Changing China's Patent Regime  

by Thomas T. Moga

The PRC State Intellectual Property Office (SIPO) recently sent draft amendments to the PRC Patent Law to the State Council Legislative Affairs Office for finalization by the end of this year and for submission to the National People's Congress in 2008. When passed, this will be the third amendment to the Patent Law. The first amendment to the Patent Law, made in 1992, enacted certain basic upgrades commonly required of developing countries after the initial adoption of a patent law. The second amendment, made in 2000, was generally aimed at bringing the law into compliance with the World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (see the CBR, July-August 2001, p.38).

The draft third amendment—which revises roughly half of the original 69 articles and adds 12 new articles—is different from the first two revisions. On one hand, the amendment may clarify some of the ambiguities introduced by the second amendment, such as the lack of clarity surrounding compulsory licensing requirements (see the CBR, November-December 2002, p.14). On the other hand, the third amendment may mark a departure from the original Patent Law and the first two amendments. Indeed, as SIPO explains, this new amendment includes changes intended to safeguard China's national interest and economic security, in line with China's current drive to promote domestic innovation and its attempt to reduce its reliance on foreign-controlled patents.

Tension with TRIPS?

Some of the most important revisions are the proposed changes for patent applications related to genetic material, which underscore China's willingness to deviate from international norms. Amended Article 25, which identifies subject matters not patentable in China, states that patent rights will not be granted "for an invention-creation, the completion of which depends on genetic resources, [and] the acquisition and exploitation of said genetic resources are contrary to relevant laws and regulations of the State." Amended Article 26 requires applicants seeking to patent an invention-creation that depends on genetic resources to specify the "source" of the genetic resource in their application. Curiously, though the revised Patent Law will likely require the disclosure of the source of genetic material, the current law and the proposed amendment lack a provision on the disclosure of relevant prior art—relevant information that was previously made available to the general public. This lack of information not only compromises a patent examiner's ability to vet the application, but also creates an incentive for inventors to hide relevant prior art that could render their invention unpatentable.

Similar requirements on the source disclosure of genetic resources already exist in some countries, such as India, Brazil, and Peru. There is, however, significant discussion about whether such provisions are TRIPS-compliant. In a September 2006 letter to SIPO, the Intellectual Property Owners Association noted three problems. First, the amendments to articles 25 and 26 appear to add new substantive requirements to patentability that exceed those required under Article 29 of TRIPS and Article 5 of the Patent Cooperation Treaty. Second, the proposed amendments, which apply only to inventions that use genetic resources, "are in conflict with Article 27.1 of the TRIPS Agreement, which provides for nondiscrimination in patent availability among different fields of technology."

Finally, the two articles include ambiguous language. For example, the meaning of the phrases "relevant laws and regulations" in Article 25 and "the completion of which depends on genetic resources" in Article 26 are unclear. The ambiguity of these phrases makes it difficult to ascertain what might not be patentable and thus to comply with the procedures for obtaining a patent set forth in articles 25 and 26. These changes conflict with Article 62.1 of TRIPS, which mandates governments to provide "reasonable procedures and formalities" for the acquisition and maintenance of intellectual property rights.

First filing

Requirements on when a patent application should be filed in China will also likely be revised. According to amended Article 20, an applicant that files an international application for a patent must comply with the provisions of amended Article 4, which stipulates that SIPO must first approve an application for an overseas patent for an invention-creation made in China. In addition, new Article 76 states that no patent right shall be granted in China if an applicant files in a foreign country without first obtaining SIPO approval. In other words, when an invention is "completed" in China, the patent application must be filed first in China unless the applicant obtains prior approval for foreign filing. This new rule will apply regardless of citizenship and will, in effect, prevent a foreign parent company from choosing where the patent application is to be first filed. Although the intent behind this proposed change may be to boost the number of patent applications filed in China, it could have a chilling effect on foreign investment in research and development in China.

Exemptions to infringement

The amended Patent Law also exempts a broader range of activities from consideration as patent infringements. The new Article 74 establishes that a patent holder's rights are not infringed "where, after the sale of a patented product made by the patent holder or with the authorization of the patent holder, or of a product directly obtained by using the patented process, any other person uses, offers to sell, sells, or imports that product." This poses a problem in cases where a product that is patented in China and that a patent holder sells outside of China is subsequently imported into China by another person: Under Article 74, the rights under the Chinese patent are deemed to be "exhausted" once the product is sold in another country. As the American Intellectual Property Law Association notes in an August 2006 report, such importation "drastically reduces the scope of patent protection in China." The association argues that sales by a patent holder that occur outside of China should not exhaust the patent holder's rights within China with regard to the item sold.

At least as great a concern is the exception to infringement for drugs and medical equipment. According to the new Article 74, an infringement does not occur when a person manufactures, uses, or imports a patented drug or a patented medical apparatus "solely to obtain and provide the information needed for the administrative approval of the drug or medical equipment" and when a third party manufactures, imports, or sells a patented drug or a patented medical apparatus to such a person. This amendment is similar to what is known in the United States as the Bolar exception, which allows for the use of a patented invention without the permission of the patent rights holder if such a use is related to providing information required to obtain regulatory approval. This exception allows, for instance, a manufacturer of a generic drug to use the technology of a patented drug before the patent expires to prepare the generic drug for regulatory approval so that the manufacturer can sell it soon after the patent expires.

But the new Article 74 lacks features found in US law that balance the interests of the patent holder and those of the party seeking to use the invention. First, under US law, a third party infringes upon the patent rights if it intends to obtain regulatory approval before the patent expires. Second, US law allows in certain circumstances the extension of a patent term for time that the patent holder loses as the third party seeks regulatory approval. (The use of an invention by a third party—without the patent holder's permission—to obtain regulatory approval is considered to shorten the term of the patent.) Third, US law requires the regulatory agency from which the third party seeks approval to withhold approval if the third party and the patent holder disagree over the scope and the validity of the patent and the patent holder brings legal action against the third party. Lacking these balancing features, the proposed amendment fails to adequately protect the interests of patent holders.

Other changes

The proposed amended Patent Law changes the standard by which an invention will be deemed novel and thus patentable. China currently applies a "mixed" novelty standard: Prior art includes material that has been published internationally but excludes inventions that have been publicly used or similarly disclosed outside of China. The amended law expands the scope of prior art by defining it as "any technology known to the public before the date of filing by way of public disclosure in publications, public use, or any other means in this country or abroad." This would level the playing field between foreign and domestic entities and individuals in China. It also mirrors the broader trend in other countries' patent regimes to remove geographic restrictions in their novelty standards.

The draft amendment specifically makes available injunctive relief to preserve evidence before the initiation of a lawsuit. Thus, a patent holder may request a court to order that the evidence of possible infringement be preserved to prevent its possible destruction. If this request is granted, a patent holder can move to protect the potentially incriminating evidence, which may be later used against the alleged infringer. TRIPS requires injunctive relief to preserve evidence, and though it is practiced in China, it has never been written into PRC law. The draft amendment also incorporates the doctrine of equivalents, which is currently not embodied in the law but has nevertheless been recognized by PRC courts. Used in the United States and other developed economies, the doctrine allows a court to impose liability for infringement on a party even though the party does not literally infringe upon a patent.

Patent holders have had for many years the option of pursuing infringers through judicial and administrative channels, either separately or simultaneously. Several articles of the amended law, particularly new Article 67, define the powers of the patent authorities more clearly. For example, the new article allows patent authorities to investigate alleged illegal acts and to conduct on-the-spot inspections of a site where an alleged act took place.

Article 49 of the Patent Law concerns compulsory licensing. Currently, this article allows the government to grant a compulsory license in the event of a national emergency or if "any extraordinary state of affairs occurs or where the public interest so requires." The proposed amendments include an amended Article 49 that, in general, represents an overall improvement because it clarifies some of the vagueness in the current law. The amended article, however, also broadens the circumstances under which a compulsory license may be granted to include the prevention, treatment, and control of an "epidemic disease." The World Health Organization defines this term as an outbreak of a disease that meets certain criteria, such as the seriousness of the disease's impact and the degree to which the disease can be spread through travel and trade. Thus amended, Article 49 appears to be overly broad and would benefit from clearer definitions.

Finally, the provisions on design patents are largely left intact. Although the amendment makes minor procedural changes, China will continue to have a post-grant opposition system that features only minimal, non-substantive examination before a patent is issued. Under such a system, third parties may challenge a patent only after it is granted. Given the importance of design patents in China, the failure to adopt substantive examination prior to patent issuance is inconsistent with China's push for innovation. Indeed, some argue that the current system allows designs unworthy of patents to be patented.

A chance to comment?

The draft amended Patent Law revises a number of provisions in the current law and introduces several new features. Although the amendment lacks details in some areas, observers hope that the law's implementing regulations will also be revised to provide more clarity. More important, foreign businesses hope that the PRC government will make the draft of the law available for public comment before it is finalized and approved, as even detailed implementing regulations will not overcome problems in the version that SIPO submitted to the State Council. As Mark Cohen, the senior intellectual property attache at the US Embassy in Beijing, said in early February, "We are hoping that the State Council will publish the next revision [of the Patent Law] and accept comments. ... We encourage the State Council to continue its engagement with the business community and the United States government to better inform its consideration of the various issues to the Patent Law amendment proposals."