Major Changes in Third Revision of Patent Law - International Law Office

Introduction
Background
Inventions Made in China
Patentable Subject Matter
Enhancement of Novelty Requirement
Broadening of Protection of Design Patents
Assignment of Patent Rights
Co-ownership of Patent Rights
Compulsory Licences
Exemptions from Infringement
Increased Damages for Patent Infringement
Protection of Genetic Resources
Administrative Enforcement

Introduction

The People’s Republic of China (PRC) Patent Law has been amended three times since 1984. The second round of amendments in 2000 was aimed at aligning the Patent Law with the World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). The most recent revisions, promulgated on December 27 2008, were passed to bring the law further into line with international standards and other PRC regulations. The amendments will come into effect on October 1 2009.

The recent revisions to the Patent Law are also part of a national strategy to assist Chinese companies move towards greater innovation and to strengthen China's legislative and enforcement framework for the protection of IP rights. They bring about several significant changes in law, as outlined in this update.

Background

Recently China has been making notable strides to improve its legislative and enforcement framework for the protection of IP rights, in keeping with the national strategic plan for IP rights issued in 2008. For example, an amendment to the PRC Civil Procedure Law in October 2007 gave higher level courts greater supervisory powers over lower courts in an attempt to ensure greater consistency in the enforcement of laws and stamp out local protectionist practices.

The size of patent awards is also noticeably increasing. Recent substantial damages awards in the patent arena include the Rmb20 million awarded on January 21 2009 to German bus and coach manufacturer Neoplan by the Beijing No 1 Intermediate People’s Court against three infringing PRC companies (under a design patent), and the Rmb50 million awarded against Samsung to a company in Zhejiang province for infringement of its dual-mode cell phone patent. On November 27 2008 Ying Xinlong, deputy director of the Shanghai Higher People's Court, was quoted in China Daily as saying, "We are hoping that harsher penalties will prevent more IP infringements in the future."

The third revision to the Patent Law will come into effect on October 1 2009. In China, the Patent Law also governs registered designs and utility models. The major changes are described below.

Inventions Made in China

Under the Patent Law 2000, patent applications for inventions made in China were required to be filed in China first before any filings were made abroad (Article 20). The amendment partially relaxes this requirement and provides a mechanism for the State Council to grant approval for patent applications for inventions made in China to be filed abroad first. The patentee is required to file a report with the State Council for a confidential examination to obtain such approval. Failure to submit such a report to the State Council will prevent the patenting of a subsequent application filed in the PRC for the same invention.

This development will raise some concerns for applicants because the procedures of the confidential examination are not detailed in the new law, rendering uncertain the process and grounds for the withholding of permission. Furthermore, the uncertainties in the existing law remain regarding what it means for an invention to have been ‘made in China’ if input has been received from research and development (R&D) units in both domestic and overseas locations.

The provision is intended to promote China as an R&D hub for multinational companies and has been broadly welcomed by domestic and foreign companies alike. However, foreign entities are likely to wait and see how the amended procedure is administered in practice before unwinding the offshoring arrangements that have widely been put in place to work around the restrictions in the existing law.

Patentable Subject Matter

The amended Article 2 introduces statutory definitions of 'patentable inventions', 'utility models' and 'designs'. The amendment is relatively unusual in that it lays down a definition of an 'invention' per se, as distinct from delineations of patentable and non-patentable subject matter.(1) Nevertheless, the definitions are broadly consistent with international positions. In the case of designs, registration is limited to designs that are both aesthetic and applicable for industrial purposes. On the other hand, purely functional features of designs may be registrable as utility models.

Enhancement of Novelty Requirement

Invention patents and utility models
The novelty requirement in the Patent Law 2000 (Articles 22 and 23) provided that an invention must not have been disclosed in publications anywhere in the world or have been used in China prior to the application date. This two-pronged novelty test is similar to that under US patent law.

The revised law has clarified and enhanced this novelty requirement by eliminating the territorial restriction on use. In other words, China will now operate an absolute standard and adopt a truly global test of novelty for both invention and utility model patents in line with the position under the European Patent Convention. This means that any act that makes an invention available to the public before the international filing date, no matter where in the world, will destroy the novelty in that invention and bar it from being patented in China. An invention will satisfy the novelty requirement if it:

• has not been disclosed in publications;
• has not been used; or
• is not otherwise known to the public anywhere in the world.

On the other hand, it is unlikely that any substantive change was intended by the amendment of the scope of prior art to comprise 'technology', in contrast to the arguably narrower 'inventions or utility models' of the current law.

Under the revised law, the test of novelty (but not distinctiveness) for designs has also been expanded to include the content of prior applications that are unpublished at the filing date, in line with the position for invention patents.

Design patents
In the case of design patents, a design will be deemed novel if it is not known to the public anywhere in the world at the international filing date. The wording of the previous requirement was similar to that for invention patents and utility models.

Although the wording now adopted - "known to the public" - is identical to that applied in respect of invention patents and utility models, the question arises of whether it will be interpreted in the same strict manner. In particular, how the standard will be interpreted as regards designs disclosed in obscure publications outside the expected circle of the relevant design sector remains to be seen. For example, an explicit saving for designs first made available to the public in a highly obscure publication or other source is contained in EU design law. It remains to be seen whether the courts will apply the new wording of the Chinese law to imply a similar saving, or alternatively to deem designs to be known to the public no matter how obscure the source of the disclosure.

Specific savings already exist in relation to all types of patent in connection with a first publication at certain exhibitions, academic meetings or without the applicant’s consent.

Broadening of Protection of Design Patents

Under the TRIPs Agreement, an offer for sale is not an infringing act with respect to a design patent. However, Article 11 of the Patent Law adds the act of offering to sell to the scope of exclusive rights enjoyed by design patentees. Therefore, holders of design patents are protected from another party making, offering to sell, selling or importing a product incorporating their patented design for production or business purposes.

Assignment of Patents

In the 2000 version of the Patent Law any assignment of either the right to apply for a patent or the patent right itself by a Chinese entity or individual to a foreigner was subject to the approval of the competent department of the State Council. Despite this requirement, no competent department was ever designated to grant such approval. The current Patent Law removes the approval requirement (Article 10). Instead, it specifies that any assignment of either the right to apply for a patent or the patent right itself by a Chinese entity or individual to a foreigner must follow the procedures specified in the provisions of the relevant laws and administrative regulations. This is principally a reference to the requirements set out in the Technology Import and Export Regulation. This regulation requires that all assignments of a patent, a patent application or the right to apply for a patent must be registered with the Ministry of Commerce. However, separate approval for the transfer is required only if the subject patent contains technology that falls into the category of restricted technology.

Co-ownership of Patent Rights

In the absence of express provisions dealing with the co-ownership of patent rights under the Patent Law 2000, a provision under the former Technology Contract Law was often taken as a reference point when dealing with this issue, despite it having been abolished by the Contract Law in 1999. The new Patent Law introduces an explicit provision regulating the rights of coowners (Article 15).

If there is no applicable agreement between the co-owners, each co-owner is entitled to work the patent itself or license third parties to work the patent. If the coowners have agreed on the ways in which their patent rights may be exploited, the revised law upholds the primacy of that contract. Except for these situations, all other use of a jointly owned patent, for example, by the grant of an assignment or creation of an encumbrance over a patent will require the consent of each of the co-owners.

These rules apply to the right to apply for a patent, as well as to the registered right itself.

It is less clear whether the exception for licensing will extend to cross-licensing or exclusive or sole grants because the status of the grant as against the non-licensing co-owner(s) will be uncertain in the absence of any clarification in the statute. The revised position also has no bearing on rights in related design and other documents protected by copyright. Interested parties should ensure that the ownership and exploitation of all IP rights arising from codevelopment work involving China is governed by a clear contract between the parties.

Where another party is licensed to exploit the patent, the royalty received must be distributed among the co-owners. The legislation does not specify how royalties are to be distributed, but presumably this will be in proportion to the parties’ respective ownership interests, or otherwise equally.

Compulsory Licences

The new law details the conditions under which a party is entitled to apply for the grant of a compulsory licence to exploit a patent right (Articles 48 and 50). Under the new law, compulsory licences will be available in the following circumstances related to exploitation by the patentee: (i) if the patentee fails to exercise its patent or has not sufficiently exercised its patent without proper reason within three years of the date of grant of the patent and four years of the filing date; or (ii) where the patentee’s exploitation of the patent is determined in accordance with the law to be anti-competitive and the compulsory licence is intended to eliminate or reduce the adverse effect on competition.

The amendment removes the previous requirement that a compulsory licence would be available only if the patent owner had refused to license the patent on reasonable terms. This appears to be inconsistent with Article 31(b) of the TRIPs Agreement, which permits member states to waive the requirement of prior negotiation with the patent holder only in cases of national emergency, extreme urgency and public non-commercial use.

Additionally, in compliance with the Doha Declaration on the TRIPs Agreement and Public Health, the law specifies that compulsory licences may be issued to manufacture and export medicines to certain countries in accordance with China’s international obligations. Compulsory licences may also be granted where required in the event of a national emergency or another extraordinary state of affairs, or in the public interest. Lastly, a compulsory licence is available to a patentee to unblock the use of its later right to more advanced technology of unusual economic significance where that right is non-severable from an earlier patent.

Exemptions from Infringement

The exemptions from infringement are set out in Articles 62 and 69(5).

Parallel imports
China has dramatically reversed its position on parallel imports. Whereas the first importation of a patented product or a product obtained directly by operation of a patented process was previously the exclusive right of a patentee in all circumstances, the new law allows international exhaustion. Third parties will now be permitted to import into China and sell patented products that have been sold in an overseas market by the patentee or with its authorization. The move is intended to open up the domestic market to increased price competition for imported goods.

‘Clinical trials’ exemption
The new Patent Law provides an exemption from infringement for the acts of manufacturing, using or importing patented medicines or medical apparatus for the purpose of obtaining regulatory approval for drugs and medical devices. This measure is intended to encourage R&D activities in China, but will also be of assistance to generic pharmaceutical companies looking to get a head start in obtaining authorization to market end-of-term drugs.

Statutory ‘squeeze’ defence
The new law introduces a statutory ‘squeeze’ defence to infringement. Infringement will not occur where the defendant can demonstrate that the technology or design it is using is included within the prior art. The defence is available to the alleged infringer without it having to seek invalidation of the patent-in-suit for lack of novelty. The wording of the article does not make it clear whether the defence will also extend to the use of obvious developments over the prior art, although policy considerations would suggest that it should.

Increased Damages for Patent Infringement

Article 65 of the new Patent Law provides that courts may determine statutory damages of between Rmb10,000 and Rmb1 million. Such an amount is well above the maximum statutory damages for copyright and trademark infringement, which are set at Rmb500,000.

The revised law appears to set up a compensation waterfall with options available for the court to assess compensation awards if more favoured alternatives are difficult to assess, including (in order of preference):

• compensatory damages;
• an account of the products obtained by the infringement;
• an (unspecified) multiple over a reasonable royalty fee; and
• if all of the above are difficult to assess, an award of statutory damages.

This development is a clear statement by the government that it wishes to focus on strengthening patent protection. What remains to be seen is how readily lower courts in particular will favour an award of statutory damages over the other bases for assessment.

If a person passes off a patent as its own, a fine may be imposed of up to four times the illegal income obtained from the infringement or of up to Rmb200,000 in the absence of evidence of any illegally obtained income.

Protection of Genetic Resources

The revised Patent Law included two provisions aimed at protecting China’s genetic resources. Under Article 5, an invention that relies on the use of genetic material that has been obtained or used in violation of any law or regulation will be denied patentability. Furthermore, in compliance with the principles of Decision VI/24 of the Conference of Parties to the Convention on Biological Diversity, Article 26 of the new law requires that a patent application for an invention made in reliance on genetic material specify the source of that material. An explanation must be given wherever the applicant is unable to state the original source of any such genetic material.

Administrative Enforcement

The new law strengthens the administrative enforcement of patents by giving further powers to administrative authorities to investigate claims of patent infringement. Article 64 provides that patent administrative authorities may:

• conduct on-the-spot investigations at the premises where a suspected patent infringement has occurred;
• have access to and reproduce contracts, invoices, books and other relevant materials related to the suspected infringement; and
• inspect the relevant products and seize any counterfeited items.

While this type of administrative enforcement is generally difficult to secure in respect of invention patents because of the technical difficulty of establishing infringement, the amendments are to be particularly welcomed in the case of design patents and some utility models.

For further information on this topic please contact Connie Carnabuci or Richard Bird at Freshfields Bruckhaus Deringer's Hong Kong office by telephone (+852 2846 3400) or by fax (+852 2810 6192) or by email (connie.carnabuci@freshfields.com or richard.bird@freshfields.com).

Endnotes

(1) An ‘invention’ means a new technical solution made for a product, method or the improvement thereof.