecurity and uncertainties in the IPcommunity spawned rumours and speculations relating to the final draft which was troubling tocorporate policy making and, to some extent, even the implementation of the Revised Law. It

was not until the last days of 2009 that everyone was able to breathe a sigh of relief: the delayedImplementing Rules were finally approved by the State Council after the Legal Affairs Office of the State Council together with Sipo made considerable changes back and forth and consultedappropriate cabinet ministries, provincial governments, courts, IP practitioners, corporations andacademic societies. The Implementing Rules were promulgated on January 9 2010 and came intoeffect as of February 1.

In general, the Implementing Rules provide further interpretation of the Revised Law and makeits implementation more solid. In comparison with the old provisions, the Implementing Rulesare more feasible, reasonable and in line with international practice. Unfortunately, theImplementing Rules also leave a number of grey areas. Hopes for a set of more pro-patenteerules are still unmet. But one thing is certain: the Implementing Rules will reshape the IP game inChina.

Changes and implications

In the Implementing Rules, a total of nine brand-new provisions were added; five old ones weredeleted and substantive changes were made to another 47 old provisions. Summarised below are


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major changes made in the Implementing Rules and how they are likely to change foreigncompanies operations in China.

1. Reward and remuneration regulations for service invention-creations: tricky but

workable

Policy on reward and remuneration to inventors or designers for service inventions is probably the only area in which major changes are made in the Implementing Rules while thecorresponding provision remains the same in the Revised Law (Article 16 in this case). Unlikeother rules, rewarding service inventions is dealt with more through the internal policy of acorporation than through interactions with the patent office.

To foreign companies, the Implementing Rules matter this time because they interpret the scopeof the law more broadly. Unlike the old rules, which were only applicable to state-owned entities,

Articles 7678 now apply to all entities, including joint ventures, wholly foreign-owned entities,

and R&D centres of foreign companies in China.

The relevant rules may seem puzzling at first look. The agreement rule here is that the one whohas agreement, rules. Under Article 76, an entity is permitted to set out its own policy and reachagreements with employees as to how and how much to reward service inventions. A company should consider a separate agreement or at least some clause in this regard in the employmentagreement or corporate policy.

In the absence of agreement, however, statutory numbers stipulated in Articles 77 and 78 willgovern. Article 77 specifies a minimum of Rmb3,000 (approximately US$440; increased fromRmb2,000) for an invention patent upon grant, and Rmb1,000 (increased from Rmb500) for autility model or design patent. Article 78 lays out the statutory remuneration package for use orlicense of an unexpired patent: (i) at least 2% (for invention or utility model) or 0.2% (for design)of annual operating profits (changed from profits after tax) generated from the exploitation of the patent; and (ii) 10% or more of royalty fees if the patent is licensed.

Articles 77 and 78 apply to both Chinese and foreign inventors. The reward and remunerationshould be shared by all inventors or designers of the pertinent patent.

2. First filing in foreign countries: ban lifted but tough penalties for violation of securityreview

The previous law bans any Chinese entity or individual from making a foreign filing first forinventions, utility models and designs made in China. However, the old law lacked penalty provisions. A multinational companys R&D centre in China might file foreign applications firstfor inventions made in China illegally but with almost no risk of penalty. Many multinationalcompanies circumvented the law legally by transferring ownership of the inventions made inChina to their foreign offices and filing foreign applications in the name of the companiesforeign offices. They must now say goodbye to those practices.

The Revised Law lifted the ban with a twist towards security review, which requires that beforeany foreign filing for an invention or utility model made in China, the applicant shall request asecurity review (similar to a foreign filing licence) by SIPO. The twist has at least three angles: (i)it does not apply to designs; (ii) it applies to anyone (including foreign entities and individuals);


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If an application is first filed in China and foreign filing is planned, the applicant should beprudent by requesting the security review well before the bar date for foreign filing to avoidpossible loss of the right to claim priority. If the first filing is a Patent Co-operation Treaty (PCT)filing to SIPO as a Receiving Office, it is deemed that the applicant has simultaneously requestedsecurity review. If no national security or confidentiality issue is triggered, SIPO normally can

notify the applicant in about one month, or even two weeks.

Notably, under separate Measures for the Administration of Registration of Technology Import and Export Contracts ( ), certain technologies are prohibited or restrictedfrom export. Lists of such technologies are published and updated from time to time, and areavailable from the Ministry of Commerce.

When a foreign filing is denied, it is not clear in the Revised Law or new Implementing Rules whether the applicant is given a chance to request reconsideration. The answer is likely affirmative under general legal practice in China.

When planning foreign filing first under the Revised Law and new Implementing Rules, oneshould calculate the possible delay of security review and bear in mind that the description of thetechnical solutions must be in Chinese (except for those filed under the PCT).

As a final note, while similar to foreign filing practice in the US, security review procedure doesnot provide a retroactive fix for non-compliance as available under US practice.

3. Information of genetic resources: what should you care about, and when?

The Revised Law and new Implementing Rules related to genetic resources are unique incomparison to those in other jurisdictions. They should be scrutinised because the price of non-compliance can be very heavy.

The Revised Law stipulates, in Article 5, that no patent right shall be granted to an invention where genetic resources are obtained or used in violation of laws or administrative regulationsand the completion of the invention relies on such genetic resources. The Revised Law, in Article26, further requires that for an invention relying on genetic resources, the applicant shoulddescribe the direct and original source of the genetic resources or state reasons if the originalsource cannot be provided. Notably, while illegal acquisition or use of genetic resources is a new ground for invalidation of a granted patent, non-compliance with the disclosure requirement isonly a ground for final rejection of a patent application.

The Revised Law is silent on which laws and regulations are relevant to genetic resources, butfortunately a list of the relevant laws and administrative regulations is provided in the new Guidelines. The Revised Law does not define genetic resources or an invention relying ongenetic resources. As such, a method of using corn to make gasoline or even a process of cooking vegetables may be literally construed as relying on genetic resources (plants). Article 26of the Implementing Rules clarifies that the relevant invention must be completed using thegenetic function of a genetic resource. The same Article also defines genetic resources as amaterial containing functional units of heredity derived from the human body, an animal, plant ormicro-organism and that has actual or potential value.

The new Guidelines further explain that using the genetic functions of the genetic resourcesmeans isolating, analysing and treating the functional units of heredity to complete the


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invention-creation and realise the value of the genetic resources. The new Guidelines alsoprovide detailed interpretations for the terms genetic functions (the ability of transition of thetraits and characteristics to next generations of an organism by propagation, or the ability of reproducing the whole organism) and functional units of heredity (a gene or DNA or RNAfragment with genetic function of an organism). Thus, the new provisions regarding genetic

resource are clearly not applicable to inventions that do not use genetic functions of materialstaken from plants or animals, such as a method of using corn to make gasoline, or cooking vegetables.

4. Compulsory licence: more operational for a possible grant

Available in law, compulsory licensing has never been granted in China. It deserves moreattention now because, with the changes made in the Revised Law and Implementing Rules,granting of a compulsory licence becomes feasible and more likely.

The Revised Law under Article 48 permits a qualified entity or individual to request SIPO togrant a compulsory licence for exploiting a patent, if (i) the patentee, without justified reason,fails to sufficiently exploit the patent for three years from the grant or for four years from thefiling; or (ii) the court or government determines that the patentee has abused the patent right ina monopolistic manner and the compulsory licence is granted to alleviate such anticompetitivemisuse of patent.

Article 73 of the Implementing Rules defines fails to sufficiently exploit the patent as themanner or scale that the patentee as well as the licensee exploit the patent fails to meet domesticdemands for the patented product or process. However, the Revised Law and Implementing Rules leave a large grey area as to what constitutes a justified reason. According to an unofficial

explanation from SIPO, the time period of conducting tests by pharmaceutical companies inpreparation for government approval may be considered justified.

Article 49 (unchanged in the Revised Law) authorises SIPO to grant compulsory licence in theevent of national emergency or where it is in the public interest. Article 50 (a new provision)provides an additional ground for granting compulsory licence, which is similar to the provisionsin the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). Article 50 providesthat for the purpose of public health, SIPO may grant a compulsory licence to patentedpharmaceuticals to be made in China and exported to nations or regions prescribed ininternational treaties of which China is a signatory or member. The term patentedpharmaceuticals may be broadly construed to include drugs and certain medical devices. Under

Article 73 of the Implementing Rules, patented pharmaceuticals include not only patentedproducts or products directly obtained from patented processes in the medical andpharmaceutical field required to solve the public health issues, but also patented activeingredients needed for manufacturing the products and patented diagnostic articles needed forusing the products.

It remains to be seen how the SIPO will exercise its authorisation to grant a compulsory licence.One possible ground is under Article 48, meeting domestic demands for certain new technologies,for instance, those related to clean technology and environment protection. Another possiblearea may be in pharmaceutical patents under Articles 49 or 50. For instance, a compulsory licenceto drugs for HIV/Aids, cancer or heart disease for the public interest (Article 49) or acompulsory licence to H1N1 flu drugs under either Article 49 (national emergency or publicinterest) or Article 50 (upon requests from countries asking China to export the drugs).


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5. Novelty standard: bar raised to fix loopholes

The new Implementing Rules throw out the old definition of prior art. This is consistent withperhaps the most dramatic change of switching to absolute novelty standard in the Revised Law,

which has been widely welcomed by foreign IP owners. Under the previous Article 30, prior

public use or other non-publication means of prior disclosure outside China was not consideredprior art and therefore did not constitute a novelty bar. As such, one was able to obtain a Chinesepatent by copying an invention seen, for instance, at an exhibition in a foreign country. Forinventors or applicants, the six-month grace period under the old law is still available for certainacts (such as a qualified international trade show) as exceptions to novelty bar. The new Article30 of the Implementing Rules clarifies that international exhibitions recognised by the Chinesegovernment are those that are registered at or recognised by the BIE (Bureau of InternationalExpositions) pursuant to the Convention Relating to International Exhibitions.

6. Double patenting: compromised practice but no double bites

The Revised Law while stipulating only one patent can be granted to an identical invention-creation, provides an exception to double patenting on simultaneous filings for both inventionand utility model on the same day for the same subject matter by the same applicant. Article 41of the Implementing Rules requires the applicant to state the facts of simultaneous filing on bothfiling requests in order to benefit from the exception. Additionally, the applicant must abandonthe earlier granted utility model in order for SIPO to grant the corresponding invention patent.

The utility model patent expires on the date the invention patent is granted.

7. Evaluation report: new bottle and new wine

A search report was available on novelty and inventive step of a granted utility model patent. TheRevised Law not only expands the scope of the report system to be available to design patents,but also adds content to the report and changes its name to a patent right evaluation report. Anevaluation report provides comprehensive analysis and assessments of all patentability issues,

which can be referred to by the court as preliminary evidence on patentability and stability of thepatent at issue. The patentee and any stakeholder may request such report.

Article 56 of the Implementing Rules further prescribes that the stakeholders requesting thereport must be those who are entitled to initiate the infringement actions. Generally, the exclusivelicensees and the specially-authorised licensees of other types are also entitled.

Meanwhile, Article 57 requires SIPO to complete the evaluation report within two months uponreceiving a request. In addition, only one report is made for a patent, which will then be madeavailable to the public.

8. Design patent: policy redesigned

In addition to the evaluation report system, many other changes are made in the Revised Law andImplementing Rules with expectation for better quality and more enforceable designs.

A brief description of the design is mandatory in design applications under the Revised Law. Article 28 of the Implementing Rules specifies what to include in a brief description: the


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products name, usage, design points and a designated drawing or photograph that could bestdisplay the design points. Under the Revised Law, a brief description of the design can be used tointerpret the design. It remains to be seen how this will affect the protection scope. Needless tosay, the brief description is critical and should be carefully drafted.

The Revised Law permits the filing of several similar designs for the same product in acombination application. According to the Implementing Rules, one design shall be designated inthe brief description as a basic design (Article 28) and each of the other designs shall be similar tothe designated basic design (Article 35). A maximum of 10 similar designs is allowed in acombination application (Article 35).

Conflicting with a prior right of another person was a ground for invalidation of design patentunder the old law. Nevertheless, the ground was toothless in practice because the oldImplementing Rules required the petitioner submitting an effective ruling or judgment to provesuch conflict of rights. A petitioner generally has no legal approach to obtain such ruling orjudgment. The new Article 66 deletes such requirement. Now, the petitioner only needs to prove

that he or she is an owner or a stakeholder of the alleged conflicting prior right. The power is vested in the Patent Re-examination Board (PRB) to determine whether there exists a conflict of rights. This change makes it practical for a prior right holder to protect his or her legal rights.

9. Misrepresentation of patent: acts defined, exemption and exception clarified

The previous law classified misrepresentation of a patent into misrepresenting patents thatbelong to others and misrepresenting non-patented products or processes as patented. TheRevised Law combines the two acts into the act of patent passing-off and stipulatesadministrative penalties for violations (up to four times of the illegal profit or Rmb200,000).

Article 84 of the Implementing Rules enumerates acts that may constitute patent passing-off. These include false marking of a product with any patent not granted, any now-expired or now-invalidated patent, selling the falsely-marked products; unauthorised use of patent numbers thatbelong to others on products or their packaging; referring to non-patented technologies ordesigns as patented; misleading the public to believe certain prior art or unpatented technology ordesign as patented; and counterfeiting or alteration of patent certificates, documents orapplications.

The Article provides an exemption for innocent misrepresentation committed by sellers whomarket products without knowledge of their patent passing-off nature. The sellers, whileprohibited from selling the products, are exempt from fines or forfeiting the profits made,provided they can provide the lawful source of the products.

Meanwhile, the Article also provides an exception to patent passing-off. If patent information hasbeen legally marked on a product covered by a non-expired patent, sale or offer for sale of theproduct after the expiration of the patent does not constitute passing off of the patent.

10. Claiming priority: lessened prejudice on errors and omissions

Both the application date and the nation which handled the earlier application must be includedfor claiming priority under the old rules. According to Article 31 of the Implementing Rules,applicants claiming priority are given a time limit to correct errors in or omissions of one or two


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items among the application date, application number and the name of the agency handling theearlier application. Consistent with the new requirement of a brief description of the design,

where the priority is claimed for an earlier foreign design application which normally lacks a brief explanation, applicants are allowed to submit a qualified brief explanation in the corresponding Chinese design application.

11. Other changes of interest to foreign companies

The rules that a request for invalidation may be withdrawn before any decision is made by thePRB are not changed. However, Article 72 of the new Implementing Rules provides that if thePRB concludes that the invalidation of the whole or part of the patent rights can be determinedbased on the re-examination already conducted, invalidation proceedings will move forwardregardless of the withdrawal.

In addition, the format requirement for invention, utility model and design applications are

almost the same under the Implementing Rules, which also cancel fees for applicationmaintenance, termination procedure request, compulsory licence request and compulsory licenceexploitation.

The Transitional ProvisionsSIPO announced the Transitional Measures for Implementation of the Amended Implementing Rules on

January 21 2010. In general, the old Patent Law and Implementing Rules still govern applicationand corresponding patents with a filing date before February 1 2010. Affairs concerned withacquisition and validity of a patent should be subject to the law which is effective on theapplication date, while other affairs of a patent or a patent application should depend on the law

effective on the date when the critical conduct or event occurs.

The road becomes clearerIn many ways, the new Implementing Rules provide a better roadmap to follow. But openquestions are left in view of the silence or vague language in the Revised Law, Implementing Rules and Guidelines. It is hard to predict at this time whether or when these open questions willbecome devastating landmines. For example, a competitor may seek to invalid a patent solely onthe basis of non-compliance with security review or genetic resources requirements the unclearlanguage of which may be interpreted differently from time to time. On the other hand, the clearlanguage in the Implementing Rules makes compulsory licences ready and feasible for grant,giving a sense of anxiety to many patentees. Moreover, with Chinas rise in the global downturn,many corporate leaders are steering their companies toward China. All wish to conquer the hugebattlefield and secure their positions. Solid IP rights in China become vital. Without question, theeconomic rise coinciding with significant changes in patent practice will inevitably drive muchmore intense competition and more disputes and litigation in China. IP practitioners need toclosely monitor the practice of SIPO and the courts, which may at times be inconsistent in theirown decisions and with each other. A specialised IP court, similar to the Federal Circuit in the US,is a necessity and more likely in China than ever.

Jonathan Zhuang Yuan, partner, Liu Shen & Associates

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Reshaping the Patents Game