China: Patent Strategies For Foreign R&D Companies

In recent years, with the sustained rapid growth of the Chinese economy and the in-depth reform and opening-up of the country, the Chinese market has witnessed a rapid expansion, and its outstanding status in the global marketplace has become ever prominent. Numerous multinational companies, such as Microsoft, IBM, Lucent, Hewlett-Packard, Samsung, Philips, Motorola, Nokia, have established their R & D centers in China, respectively. Up to now, the number of foreign companies that have set up their R & D centers in China has exceeded 1000 in total.

Most of these companies are ranking world top 500. They established their R & D centers in China in order to meet demands for localization of products, technologies and services, and to promote their enterprise image as well, while sharpening their competitive edge in the local market by exploiting the rich human resources of technical professionals and taking advantage of the low capital costs. This has become an important part of their localization strategy.

Although these R & D centers are playing an ever-important role in technological innovation and making great achievements thereof, they have encountered all sorts of problems in the process of implementing their patent strategies so as to better protect their R & D achievements. One of the outstanding problems is how to transfer abroad their technological breakthroughs accomplished by their R & D centers in China.

Regarding this issue, there have been provided relevant provisions in the Chinese Patent Law, the Chinese Foreign Trade Law, etc.

Article 20 of the Chinese Patent Law stipulates that where a Chinese entity or individual intends to file an application in a foreign country for a patent for its or his invention-creation made in China, it or he shall file first an application for patent with the patent administrative organ under the State Council and, shall appoint a patent agency designated by the said organ to act as its or his agent, and shall abide by the prescriptions of Article 4 in this law. A Chinese entity or individual may, according to the international treaties concerned to which China is a party, file an international application for patent for its or his invention-creation. The applicant for the international application should abide by the provisions of the preceding paragraph.

According to the above-mentioned provision, a patent application for the R & D achievements made in China should be filed first in China, or filed first as a PCT application, in which at least China should be designated, before the Chinese Patent Office as the receiving offices, prior to the filing of a patent application in a foreign country in the name of the Chinese entity or individual who has made the invention.

A foreign R & D center in China is an enterprise established in the Chinese territory according to the relevant Chinese laws, and therefore is a Chinese entity as stated in the patent law and should be regulated by the above-mentioned provision.

Article 10 of the Chinese Patent Law stipulates that the patent application right and the patent right can be assigned. An assignment, by a Chinese entity or individual, of the patent application right, or of the patent right, to a foreigner must be approved by the competent authorities designated by the State Council.

The above-mentioned provision covers only the patent application right and the patent right, which are bestowed upon only after the filing of a patent application.

Article 8 of the Chinese Patent Law stipulates that for an invention-creation jointly made by two or more entities or individuals, or made by an entity or individual in execution of a commission for another entity or individual, the right to apply for a patent belongs, unless otherwise agreed upon, to the entity or individual which made, or to the entities or individual which jointly made, the invention-creation. After the application is granted, the entity or individual that applied for it shall be the patentee.

The right to apply for a patent mentioned in Article 8 means the right to apply for a patent for the R & D achievements. According to the above-mentioned provision, if a R & D contract is signed between the entity or individual which assigned to carry out the R & D research projects and its entrusting party, and the contract indicate that the right to apply for a patent belongs to the entrusting party, then the right to apply for a patent shall belong to the entrusting party.

Therefore, prior to the R & D activities, i.e. before the technological achievements take shape, if a R & D contract is signed between the foreign R & D center in China and its parent company, indicating that the parent company is entitled to the right to apply for a patent for the invention made by the R & D center in China, then the R&D achievements can be transferred to its parent company, because such a contract is not related to the patent application right and the patent right, thus staying clear of the binding force of the present Chinese Patent Law. In practice, it is just in this way that many foreign companies have already transferred the R&D achievements made by the R&D centers in China to their parent companies.

The above-mentioned situation has aroused wide attention of the parties concerned. As can be seen from the discussion of the third revision of the Chinese Patent Law (expected to be on the legislative agenda of National People's Congress in 2008), this issue has become a heatedly debated topic as apparently reflected in the Draft Opinion on the Third Revision of the Chinese Patent Law distributed recently by the State Intellectual Property Office.

A brief analysis of the amendments of some related provisions is provided as follows.

Article 10. The right to apply for a patent, the patent application right and the patent right may be assigned. An assignment,by a Chinese entity or individual, of the right to apply for a patent, of the patent application right or of the patent right to a foreigner, a foreign enterprise or other foreign organizations must go through relevant procedures according to laws and administrative regulations.

In the amendment of Article 10, the "right to apply for a patent" is added in parallel to the patent application right and the patent right, and the "foreigner" is further clarified as a foreign individual, a foreign enterprise or other foreign organizations, thus broadening the range of the assignees of the rights. The legislative purpose here is to emphasize that, whether before the filing of the patent application, after the filing of the patent application but prior to the grant of the patent right, or after the grant of the patent right, the above-mentioned rights must be subject to the binding force of relevant Chinese laws and regulations, so long as they are transferred from China to some one in a foreign country, be it a foreign individual or a foreign enterprise. The laws and regulations referred hereto include the Foreign Trade Law, etc., which is to be elaborated later on.

Article 20. Where any entity or individual intends to file an application in a foreign country for a patent for its or his invention-creation made in China, it or he shall file first an application for patent with the patent administrative organ under the State Council and shall abide by the prescriptions of Article 4 in this law. Any Chinese entity of individual may, according to the international treaties concerned to which China is a party, file an international application for patent for its or his invention-creation. The applicant for the international application should abide by the provisions of the preceding paragraph.

In Article 20, the original term "Chinese entity or individual"is amended to "any entity or individual", and the term "domestic" is amended to "China". Such an amendment has broadened the coverage of the former R & D body. The legislative purpose here lies in that as long as the R & D achievements are achieved in the Chinese territory, the filing of a patent application in a foreign country must be made in conformity with the preceding provision, i.e. filing first a patent application in China, no matter whether the R & D body belongs to China or not.

Article 64. Where any entity or individual, in violation of the provisions of Article 20 of this Law, unauthorizedly files first in a foreign country an application for a patent for an invention-creation made in China, its or his patent application for the invention-creation filed in China shall not be granted a patent right. In case of divulging an important secret of the State, it or he shall be prosecuted for the criminal liability according to the law.

According to the former Article 64, where a person, in violation of the provisions of Article 20 of this Law, unauthorizedly files in a foreign country an application for a patent that divulges an important secret of the State, he shall be subject to disciplinary sanction by the entity to which he belongs or by the competent authority concerned at the higher level. In other words, only if he files in a foreign country an application for a patent that divulges an important secret of the State, shall he be subject to disciplinary sanction. If his action does not divulge an important secret of the State, he shall not be punished under such disciplinary sanction.

According to the above-mentioned Draft Opinion, where any person, be it a Chinese individual or entity or a foreign individual or entity, in violation of the provisions of Article 20 of this Law, unauthorizedly files first in a foreign country an application for a patent, he shall be subject to penalty, i.e. his patent application for the invention-creation filed in China shall not be granted a patent right, no matter whether he divulges an important secret of the State or not. Thus the enforcement of penalty is intensified in the sense of the Patent Law.

As can be seen from the proposed amendments to the provisions in the Draft Opinion on the Third Revision of the Chinese Patent Law, the legislative purpose apparently shown herewith is to further regulate acts of filing the patent application for the invention-creation made in China and to make all relevant measures taken thereby more concrete and more accurate, though they are not yet finally approved with the examination of the legislative body. If the above-mentioned Draft Opinion is finally passed, then the acts of having an R & D contract signed between the foreign R & D center in China and its parent company for transferring the right to apply for a patent, and thus the patent application right and the patent right to a foreign country shall further be restricted.

Regarding this issue, other than relevant provisions of the Chinese Patent Law, the Foreign Trade Law and the Regulations of the People's Republic of China on Technology Import and Export Administration also contain the corresponding regulations. Based on this, the Administrative Rules for Technologies Prohibited and Restricted from Export further specify more regulations in detail.

Article 2 of the Regulations of the People's Republic of China on Technology Import and Export Administration stipulates that the technology import and export as referred to in these Regulations means acts of transferring technology from outside the territory of the People's Republic of China into the territory of the People's Republic of China or visa versa by way of trade, investment, or economic and technical cooperation.

The acts mentioned in the preceding paragraph include assignment of the patent right, assignment of the patent application right, licensing for patent exploitation, assignment of technical secrets, technical services and transfer of technology by other means.

As can be seen, the objective coverage defined in the Regulations is much broader than that of the present Chinese Patent Law. Apart from the assignment of the patent right and assignment of the patent application right, it also includes licensing for patent exploitation, assignment of technical secrets, technical services and transfer of technology by other means. The objects of transfer include the patented technology as well as the non-patented technology.

According to the Regulations of the People's Republic of China on Technology Import and Export Administration, China classifies technologies related to export of technology into 3 kinds: prohibited technology, restricted technology, and freely exportable technology, among which prohibited technology and restricted technology are published in the Catalogue for Technologies Prohibited and Restricted from Export, which is regularly updated.

As can be noted from Article 31, Article 32, Article 33 and Article 39 of the Regulations, technology prohibited from export shall not be exported. Technology restricted from export shall be subject to license administration, and shall not be exported without a license. Freely exportable technology shall be subject to the contract registration administration.

Article 46 stipulates the legal consequences of violating the regulations on export of technology: where a technology prohibited or restricted from export is exported without approval shall be prosecuted for criminal liability according to the provisions for the crimes of smuggling, illegal business operation, or divulging national secrets or other crimes under the Criminal Law. Where such export is not so serious as to be prosecuted for criminal liability, penalty shall be imposed according to the circumstances pursuant to the relevant provisions of the Customs Law, or the competent foreign trade department under the State Council issues a warning against it, confiscates illegal income and/or imposes a fine one to five times the illegal income. The competent foreign trade department under the State Council may revoke the foreign trade business license.

As can be seen, the legal consequences of the preceding provision involve smuggling, illegal business operation, or divulging national secrets or other crimes under the Criminal Law and the Customs Law. These penalties are much more severe than those stipulated in the relevant regulations of the Chinese Patent Law.

In summary, at present, if a foreign R & D center in China intends to transfer R & D achievements to its foreign parent company by signing an R & D contract with its parent company, indicating the right to apply for a patent for the R & D achievements belongs to its parent company, he or it can stay clear of the regulations of the Chinese Patent Law without violating the current Chinese Patent Law.

However, if the above-mentioned provisions discussed in the Third Revision of the Chinese Patent Law are approved by the National People's Congress in 2008, this will inevitably affect the foreign companies and their R & D centers in China with a great impact, thus invoking a major binding force on their acts.

In addition, the above-mentioned practices are in violation of the prevailing Regulations of the People's Republic of China on Technology Import and Export Administration, whose superior law, the Foreign Trade Law, is in parallel with the Chinese Patent Law, although the Regulations per se are inferior to the Chinese Patent Law in a legal sense. Therefore, the effect of the Regulations is not to be underestimated. Moreover, the drafted amendments to the Chinese Patent Law provide remedies for the defects or drawbacks of the current Chinese Patent Law in line with the principles of the Foreign Trade Law and the Regulations of the People's Republic of China on Technology Import and Export Administration.

Therefore, in a strict sense, if a foreign company and its R & D center in China intends to transfer to its parent company the R & D achievements, which happens to fall into the prohibited technologies listed in the Catalogue for Technologies Prohibited and Restricted from Export, then the practice with smallest risk possible, in other words, the most secure and feasible practice is for them to file a patent application in the name of the Chinese R & D body as the applicant, and at the same time to apply for licensing of technology export with the competent department concerned (the Ministry of Commerce of PR. China) under the State Council.

Should the foreign companies and their R & D centers in China fail to follow the preceding procedures, they will certainly run the risk of paying the penalty for violation of the Chinese laws, though up to the present, there has been none of such cases adjudicated by the Chinese courts at various levels.

By now all the foregoing issues we are dealing with is limited to the R & D achievements that are wholly accomplished in China. However, if some parts of the achievements are made in China, which are insufficient to constitute a complete technical solution or an invention-creation, while the other parts are finalized in a foreign parent company, e.g. one in the United States with similar regulations, then it should be taken into consideration in which country a patent application for such an invention-creation in joint efforts should be filed first.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
CCPIT Patent & Trademark Law Office
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
CCPIT Patent & Trademark Law Office
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions