Beware the utilities

• people argue there's a lack of enforcement in China;

• they don't expect China will be their market and are then caught out when their manufacturing operations move ther (they effectively miss the point that China will be a centre of manufacturing);

• budget concerns mean that companies may need to choose where to file and may concentrate on neighbouring countries such as Thailand or Vietnam; and

• the product turns out to have an unexpectedly long life span.

On top of this, the international patent filing system is not well geared towards using invention patents: the Patent Co-operation Treaty, which allows a company to buy time in many markets simultaneously, does not allow for utility model patents.

And perhaps most importantly, a lot of companies are simply not aware of, or are unfamiliar with, utility models because their home jurisdictions do not provide exactly this kind of rights protection. It can be found in some European countries, including Germany, France and Italy, as well as in Japan, South Korea and Taiwan. But it is absent from, or listed under a different name in, the patent laws of the US and UK.

“You need to look at the mentality,” says Catherine Sun, a Shanghai-based Foley & Lardner partner and IP specialist. “In the US there's no such thing as utility model so [companies] don't consider it as a patent. They think: 'Why bother?'”

Whatever the reasons behind them, the statistics show
clearly that utility model patents are underused by foreign companies. Chinese companies, in contrast, are finding them to be a cheap and efficient way of spending a more limited IP budget.

“The biggest constraint is funding for Chinese companies. They tend to spend on marketing, rather than IP protection,” says Sun.

“Chinese companies are more encouraged to get patents now,” adds Redfearn, citing government grants for IP protection. “If they are going to get a patent then utility model patents provide a good option.”

This means in turn that more domestic companies are bringing IP actions against their foreign counterparts, resulting in what Sun calls “a more healthy distribution of patent cases”.

“It shows the development of the sophistication of the Chinese market,” she says.

In the past, lawyers most often dealt with worries about infringement, counterfeits and piracy. Now they are finding themselves advising foreign investors on how to restructure and review their China IP strategy, and they say that those investors will increasingly need to examine their Chinese competitors' IP portfolios and consider cross-licensing arrangements.

This all makes good business sense, and no one would dispute that many Chinese companies will find utility models genuinely beneficial. But the lack of substantive examination in those patents also leaves the door open for unscrupulous companies to take advantage of utility models to create so-called junk patents and attack foreign companies' products.

“Junk patents were filed under the current patent law, which has a different novelty standard, and weren't going to be refused because the same product is sold overseas,” explains Redfearn.

As mentioned earlier, the government has recognised the problem this creates for foreign investors and has made changes in the new patent law.

The revised Patent Law introduces absolute novelty for utility models (meaning they can be invalidated if the plaintiff can prove their prior use somewhere else in the world). New junk patents will no longer exist as utility model patents are brought in line with the rest of the world and the Chinese invention patent system.

But lawyers say they do not know whether the new rules will apply to utility models registered before October 1 2009.

“The previously filed ones will still exist – we haven't seen any suggestion of retrospective action,” says Redfearn.

This means foreign companies may be contending with attacks based on junk patents until 2019.

Only one way to fight back
One in-house lawyer based in China says that, in the Schneider case, Chint allegedly copied what Schneider had done several years ago and then filed their own utility model on it. This kind of copying has happened many times, he says, and it places the alleged infringer in a very difficult position.

In this kind of case, the defendant must prove that the utility model patent is valid because of prior art, through the Patent Review Board of the State Intellectual Property Office, and effectively overturn the Office's original grant decision. This places a significant burden on the alleged infringer who may in fact be the originator of the invention.

The in-house lawyer says he has heard that some Chinese companies have copied specifications from US patents, and then filed a utility model in China. There is no substantive examination and no one has to make an enforceable statement to say they believe the utility model is for a new invention. If someone files a utility model copied from elsewhere, there is no bad faith penalty, even if they knew about the prior art at the time.

For foreign companies, then, the key is to file in China. Under the unrevised Patent Law, valid US patents have no effect in China: “If you want to take care of business in China, you must file your patents in China,” the in-house counsel says.

Many foreign companies may not have much faith in the Chinese patent system, and so decide not to file. They feel the expense of local legal support, translation and possible prosecution makes the process not commercially viable. But since China joined the World Trade Organisation, there have been many positive changes. These include multiple amendments to the law, improved training for judges and patent lawyers, and more filings.

“After Schneider, we will see if companies change,” says Sun, who adds that her firm has been advising companies to use a combination of patent types.

“If the technology has [a lifespan of] five years or less, why bother with an invention patent? For this, if you don't want to do it as a trade secret, you may want to consider a utility model.”

Foreign companies take note: it is worth taking the time learning about China's patent system, and putting faith in it if you want to properly protect yourself.

For more on the Schneider case, please visit www.managingip.com

(This article is part of the China IP update special feature)