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Another Step Forward on China’s Long March Towards Improved IP Protections

Summary

Amendments to China’s Patent Law are set to take effect later this year. The changes promise to strengthen patent enforcement in China in a variety of areas and should allow foreign companies operating in China to better protect their intellectual property portfolios. However, changes to the Patent Law alone will not be enough to put an end to the predatory practices of forced technology transfer, and it remains to be seen how Chinese courts and regulators will interpret and enforce the amendments.

Enshrined in the constitution itself, US patent law has a rich and storied history. Technological development has long spurred races to file patents in America since the founding of the republic, giving us such dramas as the sparring filings of Thomas Edison and Nikola Tesla. Patent systems are a foundational component of any modernized country, and the absence of anything resembling a patent system from pre-modern China offers insights to China’s late arrival to industrialization. 

China only promulgated its initial Patent Law in 1984, recognizing the importance of having a stronger intellectual property (IP) regime to support its future growth. Since then, the Patent Law has played an important function in facilitating China’s incessant climb up the technological ladder. However, there has also been widespread criticism of the many loopholes available for Chinese companies to violate the rights of foreign companies with little or no repercussions. This is a complicated issue, with the Patent Law only playing one role on a stage with many other actors within the Chinese government. Pressure from administrations from the US and other developed nations have finally seen some success in recent years with renewed promises by China to reign in some of its predatory behaviors against foreign companies concerning IP rights. One of the areas this success can be seen is through the most recent amendments to China’s Patent Law.

China’s Rapid Rise as a Patent Contender

Early in the Reform and Opening Up period, Deng Xiaoping identified the need to grow China’s technological know-how. Mao was barely cold in his mausoleum when Deng proclaimed the Four Modernizations in 1977. Trips by Deng to Japan and the United States further drove home just how far behind China was at the end of the cultural revolution, and establishing a viable patent system became crucial in pushing forward China’s goals in technological advancement. 

In 1985, the year after establishing its Patent Law, China acceded to the Paris Convention for the Protection of Industrial Property (the granddaddy of Intellectual Property treaties, in effect since 1883). In 1994, it acceded to the Patent Cooperation Treaty (PCT), conforming China’s ‘invention patents’ to basic international standards, and became a member of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) when joining the WTO in 2001.

Faced with the relative lack of technological savvy in the early post-Mao China, it is perhaps not surprising that emphasis was placed on technology transfers and other IP rights, leveraging the promise of entry into the massive Chinese market to entice many of the world’s cutting-edge companies to set up shop in China. However, after the Great Recession, the Chinese government doubled down on initiatives to encourage domestic innovation. This move coincided with the third amendment to China’s Patent Law, which promulgated in late 2008, and became effective on October 1, 2009. 

The effects of the third Patent Law amendment have been astounding. From 308,326 filings in 2010, the number of filings had more than quadrupled to 1,327,847 in 2019. Chinese filings now far outstrip those filed in the US, which saw 521,145 filings in 2019. While a good portion of this dramatic increase is undoubtedly “fluff” (filings for inventions or designs that have little-to-no commercial value), it still reflects an astounding increase in the technological prowess of China, as well as validation of the usefulness of securing intellectual property rights.

Recent Changes to China’s Patent Law

It is within this backdrop that the Fourth Amendment to the Patent Law has emerged. The amendment, promulgated in late October of 2020 and set to go into effect on June 1, 2021, offers a range of welcomed developments that should benefit legitimate owners of patents filed in China, regardless of nationality. 

Damages

Topping the list of substantive changes are several modifications to the damages available to rights holders of infringed patents, found in Article 71. The amendments significantly increase statutory damages to a maximum of CN¥5 million from the previous CN¥1 million. Statutory damages have been important in prior years, as, in many cases, providing evidence of damages incurred by the rights holder beyond the previous statutory limit of CN¥1 million proved a significant challenge. However, the amendments also now provide easier paths to establish higher damages. The Patent Law will, for the first time, allow for punitive damages (up to five times direct damages) where infringement is serious and willful. 

Moreover, the amendments ease the burden of proof on patent owners to show infringement by providing a mechanism whereby courts can order infringers to provide evidence needed to calculate damages, or require infringers to determine damages based on calculations submitted by the patent holder. Such provisions should make it easier for patent owners to obtain judgements that more accurately reflect the damages they have incurred, and thereby make bringing infringement cases to court in China a much more attractive proposition.

Extensions

Another important theme in the amendments is extension of patent lengths within various circumstances. Chapter Five allows patent term compensation where the grant of a patent is excessively delayed during the filing of the application. In addition, the new rules allow for extensions of up to five years for certain pharmaceuticals, bringing China’s Patent Law closer to the regimes of the US and the European Union. Finally, the new rules increase the term of China’s utility model patents from 10 to 15 years.

Fair Usage

The final changes worth highlighting are the new provisions aimed at protecting fair usage of China’s Patent Law and the incentives of using China’s patent regime in general. Article 20 provides for a duty of good faith for patent applications and patent infringement actions, which are aimed at dissuading patent trolls. These trolls have become a serious problem in the US patent system and adding in provisions to deal with them in China’s burgeoning patent regime is absolutely necessary.

However, there is a danger of the good faith clause becoming a double-edged sword. For example, Chinese regulators could use this as a potential avenue to stymie legitimate patent infringement actions brought by foreign patent holders. Additionally, the amended law now also contains provisions ‘urging’ companies to set up incentives for employee-inventors (see Article 15). Finally, the amendments establish an open patent license system, which allows companies to market their patents through an ‘open license’ that any company can use upon payment of the license fee, rather than having to engage in negotiations with the patent owner directly.

The Drivers Behind the Amendment

These revisions reflect both a domestic impetus to improve patent protections as well as pressure from foreign governments to provide better protections to non-Chinese enterprises. It is no accident that the final draft of the new amendments to the Patent Law was only decided on in October of 2020, which allowed certain understandings reached in the Economic and Trade Agreement Between the United States of America and The People’s Republic of China (Phase One Agreement) to be reflected in one of China’s highest IP laws.

Comparing the Phase One Agreements to the amended Patent Law, one might get the impression that large swaths of the amendments were a direct result of the Trump Administration’s tough negotiating stance with China; however, the reality is more mundane. Certain aspects such as provisions relating to patent terms and the lowering of thresholds for criminal investigations do likely stem from Phase One Agreement commitments, and the scope of protection of pharmaceutical patents was partially expanded because of the Phase One Agreement negotiations as well. However, other important provisions had been committed to long before the Phase One Agreement was signed.

The US does deserve some recognition. The US Patent and Trademark Office has long had a devoted China team that has worked to push China’s intellectual property reforms in the right direction. Furthermore, international organizations such as the World Intellectual Property Organization have worked with China for years to bring its IP regime closer to international standards. These efforts can, in part, be seen in the consensus among many Chinese intellectuals pointing out that, while China has made major improvement in intellectual property rights protections over the years, it still lags far behind developed nations. 

According to research following the most recent amendments in 2013, China had slightly worse IP protections than the world average, despite its years of improvement. These intellectuals also consider the US to have an asymmetrical advantage over China with its more developed IP regime, and suggest that the most efficient way for China to address this deficiency is by further strengthening its own IP regime. The effects of broad international pressure and domestic impetus towards change can be seen with China’s push to accede to additional international treaties, such as the Hague System. The newly extended terms of China’s utility model patents (from 10 years to the international standard of 15 years) will allow China to meet an important factor in accession to the Hague System.

Effectiveness in the Real World

Just how useful these new changes will be for US companies enforcing their rights in China remains to be seen. The changes under the 4th amendment will, at a minimum, make patent litigation a more promising proposition for patent holders facing widespread infringement. Much will depend on how well courts and other government agencies enforce the new rules, but these amendments alone will not be a panacea to cure all patent infringement ills currently faced by foreign companies operating in China.

While it is likely that the predatory practice of forced technology transfers should be harder to realize once these revisions take effect, such practices are not directly addressed in these amendments. Examples of these practices are numerous, though the trials and tribulations experienced by Dupont provide an enlightening case study. In 2013, DuPont decided against renewing a license with a Chinese partner to produce polymers derived from corn using DuPont patents. It later brought patent infringement arbitration against its former Chinese partner, but soon found its Chinese offices being raided by Chinese Antitrust regulators, with one of the investigators telling DuPont officials they were investigating DuPont’s unwillingness to continue licensing technology to their former Chinese partner, among other things.

There is always the potential for legitimate friction between antitrust law and patent law as patents grant monopolies for the use of specific technologies for a limited period of time, particularly considering China’s Anti Monopoly Law now has a decade-long history of being used to harass foreign corporations. While recent moves in China’s antitrust scene have suggested the law is maturing, this has more to do with the willingness of Chinese regulators to apply these laws to domestic companies in novel situations; they seemed to have little compunction about applying these laws to foreign corporations. Ultimately, the understandings reached in the Phase One Agreement concerning this type of harassment will have to be addressed through amendments to other laws in addition to the Patent Law (such as the Foreign Investment Law, which has been recently amended as well), or by changes in practices of Chinese enforcement agencies themselves.

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