Chen Xiaofan of Liu Shen & Associates explains the significance of China’s change of heart on business method innovations.

11th November is an important date to online consumers in China. The socalled “Singles Day”, initially a made-up annual festival as an ‘anti-Valentine’s Day’ celebration for singletons, is now the biggest shopping event in the world, thanks to the marketing ploy of China’s e-commerce giant Alibaba Group. Chinese consumers reportedly spent over US$17.8 billion on Singles Day last year on the online shopping sites of Tmall and Taobao, two subsidiaries of Alibaba. The astonishing sales figure has far surpassed the figure of US$14.4 billion in 2015 and eclipsed both Black Friday and Cyber Monday, the two biggest shopping days in the US.

In the same month of November last year, the State Intellectual Property Office (SIPO) of China was preparing the amendments to the Guidelines for Patent Examination and circulating the consultation paper for the draft amendments to invite feedback. These amendments will now come into effect on April 1 2017.

Among the amendments, an important one relaxes the standard for business method innovations, rendering them patentable. The relevant section reads, “For claims relating to business models, they should not be precluded from the possibility of being granted a patent under Article 25 of the Patent Law if the claims comprise both the subject matter of business rules and methods and technical features”. This is the first time SIPO has explicitly acknowledged the patentability of business methods, which may result in an increase in the issuance of business method patents in future.

Singles Day prompted change of heart?

An interesting question is whether there’s any connection between the lucrative Singles Day and SIPO’s change of heart towards business method patents.

Some explanations in the consultation paper for the draft amendments of the Guidelines published by SIPO may provide a clue. It’s indicated there that the rapid development of internet technologies and the links between them and society and the economy are prompting new business models. Many companies have been pushing for patent protection for these business models.

It’s arguable that this amendment is a direct response to the needs of the growing online commerce sector in China. E-commerce giants like Alibaba and JD.com have become major economic powers in China. Alibaba’s initial public offering in 2014 raised US$25 billion, making it the largest IPO in history. Given the fierce competition in the online commerce industry, it’s not surprising that Alibaba is working hard on business innovations, particularly to do with online trading and transactions, to keep its competitive edge, and actively seeks legal protection for them.

A history of tough love for business method patents

Historically China, like Europe, has been unfriendly towards business method innovations. In fact, the exact phrase “business method” has never been mentioned in past Chinese patent laws and implementing regulations. In China, patent applications relating to business methods, which may cover the ways of doing business in operating organizations and institutions in the areas of e-commerce, banking, securities, insurance and marketing, are usually considered to fall within the category of “rules and methods for mental activities” as defined in Article 25(2) of the Patent Law, and so deemed unpatentable.

Further, much to the disappointment of those who try to protect business methods under Chinese Patent Law, the reality is that Chinese examiners are rather difficult to convince of the existence of “technical features” in a patent application relating to a business method, even if the application overcomes the first hurdle of patentability, which is having some technical aspects. In accordance with the definition in the Guidelines, “technical features” or “technical measures” in an invention are the constituting elements of a technical solution, and should take advantage of the laws of nature, resolve a technical problem, and produce a technical effect.

In practice, a large number of business method applications fail to pass this “technical” test because Chinese examiners tend to think that the subject matter of a business method ultimately is a method or process for managing performance of business activities or operations of an organization or institution, and cannot be said to take advantage of any laws of nature, nor resolve any technical problems, nor produce any technical effects. In the author’s experience, even some significant business method innovations, which have the effect of improving business transaction efficiency, online trading mechanisms, and user experience on online shopping websites, may be deemed “untechnical” and so unpatentable.

China has thus gained the reputation of being a challenging jurisdiction for those who wish to have their innovations of managing organizations protected by patent law.

Breaking dawn

SIPO’s proposal to amend the Guidelines for Patent Examination is encouraging news, and may indicate that morning has broken for business method patent applications in China. By explicitly allowing innovations comprising both business methods and technical features, China is on its way to overcoming its historical prejudice against business method patents.

The patentability of business methods has long been controversial, not only in China, but in nearly every major jurisdiction. Back in late 2002 and early 2003, business method patents were strongly opposed in the legal and academic circles in China, largely because of the fear that foreign companies who were granted exclusive patent rights of business methods would gain unfair advantages over domestic companies and dominate many industries. However, the social and economic situation has since changed significantly in China. In light of emerging of e-commerce giants like Alibaba and JD.com, widespread use of social media apps developed by domestic companies, and quite a few entries of Chinese commercial banks and insurance companies into Forbes and Fortune 500 lists, SIPO seems to be making a smart move in the development of Chinese patent law by recognising business method innovations. After all, laws should not be kept static, but need to evolve to respond to socioeconomic and technological changes.