Papers of Our US Intern

China's New Patent Law: What It Means for U.S. Companies in China 

Kyle Constantin Canton*, Jinglin Wang**

In light of the State Intellectual Property Organization's recent revisions and amendments to "Implementing Regulations to China’s Patent Law" which went into effect on February 1, 2010, the SIPO Commissioner, Tian Lipu, gave a speech for the American Chamber of Commerce. He detailed the possible impact that these regulations will have on U.S. corporations doing business in China. His speech and the subsequent presentations of several American Corporations brought up several points of contention from the numerous changes SIPO made in this third amendment.

I. ABSOLUTE NOVELTY [1] 

A third major change the laws came from a shift in the definition of novelty. In the past, if an inventive product has been on sale in the U.S. before the priority date of a Chinese patent application, the Chinese patent application still fulfilled the 'novelty' requirement for a patent filing because the inventive product was never used within China.[2] Now under the new regulations, an invention, utility model or design must possess absolute novelty, i.e. the above-mentioned patent application is no longer considered novel, because it is already publicly available somewhere else in the world. Tian Lipu and SIPO hope that through this measure they can increase the signal to noise ratio of their patent applications, increasing the quality of the patent filings while simultaneously decreasing the overall number of applications.

However, U.S. companies may find that the new novelty concept of China is still somewhat different from that of US.

Now, let us consider a situation involving Coca-Cola’s recipe that has been a trade secret since the company began. If they were to now file a patent application in China in 2010 to protect the contents of Coca-Cola, how would SIPO deal with their application?

Surprisingly, under the current regulations, China will still approve the application simply because it is not “prior art”.[3] The recipe has not been previously publicly available; it has always been secret. However, the United States Patent and Trademark Office will not protect the Coca-Cola recipe in a newly filed patent because it falls under the “one year sale bar doctrine”.  Consumers can readily purchase the product for over a year, and so Coca-Cola has passed the statute of limitations for seeking patent protection.[4]

China now leads the world in patent filings with over 300,000 patent applications in 2009. Twenty percent of these filings fall under this 'partial novelty' classification. These applications include patents for common consumer packaging, labels, etc. This major step forward will give the true innovators the attention and protection that they deserve during the filing process and once they earn their patent rights.

II. INVENTOR REMUNERATION [5] 

The buzzword of the day was ‘remuneration’. U.S. Companies operating in China potentially face a considerable added burden because of the changes to inventor remuneration. Inventor remuneration has become a significant talking point amongst the in-house counsel of U.S. corporations because now SIPO requires "reasonable remuneration" to be paid to inventors who are employees of companies or invent under someone else's direction.  Each of the four industry panelists of American Corporations expressed concern over this matter. What qualifies as "reasonable remuneration”?  Do U.S. Corporations base this remuneration on standard Chinese salaries or the average international company salary? At what point in the process must this remuneration be awarded and under what circumstances?

Overall the wording of Rule 78 is simply too vague for American Corporations to feel protected from future prosecution by either their employees or subcontractors. This rule however does make strides towards properly insuring that corporations fairly compensate their inventors for their work.

III. GENETIC RESOURCE DISCLOSURE [6] 

Article 26 also spurred discussion at the conference. Changes include a now mandatory disclosure of the direct sources of all genetic resources. This new regulation presents an array of complex questions that SIPO could not have predicted in their drafting. If SIPO truly wants to know the sources of all genetic resources cited in patent filings, it will put a large amount of duress on corporations who simply buy this material as needed from the free market.

If the onus is now on patentees to research the history of these resources, it may put unnecessary barriers in the way of otherwise simple patent application

Moreover, if these genetic resources are human based such as in the case of stem cells, to what degree must corporations identify these sources? Must they name the original human source in the application? Would this constitute some breach of confidentiality they have with whomever they sold the genetic material to in the first place? In addition, what constitutes an “unnecessary need to disclose” a patentee’s genetic resources? In-house counsel from U.S. corporations asked all these questions in the presentations after Tian Lipu’s keynote address.

IV. PATENT SQUATTING [7] 

To encourage the use of patents and innovation, SIPO has also determined that if any patentee who does not make use of their patent within 4 years of filing their application (or 3 years from earning the patent right), another party may apply for its use. This is intended to discourage patent holders from sitting on their patents without making efficient use of them, very similar to how in America if a landowner is not aware or does not take actions to remove someone illegally using their land for a certain length of time; they lose the right to that land to the illegal squatter. This regulation encourages efficient allocation and use of patent rights to people who actually need protection for inventions that will go to market.  This regulation also discourages rent-seeking inventors looking to simply collect licensing fees.

V. FREE AGENCY [8] 

Under the new regulations, so long as an IP Agency is already certified to practice IP law within the People's Republic of China, they do not have to go through any other administrative approval process before they can represent a foreign corporation in a patent filing or litigation. This lowers barriers to entry for both foreign firms/corporations seeking domestic counsel through the filing process as well as helps domestic firms find clients without necessarily having to talk to SIPO beforehand.

The free agency policy is nothing new in western countries. Anyway, the free agency policy will benefit to foreign companies to really enjoy quality patent services in China, with some potential poor services resulted from the government’s former monopoly policy before.

VI. THE POWER IMBALANCE

The Chinese patent system still heavily favors patentees over public interests. Even under the revised regulations, there are still many instances where a patentee who would lose a lawsuit in The United States wins easily in China.

Even a patent making spurious and physically impossible claims can secure protection. In the case of BEIJING FORMERS CO., LTD. v. UK STAR SYRINGE CO., LTD., the Patent Re-examination Board refused to invalidate a spurious claim made in their application.[9]  By using simple geometry, anyone can prove that if the applicant’s syringe could actually function as the application claimed, the syringe wall would have to break or the syringe rod would be stuck. The Chinese patent examiners insisted on seeing written evidence, and refused to consider any logical reasoning as a suitable evidence for the patent’s dismissal.

Also, take the example of WUHAN JINGYUAN Co. v. HUAYANG and JP FKK Co. [10] In this Supreme Court case, the judge did not recognize the implied license theory, which is common practice in The United States. Patentees who sell their patented technology to customers that later turn a profit from this technology can successfully file suit against these customers for patent infringement. [11]

The Chinese patent system does not even reject patent applications where the applicant lies to the examiner during the filing process.[12] A patent applicant can be found guilty of making false claims when responding to the first office action issued by SIPO, but the patent will still be protected and enforced. Western patent standards would deem these actions as “inequitable conduct” and unfairly stacked in favor of patent holders.

Although China is frequently criticized for its poor intellectual property protection, the patent owners in China would still enjoy significantly more protection in China than they could in the United States and the European Union. Foreign companies have repeatedly won patent litigations in China.

VII. CONCLUDING REMARKS

There are also gripes from foreign corporations fighting through the added red tape in China’s patent law and its regulation; they simply want clarification on gray issues so that they can safely wade their way through to having their patents adequately protected in China.

There are of course still issues that SIPO must deal with before the regulations are truly equitable for all parties. Due to the still existent imbalance of power in the Chinese patent system, it is currently very cost-effective to file for patent protection in China. The patents will be strictly enforced sometimes even at the detriment of public interest, and foreign companies will enjoy virtually unencumbered access to their intellectual property in China.  China unjustly favors patentees’ rights over public rights. Domestic academics have criticized SIPO for “patentee over-protection”. China encourages foreign investment by creating a favorable legal environment for inventors, but SIPO will undoubtedly correct this significant imbalance in the future.