I. INTRODUCTION

By 2015, the Chinese government plans to double the number of patent applications filed with the State Intellectual Property Office (“SIPO”), such that applications will increase from 1 million in 2010 to 2 million per year.[i]  According to SIPO’s “National Patent Development Strategy (2011-2020)” (the “Patent Strategy”), “China will rank among the top two in the world in terms of the annual number of patents for inventions.”[ii]  The Chinese government also expects that “the number of overseas patent applications filed by Chinese entities and individuals will double.”[iii]  However, this ambitious plan cannot relieve concerns about the quality of Chinese innovation.  The basis for these concerns is that “the vast majority of these applications are for utility model patents that merely undergo a preliminary examination for formalities rather than substance—a concept that does not exist in the US.”[iv]  According to a Shanghai-based patent attorney quoted by the Economist: “Patents are easy to file but gems are hard to find in a mountain of junk.”[v]

China has undertaken a number of efforts to transform from a country where products are merely “made” to one where they are innovated, designed, and branded.[vi]  During the past 20 years, China has made several significant and meaningful amendments to its intellectual property laws.  Nevertheless, China has realized that its current patent system without further improvement could hinder the Patent Strategy: “The patent system has not become fully integrated with development of socialist market economy, and its role has not been brought into full play in guiding industrial restructuring and upgrading and promoting China’s innovation capacity.”[vii]  The systems and mechanisms for patent administration need to be improved and legal enforcement of patent protection needs to be further enhanced.  To this end, on August 10, 2012, SIPO published the first draft of the proposed Fourth Amendment to China’s Patent Law for public comment.  This article provides an overview of the legislative history of China’s Patent Law and its amendments, analyzes the proposed Fourth Amendment’s positive and negative effects, and provides additional recommendations for the new amendment.

II.  LEGISLATIVE HISTORY OF THE CHINESE PATENT LAW AND ITS FIRST THREE AMENDMENTS

China’s patent system became modernized in 1984 under Deng Xiaoping’s Economic Reform Policy.  From 1978, China transformed from a planned economy to a market-oriented economy.  During the 1980s, the Chinese intellectual property system was established through a series of laws: the Trademark Law in 1982,[viii] the Patent Law in 1984,[ix] and the Copyright law in 1990.[x]  Each of these laws was designed for the Chinese political and economic environment, while following international trends in intellectual property law.

The first Patent Law, which set the foundation for the Chinese patent system, was promulgated on March 12, 1984, and came into effect on April 1, 1985.[xi]  Although the patent system started when China still had a planned economy,[xii] the 1984 Patent Law contained all of the basic elements of a modern patent system, including provisions concerning conditions for granting patent rights, filing and prosecuting patents, and protecting patent and related rights.[xiii]  Under the first Patent Law, there were three types of patents based on the “first-to-file” principle: inventions,[xiv] utility models,[xv] and designs.[xvi]  Each of these is still used today.

On January 17, 1992, the Chinese and American governments entered into an agreement called the “Memorandum Of Understanding Between The Government Of The People’s Republic Of China And The Government Of The United States Of America On The Protection Of Intellectual Property.”[xvii]  This document required China to amend its Patent Law.  The first amendment to the 1984 Patent Law was enacted on September 4, 1992 (“First Amendment”).[xviii]  The core changes included forbidding importation of patented products without the patent holder’s permission,[xix] extending the protection of invention patents from 15 to 20 years,[xx] extending the protection of utility model patents and design patents from 5 to 10 years,[xxi] and broadening the scope of patentable inventions.[xxii]

In 1994, China joined the Patent Cooperation Treaty (“PCT”) [xxiii] and the Chinese Patent Office became the PCT International Receiving Office, International Search Authority, and the International Preliminary Examination Authority for China.

The Second Amendment to the Patent Law was driven by China’s 2001 accession to the World Trade Organization (“WTO”) [xxiv] and the need to comply with Trade Related Aspects of Intellectual Property Rights (“TRIPS”) agreement [xxv] requirements.  The Second Amendment was promulgated on August 25, 2000, and came into force on July 1, 2001.  It abolished the term “patent right holder,” and substituted the term “patentee.”[xxvi] The concept of employment invention-creation was also defined more clearly in the new amendment.[xxvii]  In addition, this amendment added provisions regarding offers to sell [xxviii] and preliminary measures,[xxix] such as evidence preservation.  After this amendment, China’s patent system was, in essence, consistent with TRIPS requirements.

Unlike the two earlier amendments, which were driven by foreign businesses and governments, China’s third amendment was designed to foster the development of its own domestic economy and technology.[xxx]  In 2007, the 17th National Congress of China focused on enhancing the capacity of indigenous innovation.  The next year in 2008, the State Council formulated the Outline of National Intellectual Property Strategy.[xxxi]  On December 27, 2008, China’s Patent Law was amended for the third time and came into force on October 1, 2009 (the “Third Amendment”).

The Third Amendment introduced the absolute novelty standard to the Chinese patent system.  Under that standard, an invention is not new and therefore not patentable if it was publicly known or publicly used in China or in any foreign country, or described in any publication in China or any foreign country before the filing of the patent application.  By contrast, under the previous Chinese patent law, only disclosures in printed publication in China or a foreign country before the filing date could destroy novelty.  Public knowledge and mere use or sales in China or a foreign country did not destroy novelty.  The Third Amendment, among other things, adopted a foreign filing license policy, introduced pretrial preservation measures, and added the costs incurred by the patentee in stopping infringement to the calculation of damages.[xxxii]  In sum, the Third Amendment upgraded the Chinese patent system to keep pace with international standards.

III.  THE DRAFT FOURTH AMENDMENT

A.   Legislative History of the Draft of the Fourth Amendment

In 2011, SIPO initiated the fourth revision process to China’s Patent Law, conducted comprehensive research in 2012, and, on August 10, 2012, released the first draft of the fourth amendment for public comments (the “proposed Fourth Amendment”).[xxxiii]

On November 13, 2011, the State Council released a working agenda concerning the protection of intellectual property rights (“IPR”) and the crackdown on the production and sale of counterfeit goods.[xxxiv]  The working agenda pointed out that combating the infringement of IPR and the counterfeiting of goods will be a long-lasting, complicated, and tough mission.[xxxv]  Therefore, it required revising relevant laws and regulations to enhance punishment and establishing a long-lasting effective legal mechanism.[xxxvi]

To implement the State Council’s requirements, SIPO began to amend the Patent Law for the fourth time in November 2011 and, in 2012, the revision of the Patent Law was placed on the State Council’s legislative agenda.  In June 2012, SIPO conducted a meeting to set up the core legislative purpose of the revision: “strengthening patent protection and intensifying law enforcement.”[xxxvii]  To create a better patent system, the new revision proposes enhancements of both administrative enforcement and judicial protection.

B.  Salient Modifications Under the Proposed Fourth Amendment

Evidence of patent infringement can be difficult to obtain because patent infringement generally is easy to conceal.  This difficulty is especially problematic in a country like China, which lacks a formal discovery process to collect evidence.[xxxviii]  The difficulty is further exacerbated by the development of the Internet and improvements to logistics, both of which have accelerated the manufacturing and distribution of infringing products.[xxxix]  “Willful infringement, repeated infringement and infringement by multiple parties” frequently occur.[xl]  To safeguard their patent rights, patentees must incur significant costs in time and money.  Such obstacles oftentimes severely discourage innovation and disturb market order.

To address these problems, the Fourth Amendment proposes the below provisions.

1. Provides judicial and administrative authorities the power of investigation and evidence collection.

To address the difficulty in obtaining evidence of infringement, the proposed Fourth Amendment provides a two-pronged approach.

First, it affirms the People’s Courts’ right of investigation and evidence collection.  For example, Article 61 provides the following:

During patent infringement litigation, based on the request from the plaintiff or its litigation agent, the People’s Courts shall investigate and collect according to law evidence with respect to alleged infringing products and books, information or other evidence controlled by accused infringer; [i]f the accused infringer refuses to provide, or transfer, falsify, or destroy evidence, the People’s Courts according to law take forceful actions against obstructing civil litigation; [f]or those that commit a crime, a criminal penalty according to law will be charged.[xli]

Second, the Fourth Amendment gives the administrative authority more power to investigate patent infringement and to punish noncooperation.  Under the proposed Article 64 (1), the administrative authority for patent affairs has the right of investigation and evidence collection in patent infringement cases and patent counterfeiting cases.  In addition, “[i]f the party that is subjected to investigation refuses or obstructs the administrative authority for patent affairs[xlii] to perform its duties, the administrative authority for patent affairs shall issue warnings.”[xliii]  And “[f]or severe situations, the administrative penalties for public security shall be imposed according to law.”[xliv]

2. Empowers the administrative authority for patent affairs to determine the amount of compensation in patent infringement cases.

The existing Patent Law allows the administrative authority for patent affairs to mediate patent infringement cases.[xlv]  If the mediation fails, parties may take legal action before a People’s Court.[xlvi]  In practice, however, administrative mediation agreements regarding compensation are unenforceable.  As a result, infringers typically bring civil actions regarding compensation issues, which place further burdens on the patentee and waste time and administrative and judicial resources.

To address this problem and speed up the process of awarding compensation, the proposed revision of Article 65 gives both the administrative authority for patent affairs and the People’s Court the discretion to determine the amount of compensation for patent infringement.[xlvii]

3. Affirms the effective date of a decision on invalidity and subsequent procedures in order to improve efficiency of infringement litigation.

The effective date of the decision by the Patent Reexamination Board—either declaring a patent right invalid or affirming the validity of a patent—is important because it directly affects the efficiency of patent infringement litigation.  Currently, the Patent Law and its Implementing Regulations have no provision regarding the effective date; in practice, this omission results in prolonging patent infringement disputes.[xlviii]

The proposed Fourth Amendment revises Article 46 by adding a provision that expressly states that “[o]nce the decision on declaring a patent right invalid or affirming the validity of a patent is made, the patent administrative authority under the State Council shall register and publish it at once; [t]he effective date of the decision starts from the date of publication.”[xlix]  In addition, to improve the efficiency of resolving patent infringement disputes, Article 60(4) of the proposed Fourth Amendment requires that “[o]nce the decision announcing the invalidity or validity of a patent becomes effective, the administrative authority for patent affairs and the People’s Courts shall promptly adjudicate or process the patent infringement dispute based on the decision.”[l]

4. Introduces punitive damages for willful infringement to increase patentees’ compensation and deter infringement.

According to the current Patent Law, patent infringement compensation is based on “actual losses,” which means the amount of compensation shall be equal to the patentee’s actual losses caused by the infringement.[li]  If it is difficult to determine the actual losses, the amount of compensation may be determined according to the “benefits acquired by the infringer” through infringement.[lii]  If it is difficult to determine the losses of the patentee or the benefits acquired by the infringer, the amount of compensation may be determined according to the “reasonably multiplied amount of the royalties of that patent.”[liii]

However, protecting intellectual property rights usually costs more than protecting tangible property, while the costs and risks to infringing intellectual property rights is less than those for infringing tangible property rights.  Consequently, in practice, the “actual losses” principle cannot offset the patentees’ losses, and does not deter infringement.[liv]

Therefore, the proposed Fourth Amendment introduces a new provision providing for a punitive damages award.  “For willful patent infringement, the administrative authority for patent affairs or the People’s Court may, based on circumstances and scale of infringement, result of the injury, or other factors, raise the damages to a maximum of three times of the damages. . . .”[lv]  SIPO believes punitive damages will encourage patentees to take legal actions and will also stimulate innovation.[lvi]

5.  Delegates to the administrative authority for patent affairs the authority and duty to investigate and cease willful infringement.

“Vicious infringement” cases, including “willful infringement, repeated infringement and infringement by multiple parties,” occur frequently.[lvii]  Patentees must pursue legal actions against each infringer on an individual basis.  Without meaningful compensation and legal protection, many patentees are unwilling to incur the high costs in time and money to defend their rights, thus losing faith in the patent protection system.  Not only does vicious infringement infringe patentees’ rights, they also disturb market order, undermine the patent system’s authority, and undermine creativity in society.[lviii]

To reduce vicious infringement, the proposed Fourth Amendment grants the administrative authority for patent affairs the power to independently investigate and handle patent infringement activities that allegedly disturb market order and the authority to award administrative punishment.  The proposed Article 60(3) provides the following:

Once the administrative authority for patent affairs has determined that the infringement is established and disturbs the market order, said department shall order infringement to be ceased, seize unlawful gains, and seize or destroy infringing products or specific equipment used for infringement, and impose a fine up to four times of the unlawful gains; [f]or instances of no unlawful gains or unlawful gains that are difficult to determine, a fine of less than 200,000 may be imposed.[lix]

In addition, for cases with national influence, the patent administrative authority of the State Council has the authority and duty to investigate and handle patent infringement cases.[lx]

IV.  POSITIVE AND NEGATIVE EFFECTS OF THE PROPOSED FOURTH AMENDMENT

If the proposed Fourth Amendment is enacted, there will be many positive effects.  In general, it will expedite patent litigation, facilitate the obtainment of evidence, make compensation more favorable to the patentee, and deter infringement.

A. Expediting Patent Litigation by Reducing Delay Associated With Requests For Invalidation

Under the current Chinese patent law, the People’s Court has no power to invalidate patents.  The patent trial court usually waits for the validity decision from SIPO’s Patent Reexamination Board (“PRB”).  The speed of invalidation proceedings before the PRB has a tremendous impact on the whole patent litigation proceeding.  By reducing delay with requests for invalidation (i.e. requiring prompt registration and announcement of the PRB’s decision), the amendment will greatly speed up litigation.  Since the effective date of the invalidation decision starts from the date of publication, the parties in a patent litigation do not need to wait until after the publication.  The whole patent litigation process should move much more quickly.

B.  Introducing Punitive Damage to Deter Willful Infringement

As mentioned above, the current Patent Law only awards compensatory damages based on “actual losses suffered” or “illegal gains obtained,” which are typically not sufficient to compensate the patentee’s overall losses.  With the addition of punitive damages (i.e. up to three times compensatory damages), this should substantially deter vicious infringement activities, especially willful patent infringement.  The patent owners will be more encouraged to enforce their rights.

C.  Helping to Obtain Evidence

Proposed Article 61(3) gives the People’s Court the authority and duty to investigate and collect evidence based on a request from the plaintiff.  If the accused infringer refuses to cooperate, the People’s Court may take forceful actions against the obstruction of civil litigation or impose a criminal penalty.  Thus, by providing judicial authorities with the right to investigate and collect evidence, and the authority to punish obstruction, the amendment should solve the problem of obtaining evidence and further encourage alleged infringers to cooperate in litigation.[lxi]

D.  Potential Issues

The proposed Fourth Amendment aims to improve the enforceability of patents.  The Amendment grants several powers to the administrative authorities, such as evidence preservation, damages recovery methods, and the right to investigate and punish the alleged patent infringer.

However, due to the complexity of patent infringement, it is likely that the administrative authorities lack the legal expertise and human resources and will face great challenges with a patent infringement case.  Also, these authorities may overuse or abuse their administrative power.  The administrative authority may favor one party over the other and just look for evidence to support a favored party.  The law should be amended to include additional definitions, guidelines, and further explanations to prevent abuse of power.[lxii]  For instance, to affirm patent infringement and to award damages, more detailed regulations are needed to guide administrative authorities.

Another issue is that the term “willful” in the proposed Fourth Amendment is not defined.  One possible definition could be “with knowledge of a patent or infringement” and to further specify that “active inducement of infringement is willful if it is done deliberately and intentionally.”  By providing a clear definition of “willful infringement,” different courts in China could apply the same standard and provide predictability to patentees.

Finally, a further concern is to ensure the fairness and transparency of law enforcement.[lxiii]  “Without more clarity and safeguards, the law may not reach its full potential and could be open to abuse.”[lxiv]

V.   CONCLUSION

National economic growth depends profoundly on innovation, which fosters new products that achieve what their predecessors could not, delivers improved processes for the creation of goods and services, and guides business to success.[lxv]  There are many ways to boost innovation, including through the support of basic research and development, improvements in the availability of capital for start-up businesses, greater educational opportunities in science, technology, engineering, and mathematics,[lxvi] and greater protection of intellectual property.

A comprehensive patent system is fundamental to nurturing innovation.  China has an ambitious patent strategy to drastically increase its annual patent filings.  According to the National Medium- and Long-Term Plan for Science and Technology Development 2006-2020,[lxvii] China plans to become an innovation-based economy by 2020 and a global leader by 2050.  However, despite these inspiring polices, there are many obstacles to realizing this lofty goal.  A faulty patent system and low quality patents are two of them.

The proposed Fourth Amendment “strengthen[s] patent protection and intensif[ies] law enforcement” by giving administrative departments more power and increasing patentees’ potential compensation.  The revised provisions will improve the enforceability of patents in China, thereby reducing patent infringement and helping to stimulate innovation.  However, greater enforcement alone is not enough to bring innovation.

To foster China’s independent capacity for innovation, there needs to be an even greater focus on the quality of patents.  Unfortunately, the proposed Fourth Amendment does not address how to improve patent quality.

The former Director of the United States Patent and Trademark Office has recognized that, “[p]atent filings do not equal innovation, by any stretch.”[lxviii]  Chinese experts have also recognized the existence of a large number of “junk patents,” which have been encouraged by governmental subsidies that promote quick payment for patents.[lxix]  Junk patents mostly come from utility model patents, which are subject to lower standards of inventiveness and review and undergo no substantive examination upon grant.  A large number of patent filings cannot conceal the relatively low overall quality of Chinese patents.[lxx]  Thus, current Chinese patent policy has placed a heavy focus on quantitative patent targets, which may “incentivize the pursuit of immediate and incremental results over breakthrough innovation.”[lxxi]

Although SIPO’s efforts to revise Patent Law have been well recognized and prized, the author highly recommends that SIPO further revise the current Patent Law to improve patent quality in order to foster innovation.  How to ensure both quantity and quality of patents is a significant matter that should also be considered during the comment period of the proposed Fourth Amendment.