On July 3, 2020, China released the second draft amendments to the Patent Law. This second draft introduces significant changes to both the current Patent Law and the 2019 draft amendment. It also comes at a time when China is introducing significant legislative and judicial changes to other key IP rights, like new criteria for determination of infringement in administrative proceedings for trademark infringement, and more importantly, draft judicial regulations addressing the long disputed issues of protection of foreign trade secrets and the implementation of the commitment China recently assumed in this regard by signing the US-China Economic and Trade Agreement of January 15, 2020, also referred to as the Phase I Agreement. It remains to be seen whether all these amendments will go in the direction auspicated by the US and the EU, or whether and to what extent they may be the expression of China’s new protectionist policies and retaliation against alleged hostile foreign policies.
In the present blog we will review some of the major changes in the second draft amendment to the Patent Law and assess their likely impact on foreign businesses in China.
I. Design Patents
Article 42.1 of the draft amendments extends the duration of a design patent to 15 years from its application date. Designs are registered patents that protect the aesthetic value of a product, where the design is original and adds commercial value to the product. The final approval of this provision would allow right holders to enjoy exclusivity for a longer period, increasing the right’s value and reducing the cost and risk of having to file for surrogate IP, such as copyright and 3D marks, to try prolonging the life of the design creation. Such surrogates have proven to be only partially successful in replacing design patents, especially when enforced in place of a design.
The current version of the Patent law generally does not allow protection of portions of a design. Right now, the only partial designs that can be protected are those parts of a product that can be used and sold separately from the main product. This means that only spare and replacement parts can theoretically be protected as design patents. In all other cases, the law only allows the applicant to include portions of its design that have a particular aesthetic value of their own by describing them in the verbal descriptive portion of the application. In particular, the current Patent Law excludes the patentability of portions of complete products using dotted lines.
The second draft amendments would eliminate these limitations and hindrances by introducing the patentability of partial designs. If the amendment is approved, all partial designs with no restriction will be eligible for patentability. The downside of this, especially considering the typical Chinese landscape and the fact that there is no substantive examination of design patent applications, will likely be the unchecked proliferation of junk designs . This will force legitimate rights’ holders to increase their budget for house cleaning, to reduce the risk of theft and trolling litigation.
II. Patent Linkage
The proposed Patent Linkage provision provides that a patentee or interested party can initiate infringement proceedings (judicial or administrative) against a party who is seeking marketing authorization for a drug that falls within the scope of a patent recorded in the “Chinese Marketed Drug Patent Information Record Platform.” To utilize the proposed patent linkage provision, the patentee or the interested party will have to file civil or administrative proceedings before a People’s Court or the China National Intellectual Property Administration (“CNIPA”) within 30 days of the marketing authorization application being published by the competent drug administration. If the deadline passes without the patentee or interested party having filed a lawsuit, the party seeking the marketing authorization can file a legal action with a People’s Court or with the CNIPA to obtain a declaration of non-infringement.
The provision leaves a lot of critical points unclear and uncertain. First of all, it is not clear what the “Chinese Marketed Drug Patent Information Record Platform” is. Is it an already existing official database, like the Orange Book of the National Medical Products Administration, or a completely new repository or database? This will surely affect the type of patents registered therein and therefore the possibility for a patentee to qualify or not for patent linkage. Second, the jurisdiction of the courts is uncertain. The draft does not provide any indication of which court will have jurisdiction over the lawsuit and/or the declaratory action. Is it going to be that of the domicile of the patentee? That would contravene the general principles of the locus commissi delicti normally applied to patents. Also, it is not clear whether the pending of proceedings filed by the patentee will stay the market authorization process. Regarding the latter, the lack of express regulations may speak in favor of the market authorization not being immediately affected by the pending of linkage proceedings. However, a formal clarification would be welcome. Last but not least, there is no definition of “interested party”, although by analogy, we could safely surmise that this only includes the exclusive licensee.
One thing is certain —clarifications to the application of this new provision will be needed. Hopefully, they will be contained in a new set of amended implementing regulations to the Patent Law.
III. Patent Terms Extension
By signature of the US-China Phase I Agreement of January 15, 2020, China committed to provide patent term extensions to compensate for unreasonable delays that occur in granting the patent or during pharmaceutical product marketing approval. Article 42.2 of the draft Patent Law provides that, if an invention patent has been granted after four years from the filing date or three years from the request for substantive examination, the patent owner may request compensation for the unreasonable delay in granting the invention patent, except for the unreasonable delay caused by the applicant. This provision seems to implement the corresponding commitment of Section D, article 1.12.2.(a) of the Phase I Agreement. In practice, and in order to fully comply with the agreement, China will have to issue implementing regulations to arrange for a process to determine the exact period of extension of the patent validity.
As to pharmaceutical patents, article 42.3 of the draft amendments provides that the duration of patents of innovative pharmaceuticals for which patent terms was lost during the regulatory approval period, when a drug cannot yet be marketed, will be extended as well. However, the compensation time cannot exceed five years, and the total effective patent term after the new drug is authorised to be on market shall not exceed 14 years. On the surface, this norm seems to comply with the stipulation of article 1.12.2(b) of Phase I Agreement. However, the real scope of such regulation remains uncertain due to the unclear definition of “new drug” and whether it should be limited to one that has been simultaneously applied for authorization in China and other jurisdictions or not. Further normative clarification is needed to understand the effective application and scope of this provision, and whether it indeed complies with the spirit of the corresponding norm of the Phase I Agreement.
IV. COVID-19 Exemptions to Novelty Destroying Disclosures
China’s patent law is very strict when providing exceptions to novelty destroying disclosures (grace period disclosures). Traditionally, a disclosure of the invention without the consent of the right holder is exempted only if it occurred within six months from the date of filing. Any voluntary disclosure is always novelty destroying unless related to exhibitions sponsored or recognized by the Chinese government, or published for the first time at a specified academic or technological conference. The second draft adds a third case in which a voluntary disclosure of the invention will not be novelty destroying when occurring within six months prior to the date of filing. This is the case of the invention that is disclosed for the first time for the public interest in time of a national emergency or exceptional circumstances. It seems to be custom made for inventions related to the current emergency situation caused by the worldwide spread of the COVID-19 virus. Aside from the evident emergency caused by an epidemic, it remains to be seen what other situations could be considered as emergency and exceptional circumstances. Would an economic, political or trade crisis unrelated to a public health situation or a war, count as such an emergency?
V. Enforcement and Damages
In China it is often difficult to provide evidence to support a specific claim for damage compensation in a patent enforcement action. The absence of discovery, the difficulty of convincing a judge to conduct further investigations on accounting records and other relevant documents of the defendant, and the illicit bookkeeping practices of many Chinese firms, make it very difficult to obtain evidence that meets the strict probatory standards and supports realistic damage compensation claims. For this reason, and as a palliative in most cases, the law left it to the discretion of the judges to determine the amount of reasonable damages. These are the so called statutory damages set forth by the Patent Law.
The problem, aside from the inevitable discretion of the judge, is that these damages were capped in a range going from a minimum of RMB10,000 (USD1,450) to RMB 1,000,000 (about USD145,000). These caps are far from adequate, especially when we consider that litigation involving foreign patentees in China is rare compared to litigation among local parties, and is normally filed in severe kinds of infringements. The first draft of the patent law amendment realized such shortcoming and proposed an increase of the range to RMB100,000-RMB5,000,000. This was surely an improvement. However, the second reading of the draft amendments now under scrutiny, has changed this again, setting only an upper ceiling of RMB5,000,000 and eliminating the minimum amount. To this problem we add that the statutory damage received is effectively reduced by any reasonable expense that the patentee has incurred in order to stop the infringing act! This is definitely a serious problem, especially when the patentee/plaintiff is not able to collect evidence on its own to eliminate his reliance on statutory damages.
In this respect, the draft seems to help right holders to reach the required evidence threshold by introducing some key presumptions regarding evidence of illicit profit of the defendant. The new draft amendment provides now that, in order to determine the amount for compensation, where the right holder has endeavored to present evidence and the related account books or materials are mainly in control by the accused infringer, the People’s Court may order the defendant to provide those books and materials relating to the infringing conduct. If the defendant does not provide or provides false account books or materials, the People’s Court may refer to the right holder’s claims and evidence to rule on the amount of compensation. This norm may seem revolutionary, but a similar one was already introduced in the China Trademark law back in 2014! Also, the courts are generally willing to grant evidence preservation requests, even when litigation is ongoing, to preserve such books as evidence. Considering also how often the Chinese counterpart will try to provide only part of the required books or even disclose forged ones, we can see that the introduction of this provision in the draft amendment will not be a game-changer.
For these reasons, when a foreign patentee decides to litigate in China, it has to invest large resources in the pre-lawsuit investigations and evidence collection. This will be the most critical phase to ensure a successful outcome of a patent lawsuit.
It is likely that this second reading will be adopted into a new law amending the current Patent Law by the end of this year or the beginning of 2021. While the draft adds useful improvements, the real impact of some of the major changes is still unclear and will need additional implementing legislation. This is nothing new. Chinese general laws, like the Patent Law, are always drafted in very general terms, leaving more detailed regulations to a sub-set of rules and court interpretations. The main takeaway for now is that China IP is massively on the move and the ongoing changes are the reflection of external political and economic events. On one hand, changes are dictated by China’s desire to keep up with its long term policies of modernization its IP law system, initiated back in 2001 upon access to the WTO and the related TRIPS Agreement. On the other hand, critical changes are now dictated by China’s own policies, like Made in China 2025, or by mounting external pressure like the trade war. Whether all this will make it easier and better for foreigners to protect their IP in China remains to be seen.