Recently, the Berkeley Center for Law and Technology held a conference entitled “Beyond Piracy: Managing Patent Risks in the New China.” Speakers and panelists from the United States Patent and Trademark Office (“USPTO”), the International Trade Commission (“ITC”) and various technology corporations discussed the intellectual property landscape in China, including the Chinese Indigenous Innovation Policies, practical considerations for patenting in China, and patent litigation in China involving foreign companies. Due to the considerable growth and expansion of the intellectual property laws in China in such a short period of time, some stakeholders fear that foreign companies may be at a significant disadvantage attempting to procure and enforce their intellectual property rights (“IPR”) in China. Throughout all of the discourse, one theme became abundantly clear: opting out of the China intellectual property market is not a very viable long-term option for most large multi-national companies.

Recent Developments In Chinese Patent Law

Since Chinese patent law was initially enacted and the State Intellectual Property Office of China (“SIPO”) was formed in 1985, there have been many developments in the patent laws. China joined the World Trade Organization in 2001, and to date most of China’s IP protection laws are compliant with WTO’s TRIPs Agreement. China has also improved many of its IP offices and their functions. However, there are still potential concerns in areas such as standards setting bodies and their effect on IP rights, technology transfer, and IP enforcement.

Recent initiatives have focused on China harnessing its own technological prowess within China, such as with the China Indigenous Innovation Policies of 2006. Indigenous innovation is a massive and complicated plan to turn the Chinese economy into a technology powerhouse by 2020 and a global leader by 2050. Through the Indigenous Innovation Policies, China seeks to bring about the “great renaissance of the Chinese nation” by enhancing its capacity for innovation through reduction of Chinese dependence on foreign technologies and developing science and technology throughout China.1 In a December 2010 report, the ITC noted that some U.S. companies believe China’s indigenous innovation policies may create new barriers to U.S. foreign direct investment and exports to China.2 Admittedly, the ITC did not proffer much concrete data to support this speculation, and the Commission thus plans to issue a second report in May 2011 that attempts to quantify the impact of China’s indigenous innovation policies and the effects of historic systemic Chinese IPR infringement on U.S. interests.

In the Fall of 2010, the Chinese government introduced the “Special Campaign on Combating IPR Infringement and Manufacture and Sales of Counterfeiting and Shoddy Commodities” (“Special Campaign”) that lasted from October 2010 to March 2011.3 The Special Campaign was carried out in three steps: the mobilization period (October 2010); the implementation period (November 2010 to February 2011); and the acceptance inspection period (March 2011). The stated goals of the Special Campaign were to increase source control of production, enhance market supervision and administration, intensify IP protection on imports and exports on the Internet, intensify criminal and judicial enforcement of IPR, urge governmental bodies nationwide to use genuine software, and enhance promulgation of IP protection. Through such government efforts, China seeks to strengthen foreign investors’ confidence and improve the domestic IP environment.

In November 2010, SIPO released China’s new “National Patent Development Strategy (2011-2020)” (“NPDS”).4 The NPDS is a long term and overall plan for enhancing China’s core competitiveness by making use of the patent system and its resources. The NPDS also seeks to move toward creating a favorable international environment and to combine protecting innovation with safeguarding the public interests. In 2009, there were a combined total of about 977,000 patent applications (invention, utility and design) filed in China. Strategically, the NPDS seeks to reach a combined 2 million patent applications filed annually by 2015. In contrast, there were about 500,000 patent applications filed at the USPTO in 2009. This sharp growth of patent filings is indicative of China’s commitment to innovation going forward.

Recent trends in damages awarded in infringement actions indicate that companies seeking aggressive IPR enforcement may also have success, even in China. In the first landmark damages case, Chint Group v. Schneider (2008), the Chinese courts upheld a $40 million judgment against defendant Schneider, and the case later settled for RMB 157 million, approximately $23 million. In Neoplan v. Beijing Zhongtong Xinghua Automobile Selling Co., Ltd., et al. (2009) the Chinese courts held that the defendant Chinese automakers had infringed patent claims to bus design and held them liable for RMB 20 million, approximately $3.1 million, in damages. Even though most of the top large damages awards have been against foreign companies, the recent results in infringement cases show that Chinese courts may today award significantly larger damages than have in the past been available in patent infringement cases.

Patenting Strategies In China

The Chinese patent system is a first-to-file system and patent applications may be filed in the name of a corporation as well as an individual inventor. There are three types of patents: (1) the invention patent; (2) the utility model; and (3) the design patent. The invention patent and the utility model are most relevant to this discussion. The invention patent is analogous to the US utility patent because it has a 20-year term, it is substantively examined by SIPO, and it takes about three to five years to issue.5 The utility model, to which there is no analogous US counterpart, is not substantively examined, has a 10-year term, and takes about 10-months to one year to grant.

The utility model in particular possesses unique strategic value in China, but there is a significant opportunity for maximizing patent rights by utilizing both the invention patent and the utility model. The Chinese utility model covers only apparatus claims, not method or process claims, and it is not possible to maintain patents for a utility model and an invention patent for the same invention. But that does not prevent simultaneous filing of both type of patents for the same invention. If companies utilize what is called a “double patenting” strategy, by filing both the utility model and invention patent application at the same time, and then abandoning the more quickly-issued utility model immediately before the invention patent is granted, they can obtain IPR quickly with the utility model, and then eventually gain more comprehensive IPR with the invention patent. There is no data indicating that a utility model would be any more difficult to assert or any less likely to sustain validity as compared to an invention patent, which is an important consideration as it would likely undergo reexamination, and substantive challenge, as part of the litigation process anyway.

Litigation Strategies For Foreign Corporations In China

In 2009, there were 30,626 first instance IP-related cases accepted by the Chinese courts and 30,509 cases were decided. Even though the vast majority of IP cases were copyright and trademark cases, 4,422 were patent cases. Of the total number of cases decided, 1,361 were foreign related IP cases, 3,660 cases were IP infringement related criminal cases, and of the criminal cases, 5,832 people were found guilty. In comparison, there were about 8,000 US IP cases in 2009. Obviously China’s numbers are amplified by its population size, but overall IP litigation seems to be on the rise in China. Additionally, the winning rates vary by jurisdiction, but in 2007-2008, foreign plaintiffs asserting their IP rights have an overall winning rate of 71% as compared with the total plaintiff’s winning rate of 72% throughout all of China’s courts.

China has a dual-channel patent litigation system. The IP court, a branch of the judicial system, may only rule on infringement issues, whereas the Patent Reexamination Board (“PRB”) of SIPO only has the power to rule on patent validity. Procedurally, China represents a true “rocket docket.” The time to completion is six months to one year for cases of first instance. Once an infringement case is filed, the defendant may utilize an invalidation proceeding, within the answer period, to buy time in the litigation. A formal discovery system, such as the lengthy US discovery process, is not available. Instead, there is an evidence exchange day, and the trial is held shortly thereafter. Trials can last as short as several hours and as long as (rarely) up to several days.

Strategically, companies may attempt to avoid IP litigation in China by filing their own Chinese patent applications or defensive publications, by conducting infringement analysis of competitive Chinese patents, by considering design-arounds, and by monitoring patent portfolios or product developments of the competitors. Should companies fail to avoid litigation in China, litigation costs are most likely significantly cheaper than in the US due to the shortened litigation period, and the winning rate appears to be overall favorable to IPR holders on average.

Conclusion

Even though China has an ever-changing web of governmental policies and there are risks associated with attempting to navigate China’s patent landscape, it is clear that opting out of a China IP strategy is increasingly a suboptimal option. To stay competitive, companies must plan to proactively manage their IP risks in China. With recent developments in Chinese patent law, and patent damages on the rise, companies may increasingly look to utilize the Chinese patent system to procure and enforce their IPR in China.