The Third Amendment to the Chinese Patent Law

The Third Amendment to the Chinese Patent Law was approved on Dec. 27, 2008 and will come into effect on Oct. 1, 2009. Chinese Patent laws were first established in only 1985. The First Amendment enacted in 1992 added pharmaceutical compositions to the list of patentable subject matter and inaugurated China's membership in the Patent Cooperation Treaty (“PCT”). The Second Amendment enacted in 2000 brought the Chinese Patent Law into compliance with the Trade-Related Aspects of Intellectual Property Rights (“TRIPS”) Agreement.

This Third Amendment is expected to bring the Chinese Patent Law into closer conformity with international standards, particularly commensurate with U.S. Patent contract and litigation practice, even though several changes such as the absolute novelty requirement still clearly reflect the influence of European Patent laws on the development of the Chinese Patent Law. The Third Amendment includes changes to patent application and enforcement processes, ownership rights, compulsory licensing rules, international exhaustion rights, penalties for patent infringement, prior art defenses, and exemptions, summarized as follows.

Co-ownership (Article 15)

The current Chinese Patent Law lacks a provision addressing co-ownership rights, and the Third Amendment provides that where there is no prior agreement between patent co-owners, each may use the patent and grant non-exclusive licenses without permission of the other owner(s), although any license fees must be shared. Likewise, each co-owner of an invention may apply for a patent without the permission of the others. As such, parties entering into collaborative research and development programs should have agreements explicitly governing the disposition of intellectual property rights arising out of the collaboration. These ownership provisions are commensurate with both the U.S. and European patent laws.

Foreign Filing (Article 20)

To encourage Chinese inventors to seek patent protection and file for patent rights, the Third Amendment removes the statutory requirement for all Chinese individuals and entities to first file applications in China for inventions made in China. That means that Chinese applicants can apply for foreign patents even before filing a patent application in China. However, similar to the U.S. foreign filing license requirement, the Chinese applicants' invention must still be reviewed by patent authorities of the State Council to prevent national security leaks, so as a practical matter, filing the patent in China along with the request for foreign filing permission will be simpler. Interestingly, the current Article 20 governs only Chinese inventors, while the new law applies to anyone who made the invention in China. This broadening of scope appears to address the dramatic increase in research and development activities sponsored by foreign entities in China.

Absolute Novelty Requirement (Articles 22 and 23)

Novelty under the current Chinese patent law requires that before the date of filing, the invention must not have been disclosed in any publication in China or abroad, and not publicly used or known to the public in China. The territorial restriction on public use or public knowledge within the country of application is similar to that in the United States.

The Third Amendment raises the bar on public use and knowledge from in China only to anywhere in the world. If an invention is accessible to the public before its Chinese filing date, no matter where in the world, the invention loses its novelty, and is therefore not patentable in China. The new absolute novelty standard removes the territorial restriction and aligns with the standard in the European Patent Convention. In particular, the new absolute novelty standard prevents Chinese companies from purchasing the products overseas, and seeking a patent for their manufacture in China. It is, however, unclear whether the new absolute novelty standard would be applied retroactively.

Prior Art Defense (Article 62)

The Amendment provides a new statutory prior art defense to infringement, which does not exist in the United States. Under the Amendment, there can be no infringement if the accused object is proved to use a technology or design known before the filing date of the patent. An accused infringer may assert the prior art as a statutory defense to infringement, without the requirement to assert the prior art to demonstrate invalidity of the patent, as is required under current Chinese and U.S. patent law. Such a provision change is also being considered in currently pending U.S. patent reform legislation. Also note that the prior art definition here should be in accordance with the new absolute novelty requirement in Articles 22 and 23. It remains to be seen whether this defense could be applied retroactively, where an invention used or known abroad before its Chinese filing date is not prior art under the current patent law, but is under the new law. It is not clear yet whether such foreign public use or knowledge may constitute a prior art defense to patents granted under the current law.

Compulsory License (Articles 48 and 50)

The Third Amendment includes additional limited provisions for compulsory licensing to ensure the public's benefit of the invention under the patent system. Under the new Article 48, the Chinese government may grant compulsory licenses to qualified applicants if: 1) the patentee fails to sufficiently use the patent, without appropriate reasons, more than three years from the date of patent issuance or four years from the filing date; and 2) the patentee's use is determined to be a negative monopolistic activity. The compulsory license would be granted to alleviate a perceived anti-competitive effect of such a patent misuse under new Chinese laws analogous to U.S. antitrust. It remains to be seen how effectively this provision will be applied in China, given the inherent tensions between patent and anti-trust laws.

In particular, the new Article 50 permits the grant of a compulsory license for drugs and medical devices patented in China for the purpose of public health. This also applies to manufacturing in China as well as exporting to qualified countries under international treaties to which China is a member. The United States has similar “march-in” rights where federal funding is used to develop an invention; however, the U.S. government has not yet asserted these rights. It remains to be seen how readily the Chinese government will exercise this compulsory license right, such as whether only to alleviate a national epidemic or simply to provide more common access to generic pharmaceuticals.

Clinical Trial Exemption (Article 69(5))

The new Chinese Patent Law will also exempt from infringement the manufacture, use, and importation of patented drugs or medical devices, for the limited purpose of obtaining regulatory approval. The adoption of such an exemption is intended to benefit public health and encourage medical research and development of price-competitive (i.e., generic) drugs in China, as is the law in both the United States and Europe. This permits pharmaceutical companies to develop drugs under patents that have not yet expired, such that new product launch will not be delayed immediately after expiration.

Genetic Resources (Articles 5 and 26)

The Third Amendment requires disclosure of the origin of genetic resources upon which an invention relies. An invention is not patentable if the genetic resource was obtained illegally. Aiming to protect China's genetic resources, such as its native plants, this amendment facilitates rights protected under the International Biodiversity Treaty. No such disclosure requirement currently exists in the United States or Europe. Therefore, scientists conducting research related to Chinese genetic resources, such as extracts from traditional medicines, must be cognizant of the laws regulating procurement.

Enforcement of Patent Rights (Articles 11 and 61-69)

The new law significantly strengthens enforcement of patent rights in several ways. First, the Third Amendment (Article 11) prohibits unauthorized third parties from offering for sale products covered by a patent or obtained through a patented process. The “offer for sale” includes an intent to sell using any media channels including advertisements, trade shows, and bid processes. Such “offer for sale” constitutes patent infringement, as it does in the United States and Europe, and a patentee is entitled to file a patent infringement suit and obtain damages on this basis. However, the “offer for sale” of products that infringe a design patent in China may be exempted from infringement.

The Third Amendment also changes the “innocent infringer” defense to damages liability. Previously, lack of actual notice of patent infringement meant no liability in China. The new law will hold users, retailers, or wholesalers liable for infringement if they use, sell, or offer for sale the patented products or processes without a patentee's authorization, regardless of their knowledge of the patent, unless they can demonstrate a good faith reason to believe they had legitimate non-infringing access to the invention. This provision gives users and sellers an incentive to document their reasons for belief in the non-infringing use of products, facilitated by good faith representations of the seller or non-infringement opinions of a qualified patent counsel.

Moreover, the Third Amendment provides a patentee for the first time a right to seek a preliminary injunction and temporary restraining order. Before this Amendment, the People's Courts have never issued a preliminary injunction or a temporary restraining order in favor of a patentee in China. Because of this, it has been very difficult for a patentee to later obtain sufficient damages, due to the infringer's concealment or transfer of evidence, products, and other assets prior to or during the trial. The Third Amendment allows a patentee to collect protective evidence before a trial, subject to posting a bond or guarantee, as in the United States and Europe.

The Third Amendment raises the potential penalties and damages for patent infringement. Article 60 of the Third Amendment provides three basic measures for calculating damages based on: 1) actual loss of a patentee's profit, 2) infringer's illicit profit by selling infringing products, and 3) reasonable license fees. However, there are no clear guidelines as to which method a court or administrative agency should choose to calculate the damage, leaving the plaintiff or defendant to argue that the court or administrative agency should adopt one of the methods that favors them the most.

The Third Amendment increases damages potentially from treble to quadruple for the illicit profits, and raises the penalties from 50,000 yuan to 200,000 yuan even if there is no profit from infringement. The Third Amendment also contains a definitive statute that the People's Court can award from 10,000 yuan up to 1 million yuan (from approximately U.S. $1,500 to $150,000) in compensation when the damage cannot be specifically identified.

Conclusion

The Third Amendment of the Chinese Patent Law is expected to bring the laws and patent protection and enforcement significantly closer to international standards; however, there are still some unresolved issues. For instance, the potential for misuse of the Chinese “utility model” patent applications for unexamined granting of a patent right; double patenting issues between the utility model patents and design patents; issues related to plant and business method patents; and prohibition of patent misuse, are not addressed. Moreover, it should be understood that China is still a developing country from the legal perspective, and is desperately seeking to define the balance between rapid development and protection of new technologies for the longevity of its fast-growing economy. Protecting intellectual property rights is still a relatively new concept to Chinese culture. The Third Amendment goes a significant distance toward harmonizing Chinese Patent Law and commercial expectations with those of the other industrialized nations.

William L. Warren is a partner and Lei Fang, M.D., Ph.D. and S. Alex Cao, Ph.D. are associates in the Atlanta office of Sutherland.

The Third Amendment to the Chinese Patent Law was approved on Dec. 27, 2008 and will come into effect on Oct. 1, 2009. Chinese Patent laws were first established in only 1985. The First Amendment enacted in 1992 added pharmaceutical compositions to the list of patentable subject matter and inaugurated China's membership in the Patent Cooperation Treaty (“PCT”). The Second Amendment enacted in 2000 brought the Chinese Patent Law into compliance with the Trade-Related Aspects of Intellectual Property Rights (“TRIPS”) Agreement.

This Third Amendment is expected to bring the Chinese Patent Law into closer conformity with international standards, particularly commensurate with U.S. Patent contract and litigation practice, even though several changes such as the absolute novelty requirement still clearly reflect the influence of European Patent laws on the development of the Chinese Patent Law. The Third Amendment includes changes to patent application and enforcement processes, ownership rights, compulsory licensing rules, international exhaustion rights, penalties for patent infringement, prior art defenses, and exemptions, summarized as follows.

Co-ownership (Article 15)

The current Chinese Patent Law lacks a provision addressing co-ownership rights, and the Third Amendment provides that where there is no prior agreement between patent co-owners, each may use the patent and grant non-exclusive licenses without permission of the other owner(s), although any license fees must be shared. Likewise, each co-owner of an invention may apply for a patent without the permission of the others. As such, parties entering into collaborative research and development programs should have agreements explicitly governing the disposition of intellectual property rights arising out of the collaboration. These ownership provisions are commensurate with both the U.S. and European patent laws.

Foreign Filing (Article 20)

To encourage Chinese inventors to seek patent protection and file for patent rights, the Third Amendment removes the statutory requirement for all Chinese individuals and entities to first file applications in China for inventions made in China. That means that Chinese applicants can apply for foreign patents even before filing a patent application in China. However, similar to the U.S. foreign filing license requirement, the Chinese applicants' invention must still be reviewed by patent authorities of the State Council to prevent national security leaks, so as a practical matter, filing the patent in China along with the request for foreign filing permission will be simpler. Interestingly, the current Article 20 governs only Chinese inventors, while the new law applies to anyone who made the invention in China. This broadening of scope appears to address the dramatic increase in research and development activities sponsored by foreign entities in China.

Absolute Novelty Requirement (Articles 22 and 23)

Novelty under the current Chinese patent law requires that before the date of filing, the invention must not have been disclosed in any publication in China or abroad, and not publicly used or known to the public in China. The territorial restriction on public use or public knowledge within the country of application is similar to that in the United States.

The Third Amendment raises the bar on public use and knowledge from in China only to anywhere in the world. If an invention is accessible to the public before its Chinese filing date, no matter where in the world, the invention loses its novelty, and is therefore not patentable in China. The new absolute novelty standard removes the territorial restriction and aligns with the standard in the European Patent Convention. In particular, the new absolute novelty standard prevents Chinese companies from purchasing the products overseas, and seeking a patent for their manufacture in China. It is, however, unclear whether the new absolute novelty standard would be applied retroactively.

Prior Art Defense (Article 62)

The Amendment provides a new statutory prior art defense to infringement, which does not exist in the United States. Under the Amendment, there can be no infringement if the accused object is proved to use a technology or design known before the filing date of the patent. An accused infringer may assert the prior art as a statutory defense to infringement, without the requirement to assert the prior art to demonstrate invalidity of the patent, as is required under current Chinese and U.S. patent law. Such a provision change is also being considered in currently pending U.S. patent reform legislation. Also note that the prior art definition here should be in accordance with the new absolute novelty requirement in Articles 22 and 23. It remains to be seen whether this defense could be applied retroactively, where an invention used or known abroad before its Chinese filing date is not prior art under the current patent law, but is under the new law. It is not clear yet whether such foreign public use or knowledge may constitute a prior art defense to patents granted under the current law.

Compulsory License (Articles 48 and 50)

The Third Amendment includes additional limited provisions for compulsory licensing to ensure the public's benefit of the invention under the patent system. Under the new Article 48, the Chinese government may grant compulsory licenses to qualified applicants if: 1) the patentee fails to sufficiently use the patent, without appropriate reasons, more than three years from the date of patent issuance or four years from the filing date; and 2) the patentee's use is determined to be a negative monopolistic activity. The compulsory license would be granted to alleviate a perceived anti-competitive effect of such a patent misuse under new Chinese laws analogous to U.S. antitrust. It remains to be seen how effectively this provision will be applied in China, given the inherent tensions between patent and anti-trust laws.

In particular, the new Article 50 permits the grant of a compulsory license for drugs and medical devices patented in China for the purpose of public health. This also applies to manufacturing in China as well as exporting to qualified countries under international treaties to which China is a member. The United States has similar “march-in” rights where federal funding is used to develop an invention; however, the U.S. government has not yet asserted these rights. It remains to be seen how readily the Chinese government will exercise this compulsory license right, such as whether only to alleviate a national epidemic or simply to provide more common access to generic pharmaceuticals.

Clinical Trial Exemption (Article 69(5))

The new Chinese Patent Law will also exempt from infringement the manufacture, use, and importation of patented drugs or medical devices, for the limited purpose of obtaining regulatory approval. The adoption of such an exemption is intended to benefit public health and encourage medical research and development of price-competitive (i.e., generic) drugs in China, as is the law in both the United States and Europe. This permits pharmaceutical companies to develop drugs under patents that have not yet expired, such that new product launch will not be delayed immediately after expiration.

Genetic Resources (Articles 5 and 26)

The Third Amendment requires disclosure of the origin of genetic resources upon which an invention relies. An invention is not patentable if the genetic resource was obtained illegally. Aiming to protect China's genetic resources, such as its native plants, this amendment facilitates rights protected under the International Biodiversity Treaty. No such disclosure requirement currently exists in the United States or Europe. Therefore, scientists conducting research related to Chinese genetic resources, such as extracts from traditional medicines, must be cognizant of the laws regulating procurement.

Enforcement of Patent Rights (Articles 11 and 61-69)

The new law significantly strengthens enforcement of patent rights in several ways. First, the Third Amendment (Article 11) prohibits unauthorized third parties from offering for sale products covered by a patent or obtained through a patented process. The “offer for sale” includes an intent to sell using any media channels including advertisements, trade shows, and bid processes. Such “offer for sale” constitutes patent infringement, as it does in the United States and Europe, and a patentee is entitled to file a patent infringement suit and obtain damages on this basis. However, the “offer for sale” of products that infringe a design patent in China may be exempted from infringement.

The Third Amendment also changes the “innocent infringer” defense to damages liability. Previously, lack of actual notice of patent infringement meant no liability in China. The new law will hold users, retailers, or wholesalers liable for infringement if they use, sell, or offer for sale the patented products or processes without a patentee's authorization, regardless of their knowledge of the patent, unless they can demonstrate a good faith reason to believe they had legitimate non-infringing access to the invention. This provision gives users and sellers an incentive to document their reasons for belief in the non-infringing use of products, facilitated by good faith representations of the seller or non-infringement opinions of a qualified patent counsel.

Moreover, the Third Amendment provides a patentee for the first time a right to seek a preliminary injunction and temporary restraining order. Before this Amendment, the People's Courts have never issued a preliminary injunction or a temporary restraining order in favor of a patentee in China. Because of this, it has been very difficult for a patentee to later obtain sufficient damages, due to the infringer's concealment or transfer of evidence, products, and other assets prior to or during the trial. The Third Amendment allows a patentee to collect protective evidence before a trial, subject to posting a bond or guarantee, as in the United States and Europe.

The Third Amendment raises the potential penalties and damages for patent infringement. Article 60 of the Third Amendment provides three basic measures for calculating damages based on: 1) actual loss of a patentee's profit, 2) infringer's illicit profit by selling infringing products, and 3) reasonable license fees. However, there are no clear guidelines as to which method a court or administrative agency should choose to calculate the damage, leaving the plaintiff or defendant to argue that the court or administrative agency should adopt one of the methods that favors them the most.

The Third Amendment increases damages potentially from treble to quadruple for the illicit profits, and raises the penalties from 50,000 yuan to 200,000 yuan even if there is no profit from infringement. The Third Amendment also contains a definitive statute that the People's Court can award from 10,000 yuan up to 1 million yuan (from approximately U.S. $1,500 to $150,000) in compensation when the damage cannot be specifically identified.

Conclusion

The Third Amendment of the Chinese Patent Law is expected to bring the laws and patent protection and enforcement significantly closer to international standards; however, there are still some unresolved issues. For instance, the potential for misuse of the Chinese “utility model” patent applications for unexamined granting of a patent right; double patenting issues between the utility model patents and design patents; issues related to plant and business method patents; and prohibition of patent misuse, are not addressed. Moreover, it should be understood that China is still a developing country from the legal perspective, and is desperately seeking to define the balance between rapid development and protection of new technologies for the longevity of its fast-growing economy. Protecting intellectual property rights is still a relatively new concept to Chinese culture. The Third Amendment goes a significant distance toward harmonizing Chinese Patent Law and commercial expectations with those of the other industrialized nations.

William L. Warren is a partner and Lei Fang, M.D., Ph.D. and S. Alex Cao, Ph.D. are associates in the Atlanta office of Sutherland.