China’s New Patent Regime

Changes to China’s patent regime provide greater clarity.by Douglas Clark, Geoffrey Lin, and Alex XiaDuring the past year, legislative and regulatory changes have clarified China’s patent regime and improved its transparency. The amended PRC Patent Law took effect October 1, 2009 and contains a few important changes and several new provisions. Next, the Supreme People’s Court (SPC) on December 28, 2009 issued a judicial interpretation on patent infringement trials that clarified various issues related to patent infringement. The PRC State Council then revised the Implementing Regulations of the PRC Patent Law, and the State Intellectual Property Office (SIPO) revised the Patent Examination Guidelines, both of which took effect February 1, 2010. Some of the revisions made important changes related to the acquisition and maintenance of patent rights, patent infringement, noninfringement defense, and damages.

Acquisition of patent rights

Confidentiality examination

Previous versions of the Patent Law required Chinese applicants (including foreign-invested enterprises that were registered in China) whose inventions had been completed in China to file an application there before filing for a patent in a foreign country. This provision did not apply to foreign applicants. Article 20 of the recently amended Patent Law no longer requires a first filing in China, but it requires that all applicants—Chinese and foreign—report to SIPO for a “confidentiality examination” before any foreign patent filing if the invention was completed in China. The stated goal of the confidentiality exam is to protect China’s “national defense” interests or other vital national interests. The implementing regulations (Articles 8-9) and the examination guidelines (Part V, Chapter 5, Section 6) provide details on the confidentiality exam requirement:

• To file a patent application abroad (including filing a Patent Cooperation Treaty [PCT] application with a foreign receiving office), the applicant must submit a confidentiality exam request form and a detailed explanation of the invention’s technical solutions in Chinese. (Administered by the World Intellectual Property Organization, the PCT is an international treaty that promotes unified procedures for patent filing across participating countries.)
• If the applicant submits a PCT application to SIPO’s Patent Office, the Patent Office will automatically treat the submission as a request to file a patent application abroad at the same time.
• After receiving a request to file an application abroad, the Patent Office should send a first notice asking the applicant to delay filing abroad (if it determines that the invention may need to be kept confidential), after which the Patent Office will send a second notice to allow or deny the request. If the applicant does not receive the first notice within four months or the second notice within six months of submitting the request, the applicant may file abroad.

Because a confidentiality exam takes time (usually about two weeks, though the time may increase as backlogs build up), applicants that want to obtain a priority date—the date that precludes later-filed applications from claiming the same invention in most situations—as soon as possible and obtain a Chinese patent should consider filing a PCT application, with China as the receiving office, or a Chinese patent application, first. Alternatively, the applicant can send a request for filing abroad to China’s Patent Office, but the confidentiality exam may delay the priority date.

Rewards and remuneration for inventions made by employees

The Patent Law specifies that employers should reward employee-inventors for their patents and should provide “reasonable remuneration” based on the commercial exploitation of the patented invention and economic benefits derived from the invention (Article 16). Because it is unclear what remuneration would be considered reasonable, some employers feared that the provision could open the door to lawsuits by employee-inventors who seek to share significant portions of the employer’s profits.

The implementing regulations eased the remuneration concern by stating that employers may “reach an agreement with the inventor or designer of the patent or specify in its legitimately enacted company rules the form and amount of the reward and remuneration” (Article 76). Articles 77-78 further specify minimum rewards and remunerations in the absence of a contract or company rule. These articles will likely be interpreted to mean that employment contracts or legitimately enacted company rules control the form and amount of rewards and remunerations. Allowing company rules to control the form and amount of rewards and remunerations is particularly welcome because it provides a safety net in case the issue is left out of employment contracts.

Design patents

The amended Patent Law raises the standard for patenting a design. A patentable design (Design A) cannot be the same as the design of a prior art application (Design B) that has an earlier application date but that was published after the application date of Design A (Article 23). This new provision mirrors an existing novelty requirement for invention and utility model patents as specified in Article 22 of the Patent Law. Also according to Article 23, a patentable design must be substantially different from any prior art design or a combination of the features of prior art designs. Previous versions of the law required a patentable design to not be identical or similar to an existing design; the change aims to discourage the filing of invalid or junk design patents in China. (For the Patent Law’s definitions of design, invention, and utility model, see the CBR, March-April 2009, Changes to China’s Patent Law and Practice.)

The amended Patent Law also offers broader protection for design patents. Article 11 prohibits parties from offering to sell goods that infringe a design patent. Thus, a party can no longer advertise or display products that infringe a design patent at trade shows or on the Internet.

Prior art

Articles 22-23 of the amended Patent Law state that the Patent Office can consider references regarding overseas use or sales to determine novelty and inventiveness of inventions, utility models, and designs. Previously, prior art was limited to what had been known to the public in China (or, for design patents, what had been publicly used in China) or published anywhere in the world. By expanding the scope of prior art, the amended Patent Law establishes an “absolute novelty” requirement that is in line with the European Patent Convention.

Compulsory licensing

The amended Patent Law specifies a broader range of circumstances under which SIPO can grant a compulsory license for an invention or utility model patent after receiving an application from a third party. A compulsory license can be granted if

• Without a proper reason, the patentee fails to practice or sufficiently practice the patent for three years after it is granted or for four years after the patent application date (the later deadline applies). The implementing regulations specify that the phrase “fails to sufficiently practice the patent” means that the patentee and licensees have not exploited the patent in a manner or scale that meets domestic demand; the regulations do not specify what constitutes a “proper reason.”
• The patentee’s enforcement of the patent right is deemed monopolistic conduct and a compulsory license would remove or diminish the interference of competition primarily within the China market. It is unclear, however, under what circumstances the enforcement of a patent would be deemed “monopolistic conduct.”
• It is necessary to protect public health. Reflecting the Doha Development Round of the World Trade Organization (WTO) talks, the amended Patent Law allows SIPO to grant a compulsory license for the manufacture and export of patented pharmaceuticals to countries designated under international treaties that China has signed (Article 50). Under Article 73 of the implementing regulations, “patented pharmaceuticals” refers to any patented product or product directly obtained through a patented process that addresses public health problems, including active ingredients granted a patent right for making the product and diagnostic articles for using the product.

These provisions have created concerns for holders of Chinese patents. So far, China has never granted a compulsory license, but the question of how the new compulsory licensing provisions would be enforced remains, and more clarification is needed.

Infringement proceedings

Claim interpretation

SPC’s Interpretation on Several Issues Concerning the Application of the Law on Trials of Patent Infringement Disputes provides much-needed judicial guidance on how the courts should construe patent claims:

• The courts should first use intrinsic evidence (evidence from the patent claims, specification, and prosecution history) in claim interpretation, but they can use extrinsic evidence (for example, dictionaries and textbooks) if the meaning of the relevant claim language cannot be determined by using intrinsic evidence.
• A patentee may choose to give a claim term a meaning in the patent specification that is different from its normal meaning.
• The courts should interpret means-plus-function elements (claim elements that are described through their functions) according to the described embodiments and their equivalents. For example, if a patent claim uses the phrase “means for connecting A and B,” and the specification describes a fastener for connecting A and B, the claim term should be interpreted as a fastener and its equivalents.

These claim interpretation rules are generally consistent with US patent law.

Right to a declaratory judgment action

In the past, various PRC courts, including the SPC, have allowed declaratory judgment actions relating to patent infringement (that is, actions in which a party asks the court to declare that it does not infringe the other party’s intellectual property rights). The judicial interpretation specifies one situation under which an alleged patent infringer has the right to a declaratory judgment action. Article 18 of the SPC judicial interpretation states that if, after being warned of patent infringement, a party (or an interested party) requests in writing that the right holder exercise its right to sue, but the right holder fails to withdraw the warning or to file a lawsuit within one month after receiving the written request or two months after the written request is sent, the warned party would be entitled to a declaratory judgment action.

In the past, some patentees have sent warnings to distributors or end users of products to obtain royalties or force the distributor or end user to buy from the patentee with no intention of suing. This provision allows the recipient of the letter or the ultimate supplier of the products to bring an action for declaratory judgment if the patentee does not file a case.

Further, if a patent owner is not ready to litigate with an infringer, or is concerned about litigating in the infringer’s home court, the patent owner should consider a declaratory judgment action before sending a warning letter. Alternatively, the patent owner may want to prepare to file a lawsuit in a more favorable forum (for example, a court in Beijing, Shanghai, or Shenzhen, which are considered more experienced in patent litigation) if the circumstances allow it and then send the warning letter. (Generally, the patent owner can sue where the defendant is located or where the infringement occurred.) In this situation, the patent owner can file the lawsuit as soon as the owner receives a response from the infringer denying patent infringement and urging the owner to exercise its right to sue.

Prosecution history estoppel

Various PRC courts have applied the doctrine of prosecution history estoppel, which bars a patentee who has withdrawn certain subject matter from the scope of protection during the patent application process or invalidation proceeding (by making a narrowing amendment to a patent claim or making a statement to the patent office that narrowly interpreted a claim term) from reclaiming it in an infringement proceeding. The SPC judicial interpretation now affirms this doctrine. A patentee may not re-include in the scope of protection technical solutions it relinquished during patent prosecution or invalidation proceedings.

The judicial interpretation does not specify whether courts may still apply the doctrine of equivalents for a claim element that was narrowed during prosecution. (The doctrine of equivalents allows a court to rule that a product or process had infringed a patented invention even if the product or process did not literally infringe the patented invention but was equivalent to it.) Article 44 states that when the doctrine of equivalents conflicts with the doctrine of prosecution history estoppel, the prosecution history estoppel should be applied. Thus, patentees may be unable to benefit from the doctrine of equivalents if narrowing amendments have been made. Therefore, a prosecutor of a patent should consider adding claims that cover other embodiments of the relevant claim element when making a narrowing claim amendment.

Products that use an infringing component

The judicial interpretation states that if a product is made from a component that infringes a patent, the acts of making and selling the product are infringing acts (Article 12). With this clarification, downstream manufacturers would be found liable for using patent-infringing components to build their products.

Defenses

The prior art defense

The “prior art defense” allows a defendant in an infringement case to argue that its allegedly infringing product or process is based on prior art and is therefore non-infringing. Various PRC courts have applied this doctrine, which has been codified into the amended Patent Law (Article 62).

The judicial interpretation has expanded the exact meaning of the defense and provides that the requirements of the prior art defense are satisfied “if all the technical limitations that have been accused to have fallen within the scope of protection of patent rights are identical to or have no substantive differences with the corresponding technical limitations of a prior art technical scheme” (Article 14, emphasis added). Therefore, the allegedly infringing technical scheme can vary slightly from the prior art—the prior art defense can succeed if the two are considered equivalent. Though a court would probably not allow the defendant to combine prior art references for its prior art defense, it would likely allow the defendant to use evidence of common knowledge to show that the prior art technical scheme has no substantive differences with the infringing technical scheme. This effectively introduces a “novelty plus common knowledge” standard for a prior art defense.

International patent exhaustion

Previously, it was unclear whether the doctrine of international patent exhaustion applied in China. The amended Patent Law now provides for international exhaustion of patent rights. Therefore, parallel importation is allowed in China.

Bolar exemption

According to Article 69 of the amended Patent Law, certain otherwise infringing acts, such as obtaining PRC State Food and Drug Administration approval to sell pharmaceuticals and medical equipment, are not subject to patent infringement liability. This provision, which concerns the pharmaceutical industry, is similar to the Bolar exemption available under US law. (The Bolar exemption allows pharmaceutical companies to conduct research and tests to prepare a generic drug for regulatory approval before a patent term ends, without violating patent law.)

Throughout the drafting process, pharmaceutical companies raised the concern that this exemption was introduced without a corresponding increase in patent terms to account for delays in obtaining regulatory approval, thus effectively shortening the term of their patents. This concern, however, was not addressed by PRC authorities.

Infringement damages

The amended Patent Law includes a provision on damages that aims to strengthen patent protection (Article 65). Infringement damages should include reasonable expenses that the patentee has paid to stop the infringement. The law also doubles the previous maximum statutory damage amount from ¥500,000 ($73,235) to ¥1 million ($146,470).

The judicial interpretation provides a rule of apportionment when calculating infringement damages. When calculating damages based on an infringer’s profit, the courts should determine the profit that is obtained due to infringement of the patent instead of all profits made from selling the infringing product. The provision states that “profits of the infringer that have been generated due to other rights shall be excluded.” The provision further specifies that if only a component of a final product infringes, the court shall determine the amount of damages based on factors such as the value of that component and its contribution to the total profit of the final product. The rule of apportionment would limit a court’s power in granting damage awards equal or close to total profits and is in line with the law of damages in other jurisdictions, such as Germany or England. (Apportionment is not relevant in the United States because damages are not based on infringer’s gain there.)

“Home-grown” amendments bring clarity

In speeches about the Patent Law, PRC officials have proudly stated that the latest amendments are “home grown,” unlike the first two sets of amendments. The first round of amendments in 1992 was a response to foreign pressure to improve patent protection, and the second round was required by China’s WTO commitments. But China launched the third round without major external pressure to amend the law. The home-grown nature of the amendments is clear in the introduction of provisions that favor Chinese interests, such as the Bolar exemption or the confidentiality examination requirements.

Nevertheless, the amendments bring greater clarity to the PRC Patent Law and move the law closer to the patent laws of developed nations such as European countries and the United States. This greater transparency will help companies make better investment and enforcement decisions.

[author]Douglas Clark and Geoffrey Lin are partners, and Alex Xia is an associate, at Hogan Lovells, Shanghai. (Lovells and Hogan & Hartson merged to form Hogan Lovells on May 1, 2010.)[/author]