China: China Solidifies Its Position In IP

While 2009 will probably be remembered mostly as the year of the Great Recession, it will also likely be remembered as the year in which China solidified its position as a major force in many areas, not the least of which is intellectual property. In a year during which the number of patent and trademark applications fell in almost all major countries, including with the WIPO, China's State Intellectual Property Office (SIPO) and Trademark Office (CTO) continued to receive record number of applications. The country also saw the implementation of the third amendment to its patent law, while the newest round of amendment to its trademark law is also in the works. In the enforcement area, IP civil cases received and completed by the court system remained at record level, as the legal system continued to see more landmark cases and becomes more mature.

The Rise of the Chinese Applicants

In 2009, the SIPO received over 976,000 patent applications, an increase of about 18% over 2008. Chinese entities accounted for almost 90% of the total applications. While Chinese applicants have traditionally been responsible for almost all of the applications for utility model and design patents, it is surprising to many people that domestic applicants also accounted for over 75% of the more valuable invention type patent applications in 2009. More significantly, Chinese entities received over 50% of granted invention patents for the first time in 2009.

Another indication signaling the rise of the Chinese applicants is international patent filings under WIPO's PCT regime. While the total PCT filings fell by 4.5% in 2009, with sharper than average declines experienced by industrialized countries such as the U.S., Germany and the UK, applications from China rose almost 30%, making the country the fifth largest user of the PCT system, behind the U.S., Japan, Germany and South Korea. The Chinese company Huawei Technologies has become the number one PCT filer in the world.

The numbers for trademarks continue to be striking. The CTO has been the largest in the world, in terms of number of applications received, for the past eight years. Trademark filings and cases of all types remained at record level in 2009, despite a global downward trend. Among them, the number of new trademark applications in 2009 was 830,000, a 20% increase over 2008. As in the past several years, over 85% of the applications were filed by Chinese entities.

It is true that many people believe patent applications filed by Chinese entities are generally simple in nature and lack pioneering innovations; and many trademark applications by Chinese entities are imitations or outright copying of international brands. At the same time, most people also believe that the quality and complexity of patent applications by Chinese applicants continue to enhance over time, as does the sophistication of trademark applications. One also has to remember that the concept of intellectual property was almost non-existent to the Chinese system and culture before the 1980s. It is remarkable that, in a span of less than thirty years, China and its people's attitude towards intellectual property has undergone a breathtakingly fast evolvement, from totally foreign to uneasiness and ambivalence, and to active embracing, as clearly demonstrated in 2009.

It seems that every Chinese company of a certain size is including IP in its business strategy. The government certainly recognizes and encourages the trend. The National Intellectual Property Strategy, released by China's State Council in 2008 represents a genuine intention by China that it does not want to remain a mere manufacturing power. Rather, the Strategy sets out a course for China to concentrate more on innovation and move up the ladder in the global economy. In October of 2009, the Ministry of Finance announced a government program to support small- and medium-sized companies in overseas patent filings. The program allocated RMB 100 millions (about US$15 millions) in direct financial support for qualified applicants. It is safe to say that awareness and activities by Chinese applicants will continue to increase at a fast pace.

Newly Amended Patent Law

The Third Amendment to the Chinese Patent Law took effect on October 1, 2009. Unlike the first two amendments, which were made in 1992 and 2000 and primarily to fulfill China's international treaty obligations, the Third Amendment aims to enhance the law's effectiveness in promoting innovation and avoiding abuses, as well as eliminating problems or gaps in the prior law.

With regard to inventions made in China, the current law allows related applications to be filed in foreign countries first, after receiving approval from the SIPO based on secrecy review, a similar regime as granting a foreign filing license in the United States. Although the timing and the exact nature of the secrecy review are still to be seen, the law provides more certainty to international companies, which are increasingly seeing their inventions made by team members residing in different countries.

The change in prior art definition makes China's novelty standard absolute, on par with what is required under the European Patent Convention. In making public use outside of China as part of prior art, the new law is especially helpful for international companies having operations outside of China and may want to use such activities as prior art to invalidate certain patents or defend itself against infringement charges.

The several changes made with regard to design patents should enhance the quality of design patents, as well as reducing filing costs for multiple similar designs. The provision regarding Patent Assessment Reports for design and utility model patents will undoubtedly reduce frivolous infringement allegations, as well as discouraging the so-called junk-filings for design and utility model patents. As the vast majority of design and utility model applications are filed by Chinese entities, this should be a welcome change for international companies who often feel that they are threatened by lawsuits based on patents that are copies or imitations of their own technologies or designs.

Speed is Everything at the CTO

With record numbers of trademark applications, the number one issue for the Chinese Trademark Office, in fact for everyone involved with the Chinese trademark system, has been backlog and examination speed. At the end of 2007, the CTO set a two-fold goal: solving the backlog problem in 3 years and matching the international examination level in 5 years.

In 2009, the number of preliminary examination made and published by the CTO was over 1,000,000, and new trademark registrations were over 800,000. Both numbers are record-breaking. At the same time, and probably as a result, the number of cases received by the Trademark Review and Adjudication Board TRAB saw an increasing of about 120% from 26,000 cases in 2008 to 57,000 cases in 2009. The TRAB also issued judgment in 36,000 cases, the highest in history as well.

While the CTO appears to be on its way to achieve the goal of eliminating backlogs by the end of 2010, the second goal, matching international examination level, will probably take a much longer time to achieve. Many people believe that, to increase the quality of examination, improvements need to be made in many aspects, such as in law and regulations, qualification and training of examiners, and communications and coordination between the CTO and TRAB. In addition, as many people have argued, the backlog problem should not be solved at the expense of the quality of examinations and of the examiners. Because of the strict speed and quota requirements, many under trained or even unqualified examiners are being pushed to the front line, resulting in many inconsistent and sub-par examinations.

An Increasingly Used Legal System

The number of IP related litigations is probably the most surprising, especially for people outside of China. Even though statistics in this regard are not very complete, it is safe to estimate that the number of IP related civil cases handled by the People's Courts saw an increase of about 30% over each of 2008 and 2009. In 2009, the Chinese courts issued judgment in about 30,500 patent, trademark and other IP related first instance cases, an astonishing number, especially when you consider that there were probably more IP cases handled by the various administrative agencies. The vast majority of the cases are between Chinese entities, which, until less than 30 years ago, did not even have or know such means to resolve disputes. Even though the process and cost involved in Chinese IP cases are usually substantially simpler and lower than those involved in IP cases in the western countries such as the U.S., the numbers demonstrate not only that the Chinese are becoming more litigious, but also that the legal and court systems are maturing and being relied upon by IPR owners, Chinese and foreign, to resolve disputes and achieve their business objectives.

Two of the cases concluded in 2009 are illustrative of the current state of the court system. The first case has been dubbed by the media as "China's No. 1 Bus Infringement Case," because of its high profile and damage amount. The case involves Germany's Neoplan Bus GmbH and its competitor in China, the Zhongwei Bus Group. Neoplan filed the lawsuit in 2006 with the Beijing First Intermediate People's Court, alleging infringement of its Chinese design patent by Zhongwei's A9 buses. The course of the case included a validity challenge against Neoplan's patent, Zhongwei's defense that its A9 bus' design is different and protected by its own design patent, and field trips organized by the court to inspect the alleged infringing product. In January 2009, the court rendered its decision in favor of Neoplan. The 23 page judgment includes detailed analysis, as well as photographs both of the design patent and one of the infringed buses. The court holds that the A9 Buses made and sold by Zhongwei are copies of Neoplan's "Starliner Buses," the design patent right of which is held by Neoplan in China. The Zhongwei is ordered to pay damages in the amount of RMB 20 million, plus RMB 1.16 million in legal costs (a total of about US$3.1 millions). Although it is currently being appealed art the Beijing High People's Court, the Neoplan case has illustrated the sophistication and thoroughness of the Beijing No. 1 Court, as well as the maturity and consistency of the different parts of China's IP system involved in the case.

The second case involves an eight-year long battle pitching China Environmental Project Company (CEPT), an engineering company based in Wuhan, central China, against Japanese company Fujikasui Engineering and Huayang Electric Power Company, a coal-fired power plant based in southeastern Fujian Province. CEPT first filed suit in 2001 in Fujian, alleging infringement by Fujikasui and Huayang of CEPT's patent related to method and apparatus for removing sulfur from power plant discharges by using seawater. In the subsequent years, the defendants filed a total of five invalidation requests with the SIPO against CEPT's patent, all failed to wholly invalidate the patent. But the invalidation requests and the subsequent appeals of the invalidation decisions to the court did slow down the infringement case. During the course of the cases, the Fujian High Court also appointed a large group of technical experts, providing the court with technical analysis.

The case went all the way to the Supreme People's Court, a rare occasion for patent cases. In December 2009, The Supreme Court issued its final decision and held that Fujikasui and Huayang had jointly infringed CEPT's patent. The two defendants were ordered to pay damages in the amount of over RMB 50 million (about US$7.3 millions). The court also ordered Huayang, the power plant operator, to pay CEPT an annual patent usage fee based on the power plant's operating capacity.

The CEPT case is unusual in several aspects, including its length of eight years, which is very rare for Chinese patent cases, the number of invalidation requests involved, that the Supreme Court is involved, the damage amount, and the fact that the decision effectively gives a compulsory license to the power plant operator Huayang, even though it had to pay an annual usage fee. The case illustrates fully the various factors that could be involved in a Chinese patent litigation, such as the bifurcation of infringement and validity issues, that the invalidation proceeding may be used, or abused, in an effort to delay or distract the infringement case, the important and complex roles of technical experts, international politics and local protectionism, as the case involves a Japanese company and a Taiwanese backed Fujian power plant, which is a big tax payer locally. While the case exposed certain weaknesses and gaps in the Chinese legal system, it also demonstrates the depth and capacity of the system in handling such complex cases.

On December 21, 2009, the Supreme People's Court issued "Provisions regarding Several Issues Concerning Applicable Law in Patent Infringement Trials" (Judicial Interpretation), the third of its kind. The Interpretation aims to clarify issues related to asserted claims by the plaintiff, interpretation regarding functional claims, prosecution history estoppel, the "all technical features" requirement, "practicing prior art" as a defense, determination of damages, and declaratory judgment. Although the Interpretation does not include as many issues as people had been expecting, it represents an effort by the Supreme Court some of the more important and less controversial issues, while leaving other issues to be further discussed and determined later. Although the full effect of the Interpretation will only be seen in the coming years, it is safe to say that it will help courts in issuing more consistent decisions and encourage more usage of the system.

The Chinese are innovative people. They are pound and always like to remind the world of their glorious past and great contributions to civilization, such as the Four Great Inventions: paper making, gunpowder, movable print, and the compass. The current legal system, despite all its shortcomings, has by and large encouraged and freed people to release and realize their ingenuity and potentials. With all that happened, 2009 will be remembered as the year that China solidified its position as a major force in the field of intellectual property.

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.

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