Law360, New York (March 15, 2013, 12:24 PM ET) -- On Feb. 6, 2013, the State Intellectual Property Office of the PR China (SIPO) issued a draft amendment of the 2010 Patent Examination Guidelines seeking public comments and consultation in view of its final adoption. The draft amendment to the guidelines contains a very important change to the system of examination of utility model and design patent applications currently founded on the principle of mere formal examination.
In particular, the amendment to the guidelines, if approved and adopted, will allow examination of obvious novelty of utility model and design patent applications with the precondition of complying with the principle of mere formal examination. In practice, this amendment shall provide SIPO with a legal base for setting aside the formal examination system by its substitution with that of a "de facto" substantive examination.
One of the reasons for such a change may likely be based on the objective recognition that the abuse represented by the continuous and systematic registrations of utility models and design patents incorporating old and no longer original technology of foreign companies by Chinese competitors (so-called "junk patents") creates a distortion of the competition, and that the actual Patent Law does not contain any provision which could put a check on it.
The System of Formal Examination and the Phenomenon of the Junk Utility Models
According to Article 40 of the Patent Law in force, utility models and design patents must be granted immediately upon preliminary examination if no formal errors are found in the application. This article establishes the legal base for the rule of mere formal examination of utility model and design patent applications, in contrast with the principle of formal and substantive examination of invention patent applications set forth by the same patent law in Articles 35 ff. This system is actually similar to that in place for community designs and for German utility model applications, but the complete opposite to the examination principles in the U.S. patent system.
Utility models were introduced in China with the intent of providing emerging Chinese enterprises with an incentive to invest in technical development. In this way Chinese enterprises could be rewarded for lesser types of inventions by an inexpensive and easy-to-obtain "smaller" type of patent right. Soon the instrument was subjected to abuse, due to the mere formal examination of utility model applications, and the then relative-novelty system adopted in China till 2009. Utility models became highly attractive to Chinese companies trying to block foreign competitors from doing business in China. Rather than an incentive to small scale innovation, utility models became an immoral, but unfortunately not illegal, business tool.
In the worst case, utility models of this kind have been employed as blackmail tools against foreign competitors, used with the intent of forcing them to refrain from manufacturing or selling their competing products in China, at least until these "junk patents" were cleaned up through patent invalidation lawsuits. The "Schneider" case back in 2009 was the most dramatic example of how "junk" utility models could be used as real torpedoes to sink foreign competitors. In this case, the junk utility model hold by a Chinese competitor and based on an old technology of Schneider, was used in an infringement lawsuit, in which Schneider was judged as a patent infringer and condemned to pay more than the equivalent of $50 million in damage compensation.
The phenomenon of junk utility models has become more acute with the launch of ever more frequent government subsidy campaigns to Chinese emerging national industries. Utility models, especially those based on copying older nonpatented technologies in China, have become the cheapest and fastest way for Chinese companies to attain the requirements for obtaining government money and incentives.
The overcome of the relative novelty with the entry into force of the third amendment of the patent law in 2009 has had less impact than expected on this disturbing phenomenon. Other solutions started to emerge at a lower administrative level, aiming at correcting this distortion of the patent law and the rules of fair competition in China.
The Patent Examination Guidelines of 2010 and Changes in the SIPO Internal Practice in 2012
Although and in spite of the pressure of the international community with the U.S. in a leading position, the Chinese legislator had failed to amend Article 40 of the Patent Law in the last round of amendments back in 2009. The problem of junk utility models and design patents was, however, indeed of concern to SIPO. In the latest version of the guidelines issued in 2010 to comply with the many changes brought by the then new Patent Law, SIPO had already attempted to introduce a norm extending the interpretation of "preliminary examination" of Article 40 of the Patent Law. The Patent Examination Guidelines are the official regulation binding examiners in relation to patent prosecution in China.
It was indeed a first and timid attempt to address the problem of junk patents. This is also the norm in force at present and the object of the present draft amendment, and it provides that "In the preliminary examination, the examiner generally does not determine on search whether utility model is obviously lacking of novelty, but may determine it in the information of related prior art or conflicting applications obtained not through search." This convoluted sentence simply restates the principle of formal examination of utility models, adding that it may reject a utility model application if this lack of novelty appears to be evident from the available information, but expressly prohibits that for such an evaluation the examiner resorts to a patent search.
In the following paragraph of the same norm, SIPO stipulates an exception to the general principle allowing rejection for lack of novelty (i.e., upon substantial examination) based on a patent search for cases concerning "abnormal applications for utility model ... such as an application obviously plagiarizing prior art or repeated submission of an application with substantially identical content." The same can be repeated for the parallel provision of the guidelines in force concerning design patents.
In spite of this internal regulation offering a more flexible interpretation of Article 40 of the Patent Law, this may not have been considered a sufficient step to tackle the problem of junk patents. It is in this context that in 2012, SIPO had considered further intervention on the Patent Guidelines. At the beginning of 2012, the examination scope of "obvious novelty" as contained in the guidelines of 2010 had been virtually expanded in the "Utility Model brochure of Examination Operating Procedure." This is an internal document of SIPO without legal binding value. It is however, an important internal tool to regulate and consolidate the examiners practical work. In this operating procedure it is stated that, if there is document for comparison, the examiner must conduct novelty examination. In short it states that obvious novelty examination shall become the rule and is not left to mere discretion of the examiner, as in the actual text of the Guidelines.
The draft amendment to the guidelines as we will discuss below can be seen as a follow-up of the change in operating procedure.
The proposed amendment of the guidelines of 2010 and the introduction of a substantive examination of utility model and design patent applications in China.
It may be the awareness of the present guidelines' failure to keep junk patents in check that made SIPO takes a bolder step. According to the draft for an amendment of the above cited provisions of the guidelines, not only the patent office must examine whether the utility model or a design patent application is obviously lacking novelty, but also that he may determine such lack of novelty on the information about the related prior art or conflicting applications obtained from an official search or other approaches.
The first sentence of the actual norm, "In the preliminary examination, the examiner generally does not determine on search whether utility model is obviously lacking of novelty," has been removed and substituted with the short and clear provision that, "In the preliminary examination, the examiner examines whether a utility model patent application obviously lacks novelty." The word "obviously" is the only apparent limitation. It could be understood in the sense that substantial examination is limited to "obvious" cases of lack of novelty, as it is in the actual version of the norm. However, the position of this adverb in the norms may also be interpreted in a way that examination is conducted in any case, and it is also based on search results, and if lack of novelty is obvious, there will be a rejection decision. From the available public information of related office actions so far, it can be seen that the term is interpreted in the broader way.
Possible Conflict Between the Amended Guidelines and the Patent Law
The extension of the concept of "preliminary" examination in the actual version of the guidelines appears to be still in compliance with the general dictate of Article 40 of the Patent Law. The guidelines at present fully recognize that SIPO is not obliged to carry out substantive examination of utility model and design patent applications. The introduction of substantial examination is done as an "extrema ratio," i.e., for cases of "obvious lack of novelty" and its practical impact reduced by two important limits: The first one is that of prohibiting a rejection for lack of novelty based on patent searches. In this way, the easiest and most reliable form of novelty evaluation is taken away, making it very difficult for an examiner to ever be sure that an application is obviously lacking novelty. The other limitation is that of allowing patent search report only in cases which are defined as "abnormal." This marginalization of the exceptions is in itself a confirmation of the general rule of mere formal examination.
This may not be said of the draft amendment. In it, there may be a real and direct contradiction with the mandatory provision of Article 40 of the Patent Law and the guidelines. What will happen if this amendment will become the new norm in the guidelines? What could happen in the context of re-examination, if an applicant will challenge the rejection decision based on a wrong application of Article 40 of the Patent Law? Shouldn't such a change of the patent system be done through an amendment of Article 40 first of all? A recent draft amendment of the patent law issued for public comments in August 2012, has not mentioned any amendment of Article 40 of the Patent Law.
It may be in the end that the change of the guidelines will trigger a change of Article 40. On the other hand, the formulation of the draft amendment of the guidelines, which still refers to "preliminary examination," may be accepted as not being in contradiction with Article 40 of the Patent Law. All these questions remain for now unanswered.
Evaluation of the Impact of Such a Change of the Junk Patents Issue
Hypothetically, an extension and a broader application of the principle of substantive examination to utility model and design patent applications may reduce — if not eliminate — the problem of junk patents in China. In fact, the likely increase of the number of rejections, coupled with a likely increase of the prosecution costs may keep "junk applicants" away from SIPO's filing offices. Also, longer granting times may be expected. If this is going to be the case, utility model may end up losing most of their appeal together with their original functions of patents for the "emerging" local industries!
From the point of view of the foreign IP right holders in China, this change is most welcome and should make their utility models and design patents easier to be successfully enforced in China.
Originally published in Law 360, March 15, 2013.