The third revision of the PRC Patent Law took effect on 1 October, but implementing regulations only exist in draft form. China Business Law Journal asked lawyers and corporate counsel how the new law was working out in practice By Alfred Romann

Shawn Zhao has his hands full. As managing corporate counsel at Google in Beijing, Zhao will have to deal with the third amendment to the PRC Patent Law that took effect on 1 October. This third incarnation makes significant changes to a piece of legislation integral to the government’s dream of knowledge-based and high-value growth.

Significant changes relating to intellectual property (IP) protection, including new requirements to share profits with employee inventors, mean Zhao and thousands of other lawyers and business people who deal with IP may have to rethink their strategies.

Broadly speaking, IP professionals have welcomed the new law as a well-crafted piece of legislation that brings IP protection more into line with international practice. Unfortunately, the law still leaves a number of grey areas.

In Zhao’s case, the issue is with one provision that may require companies to sign agreements with inventors on their staff covering how revenues from licensing of patents will be shared.

While Google already has a system to reward employee inventors, Zhao says it is still unclear how the new law will mesh with the company’s existing practice.

An amended draft of the existing PRC Patent Law Implementing Regulations has been circulated, but has not yet been passed. In cases when there is no agreement to the contrary, these draft implementing regulations require a minimum reward payment to the employee inventor of RMB3,000 (US$440) per invention plus remuneration of not less than 2% of after-tax profits, or a reward of RMB1,000 plus 2% of profits for utility models, or RMB1,000 plus 0.2% of profits for designs, says Li Yong, a partner and head of the IP practice at King & Wood. If a patent is licensed or assigned to a third party, the inventor’s remuneration should be no less than 10% of after-tax profits derived from the licensing or assigning of the patent.

What changes Zhao may – or may not – have to implement depend to a large extent on the as yet unanswered questions. Will the amended implementing regulations take effect as drafted? To what extent will Google need to change its existing procedures? And will the law be retrospective? These questions, and others, may be settled when the implementing regulations are passed. For now, IP professionals and in-house counsel like Zhao are coming to grips with a piece of legislation that changes the rules of the game considerably in some areas.

Raising the stakes

The PRC Patent Law has been revised three times. The first revision resulted from a memorandum of understanding between the US and China before China joined the WTO. The second amendment, in 2000, sought to incorporate more WTO rules and standards. According to Sam Li, senior partner at Jincheng Tongda & Neal in Beijing, the recent, third amendment was the first to be made without external pressure. “It developed out of China’s own recognition that if it wants to become an innovative country, it needs a good patent law,” he says.

Notable developments this time around include changes to design patents and the compulsory licensing regime, and requirements for absolute novelty and for Chinese security reviews of filings that are to be made outside China.

Fred Yen, Partner, Tai E International Patent & Law OfficeChung-Teh Lee, senior partner at Lee Tsai & Partners in Taipei, notes that the adoption of an absolute novelty standard for invention patents and utility models brings China into line with the standards of the European Patent Convention. “The territorial restriction on prior public use and knowledge has been removed,” he says, “and an invention loses its novelty in China from any prior public disclosure [anywhere] in the world.”

Under the old patent law’s ‘blended’ novelty regime, before a Chinese patent application could be rejected by the State Intellectual Property Office (SIPO) for lack of novelty, prior sales, public knowledge or commercial use of the invention had to have occurred inside China, or the invention must have been described in a publication either in China or in a foreign country.

Chen Jihong, a partner at Zhong Lun Law Firm in Beijing, says the absolute novelty requirement is the most significant change. “It introduces a new concept of ‘prior art’, which refers to all technologies known by the public prior to the application date,” says Chen. “If the invention has been sold, offered for sale or manufactured anywhere in the world, novelty will have been destroyed.”

Huang Song, Partner, Jun He Law OfficesHuang Song, a partner at Jun He Law Offices in Shanghai, agrees. “The single most meaningful change in the amended Patent Law is the absolute novelty standard,” he says. “The notion that patents are available only for inventions that are truly novel is a bedrock concept in all patent systems.”

In China first

The move to an absolute novelty regime would not be a major change for “multinational companies that already have effective disclosure management practices in place,” says Shirley Kwok of Bird & Bird, who is quick to note that even the previous regime was not strictly domestic novelty but a hybrid one.

“Under the old law, any foreign prior public written disclosure is already effective prior art. The new law merely adds prior foreign non-published public disclosure – essentially oral disclosures or public demonstrations – into applicable prior art,” explains Kwok.

This provision might resolve the frequent complaint from foreign inventors that their inventions, which are publicly used outside China, are filed in China by Chinese applicants, notes Fred Yen, managing partner at Tai E International Patent & Law Office in Taiwan. “Under the new standard, to be considered ‘novel’, an invention must be unknown to the public both in China and abroad prior to the date of filing,” says Yen. One common complaint among IP professionals is the number of generally useless patents granted in China. “The biggest impact of this change of law might be to contribute to eliminating some of the more obviously vexatious or frivolous utility model and design patents,” says Richard Bird, a Hong Kong based senior associate at Freshfields Bruckhaus Deringer. Wang Zhengfa, a partner at Hylands Law Firm in Beijing, is also among those who consider the adoption of the absolute novelty standard as “most meaningful” and “a welcome change which will harmonize China’s patent law with international standards”. Among other things, says Wang, it will lead to the issuance of fewer “junk” patents and “reduce instances of ‘patent hijacking’ resulting from the lack of public use inChina of the product by the real owner”.

Another common complaint is a Chinese company taking an invention with an overseas patent, copying it and selling it domestically. The new patent law should, in theory, help in that situation. “The adoption of the absolute novelty principle will improve the quality of granted patents, which in turn should encourage more foreign applications in China,” says Yen of Tai E.

A security issue

The previous version of the PRC Patent Law required companies (whether Chinese, or foreign with establishment in China) to file patents in China first or take the risk of never getting patent protection in the country, says Zoë Wang, a partner at Perkins Coie in Shanghai.

Provisions in the new version of the law allow companies to file in another country before filing in China, after a review by SIPO to ensure no state secrets are revealed. Multinationals that make it a practice to file in the US first (as is policy with many such companies) may now see a clearer path towards getting a patent overseas first and then in China.

However, observers believe the review could take three to five months, creating a risk that a competitor may file a similar patent during that period.

“What a lot of people may not realize is that the rule will apply to any foreign filing and not only where the foreign filing is the first filing,” warns Bird of Freshfields. “This is a very significant change. The requirement for confidential examination will create uncertainty.”

Tina Tai, of China Patent Agent in Hong Kong, believes that the foreign filing requirements are very significant. “‘Any Chinese entity’ of the old Patent Law is replaced by ‘any entity’ and ‘must be filed in China first’ is replaced by ‘confidentiality examination’,” she notes.

Failure to submit a patent application to SIPO for the “state secrets” review could lead to sanctions or criminal liability. Here, a problem surfaces. Lee of Lee Tsai & Partners notes that “inventions related to national security or other vital interests” is undefined and “will be interpreted purely by the authority”. Interpretation will be solely up to SIPO.

Ultimately, the concerns associated with the SIPO review have less to do with secrecy than they do with efficiency. If SIPO is efficient in its response, the effect should be limited, says Nick Redfearn, head of Asia business development and country head for Hong Kong at Rouse & Co, a specialist IP firm. “If it is not, then it could become a barrier to conducting research and development.”

But others appear more sanguine. Stephen Yang, a partner at Peksung Intellectual Property in Beijing, believes that the requirement for a SIPO review is aimed at Chinese subsidiaries of foreign companies, which may in the past have filed patents in the name of their parent companies overseas rather than in their own right. “I think this has no impact on research activities in China,” he says. “The new provision is actually more lenient in terms of first filing in China, as this is no longer required”.

Raising the bar

The new Patent Law may encourage companies to become more sophisticated through a series of requirements that change the focus of patents from domestic to global.

“Under the current law, only public use within China constitutes a public use bar,” says Zoë Wang, a Shanghai-based partner of Perkins Coie.

The new Patent Law requires absolute novelty before patents are issued. Absolute novelty means that whatever is being patented has to be completely new.

Chinese companies are likely to adopt more stringent confidentiality and nondisclosure policies to meet the requirements of these provisions. International companies, on the other hand, typically have nondisclosure policies already in place due to similar provisions in locations like the European Union.

Cheng Bing, a partner at Run Ming Law Office in Beijing, says the change applies to all three types of patents available – invention patents, utility model patents and design patents. Cheng says the absolute novelty standards should prevent patent hijacking, raise the bar for patents, change how they are challenged and proves the government “is committed to protecting intellectual property rights”.

Genetic resources up for grabs

While the government is keen to protect State secrets, it is also eager to get as much information as it can – particularly information about the development of IP-intensive industries such as pharmaceuticals and food. The government’s thirst for knowledge has translated into increased requirements in the new Patent Law for the disclosure of genetic resources.

Tiger Zhao, Partner, HFGThe practice of asking for disclosure of these resources has become particularly common in developing countries. “It has become common sense to protect genetic resources, and many countries in the world have legislation in this regard,” says Tiger Zhao, a partner at intellectual property practice HFG in Shanghai. “The adoption of this rule will enhance China’s research and development in this field.”

Take the example of Monsanto, which develops genetically modified seeds that it claims grow better, faster and more efficiently in a wide range of environments.

Much of the company’s research is genetic in nature and, as such, says Michael Roth, associate general counsel for Monsanto in Beijing, the requirement in the new law for genetic disclosure may be extremely burdensome. “We may need to use additional resources and to implement additional procedures to comply with this requirement,” says Roth.

Monsanto has the long-held patent experience, says Roth. The issue may be more of a concern for the company’s local partners in China, for whom the requirement to disclose information about genetic resources “may impair the ability … to patent technologies they develop”.

Tong Chen, Partner, Jones DayThere is a lot of discussion about what constitutes direct or original genetic resources and what are grounds for non-disclosure. “The combination of vague terms and severe penalty … makes this provision a potential minefield for life science inventors,” says Tony Chen, a partner at Jones Day in Shanghai.

Disclosure requirements may be difficult to meet since tracking original genetic resources is not always easy, particularly if they are linked to a cascade of research and exploration, says Fred Yen. Foreign companies are also unlikely to devote resources to investigating genetic resources of uncertain origin.

“Foreign corporations from developed countries may not be familiar with this, and will need to watch out,” says Kwok of Bird & Bird. “It should be noted that failure to disclose can only be used to reject a patent application, but not to invalidate a patent that has been granted.”

However, according to Kwok, a patent can be both refused and invalidated after grant, if an invention is completed on the basis of genetic resources obtained illegally or used in violation of laws or administrative regulations.

Compulsory licensing: a bargaining chip?

Another new requirement that has been much discussed is that of compulsory licensing for essential medicines. The use of compulsory licensing allows a government to force a patent holder to give others the right to use the patent.

“Although the compulsory licensing provision has not been enforced so far, it is a facility in line with the increasing number of public health events in China and worldwide,” says Zhao of HFG.

Other countries have used compulsory licensing to allow for the manufacture of essential medicines deemed too expensive or otherwise unavailable. Thailand, for example, has used its prerogative to produce HIV/AIDS drugs. India, which has long had the prerogative, has not. Neither has China, despite increasing pressure. A number of epidemics and emerging viral diseases in the last decade such as bird flu (which emerged in 1997), severe acute respiratory syndrome (SARS) in 2003 and the current swine flu, have only made the use of compulsory licensing requirements more tempting for the government.

Zoë Wang, Partner, Perkins Coie“The possibility of the Chinese patent authority issuing a compulsory licence is likely to be troubling to many healthcare and pharmaceutical companies,” says Wang of Perkins Coie. However, she notes that in the past several decades, the Chinese government has rarely, if ever, exercised its existing compulsory licensing powers.

In fact, there is virtually nothing new in the provisions for compulsory licensing in the new law. Article 48(1) looks like it derived from Article 5A(2) and 5A(4) of the Paris Convention on the Protection of Industrial Property. The new article 48(2) has evolved from Article 31(k) and Article 40 of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). Article 50 has evolved from the Declaration on the TRIPS Agreement and Public Health (the Doha Declaration) and the Decision on the Implementation of Paragraph 6 of the Doha Declaration.

“There are no precedents of compulsory licensing so far in China, so it is not clear how those articles will be applied and to what extent,” says Lili Wu, director of the patent application department at CCPIT Patent and Trademark Law Office.

But Wu notes that the fact that China has never granted a compulsory licence under its pre-existing powers suggests that the country will use the compulsory licensing provisions in the new Patent Law with care. However, she wonders whether “compulsory licensing might be used more like a bargaining chip in the negotiation of commercial licensing”.

Implementation concerns linger

At first glance, the new law appears much clearer than the previous version. Among other things, it brings together items previously covered by multiple laws, rules, treaties, and other documents. But the devil is in the detail – or the implementing regulations, as the case may be.

Jerry Xia, Honeywell“We have been tracking the changes but impact on business is hard to assess until the implementing regulations are announced,” says Jerry Xia, IP counsel at Honeywell, a multinational manufacturer of aerospace, automation, chemical and automotive products that has a specialized team in Shanghai to handle IP issues.

For one, it is unclear whether the law will be retrospective. If it isn’t, it will leave many weak patents in place.

Article 15, which raises concerns about payments to inventors, also states that in the absence of a prior agreement to the contrary, the various co-owners of a patent can exploit it at will. Any of them may, for example, grant non-exclusive licences over the invention to third parties, without requiring the consent of the other co-owners.

According to Yoshiakira Aizawa, intellectual property director at Watson & Band in Shanghai, such a provision is uncommon in other countries. Aizawa believes it may have its roots in the situation where IP rights are co-owned by a private company and a university or research institute. While the company’s timetable for getting a patented product to market may be dictated – and possibly delayed – by commercial concerns, the academic institution may wish to take advantage of its IP as quickly as possible. “Consequently, the university or research institute may take action to grant a licence to a competitor of the co-owner,” says Aizawa.

Yet another point to note is the “cancellation of the designation of foreign-related agencies”, according to Gary Ng, lead partner of Kangxin Intellectual Property Law in Beijing. Under the previous law, only agencies designated by SIPO could deal with patent applications by foreign parties. The new law allows any legally established patent agency to handle the work. Although it sets higher standards for such agencies, the change may give foreign organizations filing a patent in China more options.

Litigation set to surge

The most immediate impact of the new PRC Patent Law is likely to be a sudden increase in litigation. In China, which has more patent lawsuits outstanding than any other country, this could be a serious issue.

Chinese courts are already fairly sophisticated when it comes to intellectual property. Preliminary injunctions and other litigation tools are increasingly used and accepted throughout the hundreds of courts capable of hearing IPR cases. Now, there may be a raft of lawsuits as ownership disputes grow. The new law requires that co-owners of a patent determine ownership in advance or risk having everyone be able to claim ownership and grant third-party licences.

“We do not see future disputes if the ownership is pre-arranged before filing new applications,” says Wu of CCPIT. However, in cases where the ownership is not pre-arranged, the situation is different.

“It is common practice to define licensing fee division in a co-ownership patent application agreement,” says Hu Qi, senior partner of Intellecpro. “But, according to our experience, how the patent is split is not normally defined in the agreement. Since the new Patent Law also does not deal with this matter, future disputes may occur.”

Tony Chen, Jones DayA prior art defence for patents is also likely to lead to more court cases. “The prior art defence provision will encourage more patent lawsuits,” says Chen of Jones Day. “Patentees will be more inclined to sue competitors for patent infringement instead of sending warning letters. Alleged infringers will be more inclined to sue patentees and ask a court to declare non-infringement.”

Spring Chang of Chang Tsi & Partners in Beijing tells China Business Law Journal that while the amended PRC Patent Law came into effect on 1 October 2009, as yet no implementing regulations have been passed or judicial interpretations relating to it issued. “In the time of transition between the old law and the new, the most pressing issue may be that of which law to apply,” she comments.

However, she points to the Notice Regarding the Study and Implementation of the Amended Patent Law (No.49 of 2009), issued by the Supreme People’s Court on 27 September, which offers some clarification. (For further information on this notice and its implications, please refer to Business Law Digest .)

Lawyers are warning of a rush of lawsuits as companies seek to gain a strategic advantage under the revised law. “Beware of the real and present danger of patent litigation in China,” says Chen.

‘Bolar’ exemption problematic

Among pharmaceutical companies, a rising concern associated with the third version of the PRC Patent Law is the introduction of an exemption that allows the manufacture of patented drugs or medical devices by parties other than the patent holder to get administrative approval.

This means manufacturers can begin researching products and developing production lines in advance so as to be ready to market the as soon as the patent protection expires. Manufacturers of generic medicines, for example, can use this exemption to put manufacturing processes in place for new products while they are still under patent protection.

A similar clause, known as the Bolar exemption, exists under US law.

Unfortunately, China’s Patent Law does not balance the lead time granted to competitors with any extension of the term of the patent, as does legislation in the US and EU. There is also a “lack of definition about what products and activities will be exempted”, says Zoë Wang, a partner at Perkins Coie in Shanghai.

“It is clearly intended to benefit the local pharmaceutical industry,” says Nick Redfearn, head of Asia business development at IP specialist firm Rouse & Co.

Tougher penalties may deter

Professor Jiang Zhipei, former chief justice of intellectual property rights tribunals at the Supreme People’s Court and senior adviser to Fangda Partners in Beijing, shares his thoughts on the increased punishments for violations of IP rights contained in the amended Patent Law.

One of the key changes contained in the third amendment to the PRC Patent Law is that it significantly increases administrative penalties and the levels of civil compensation associated with infringements of patent rights. This will play an important role in raising the level of patent protection in China, hopefully spurring the renewal of science and technology.

The main sanctions contained in the Patent Law against passing off and the infringement of patent rights can be divided into three categories: administrative penalties, civil liability and criminal liability. Among these, criminal liability only applies to passing off, but does not apply to the infringement of patent rights. This amendment to the Patent Law affects the rules relating to the administrative penalties for passing off, and the apportionment of civil liability for infringements of patent rights. The fine for passing off has increased from a maximum of three times the amount illegally gained due to the violation to a maximum of four times the amount illegally gained. The fine for non-illegal gains has increased from a maximum of RMB50,000 to a maximum of RMB200,000. At the same time the law also gives the departments responsible for managing patent work the power to seal up or detain passed-off products.

With regard to the determination of civil liability for the infringement of patent rights, the law has been significantly amended. Not only has it added rules requiring the infringer to pay the rights holder reasonable compensation for expenditure incurred in stopping the infringement; it also adds statutory rules for statutory compensation in cases where the damage caused by the infringement is difficult to determine; and it stipulates the order of priority of four methods of compensation for damage caused by infringement.

Before the amendment, the PRC Patent Law did not contain rules stipulating statutory compensation. Therefore, where compensation was difficult to calculate, it could only be determined in accordance with regulations set out in relevant judicial interpretations of the Supreme People’s Court. The range of compensation was previously between RMB5,000 and RMB500,000. This amendment not only provides for statutory compensation, but also provides that such compensation may be as high as RMB1 million, and that the lowest threshold for compensation shall be RMB10,000. In other words, the lowest amount of compensation payable shall be RMB10,000. This undoubtedly increases the seriousness of the punishment for patent infringement, reduces the cost of protecting patent rights, and plays a role in encouraging patent holders such as inventors to continue creating and inventing.