Heads up

There is a lot of interest in China's Patent Law these days. Now that the 2008 Beijing Olympics is over, business has returned to normal. On top of China's lawmaking agenda are the proposed amendments to the Patent Law.

The proposed amendments are important for China as they come at a time when the country's economic policies have shifted to favor high-end manufacturing, technology and services as Chinese industries move up the global value chain. Major obstacles toward reaching these ambitions are the lack of independent innovation and sufficient protection of intellectual property rights in China. The current draft of the amendments hopes to resolve this dilemma.

The most recent draft of the amendments to the Chinese Patent Law was published this August. The draft is open for public comment with a deadline on October 10. Already many interested groups, including the American Bar Association, are expected to provide timely comments. If fully approved, this will be the third amendment to the Chinese Patent Law since the law was last amended in 1992.

Expect the changes to be made quickly, perhaps being approved by the end of this year or early next year. Already, China has placed these amendments on a fast track - less than three months after the State Council announced its National IP Strategy, on August 25, the draft of the amendments was submitted to the National People's Congress for first reading. It can pass after the required three readings.

These amendments should be of particular interest to foreign companies conducting business in China and have concerns about protecting their intellectual property.

An important change will be the standard of review applied by patent examiners when reviewing an application.

Be prepared to face a more stringent standard when filing a patent for an invention or creation. Instead of being limited to considering prior use in China, examiners are also to consider prior use outside of China when determining the novelty of a creation or invention. Absolute novelty will replace the lower relative novelty standard being applied under the current law.

Obtaining a Chinese patent would require "absolute novelty" and any public prior use or disclosure anywhere in the world would be assessed against a finding of novelty.

This change, it is hoped, will reduce infringement and protect innovation. By deterring patent hijacking, where parties now cannot file for patents in China on inventions seen or used outside of China, innovation in Chinese patents should certainly result. It remains to be seen whether the new change would be applied retroactively.

Another proposed change provides for a stronger damage mechanism against infringers. The change addresses complaints by foreign companies that penalties are insufficient to deter infringement conduct. Under the proposed change, damages amounts have been increased. The proposal provides for an increase in the amount of damages from 300 percent to 400 percent on the illegal profits. Even if no illegal profits are found, damages are increased from 50,000 yuan to 200,000 yuan. Where damages cannot be ascertained, the courts can still order compensation of amounts ranging from 10,000 yuan to 1 million yuan. Also, the court can award reasonable expenses to the patentee for stopping the infringing act. The US patent laws, in comparison, allow a court to award attorney's fees to the prevailing party in extraordinary cases.

If the infringement is complex and of such a large scale, the proposed amendments increasing damage awards may now encourage use of China's courts since it can award larger damages and expenses. The disadvantage will be the higher costs, but this should be factored with other considerations such as the scale and extent of the infringement, the place where the action is to be bought and the financial solvency of the infringing party.

Another significant change will allow all Chinese entities and individuals to file patents for creations or inventions made in China first in foreign countries.

But, this is subject to prior national security examination and approval. For filing the patent application in a foreign jurisdiction without first obtaining SIPO approval, no patent will be granted in China.

This proposed change, while designed to protect China's national security interest, closes a loophole used by foreign entities that have research centers in China. Often, inventions discovered in China are assigned by the foreign entity in China to its foreign affiliate outside of China which in turn files a foreign patent. There is legitimate concern that there may be breaches in national security for sensitive information being transferred out of the country. The practice occurs since existing Patent Law requires only the Chinese citizens to file their patent applications first in China.

This change will bring China more in line with international IP practice and laws, including the United States patent regimes. US patent laws presently allow parties to file foreign patent applications for creations and inventions first made in the United States only if they obtain a prior national security check and licensing approval from the Patent Commissioner.

There is a component in the draft amendments to protect China's genetic resources. No patents will be granted on inventions or creations based on genetic resources which are acquired illegally or violate related laws or regulations. What "related laws" are is still unclear and needs further clarification. An application for an invention or creation based on genetic resources requires disclosure of the original source of the genetic resources, or if disclosure cannot be made, the application must specify the reasons.

Other proposed changes seek to deter patent owners from using their patents in an anti-competitive fashion. China's State Intellectual Property Office (SIPO) will be empowered to grant a compulsory license where an abuse is determined under a judicial or administrative review. SIPO can also grant compulsory licenses to third parties if the patent owner without justification fails to exploit the patent three years after the patent was granted. A compulsory license will allow a third party to manufacture patented drugs and distribute these to an under-developed country or a WTO member that does not have the capacity to produce the patented drugs.

As the amendments have not yet passed by the National People's Congress, it still remains to be seen what the final amendments will end up being and how these will test out.

One thing is for sure, aside from these amendments, you will still need to continue to exercise best practices - including having a proactive IP strategy to maintain due diligence with new partners and your employees, having confidentiality and nondisclosure agreements signed, compartmentalizing your confidential information to prevent infringement opportunities for third parties and competitors, registering your IP, and above all, being prepared to enforce your rights.

The author is an attorney with the US law firm Taft Stettinius & Hollister LLP and is based in the firm's Beijing representative office. The views expressed in the article are his own.

(China Daily 10/06/2008 page9)