Reshaping the game

Changes and implications
In the Implementing Rules, a total of nine brand-new provisions were added; five old ones were deleted and substantive changes were made to another 47 old provisions. Summarised below are major changes made in the Implementing Rules and how they are likely to change foreign companies' operations in China.

1. Reward and remuneration regulations for service invention-creations: tricky but workable

Policy on reward and remuneration to inventors or designers for service inventions is probably the only area in which major changes are made in the Implementing Rules while the corresponding provision remains the same in the Revised Law (Article 16 in this case). Unlike other rules, rewarding service inventions is dealt with more through the internal policy of a corporation than through interactions with the patent office.

    To foreign companies, the Implementing Rules matter this time because they interpret the scope of the law more broadly. Unlike the old rules, which were only applicable to state-owned entities, Articles 76–78 now apply to all entities, including joint ventures, wholly foreign-owned entities, and R&D centres of foreign companies in China.

    The relevant rules may seem puzzling at first look. The “agreement rule” here is that the one who has agreement, rules. Under Article 76, an entity is permitted to set out its own policy and reach agreements with employees as to how and how much to reward service inventions. A company should consider a separate agreement or at least some clause in this regard in the employment agreement or corporate policy.

    In the absence of agreement, however, statutory numbers stipulated in Articles 77 and 78 will govern. Article 77 specifies a minimum of Rmb3,000 (approximately US$440; increased from Rmb2,000) for an invention patent upon grant, and Rmb1,000 (increased from Rmb500) for a utility model or design patent. Article 78 lays out the statutory remuneration package for use or license of an unexpired patent: (i) at least 2% (for invention or utility model) or 0.2% (for design) of annual operating profits (changed from profits after tax) generated from the exploitation of the patent; and (ii) 10% or more of royalty fees if the patent is licensed.

    Articles 77 and 78 apply to both Chinese and foreign inventors. The reward and remuneration should be shared by all inventors or designers of the pertinent patent.

2. First filing in foreign countries: ban lifted but tough penalties for violation of security review

The previous law bans any Chinese entity or individual from making a foreign filing first for inventions, utility models and designs made in China. However, the old law lacked penalty provisions. A multinational company's R&D centre in China might file foreign applications first for inventions made in China illegally but with almost no risk of penalty. Many multinational companies circumvented the law legally by transferring ownership of the inventions made in China to their foreign offices and filing foreign applications in the name of the companies' foreign offices. They must now say goodbye to those practices.

    The Revised Law lifted the ban with a twist towards security review, which requires that before any foreign filing for an invention or utility model made in China, the applicant shall request a security review (similar to a foreign filing licence) by Sipo. The twist has at least three angles: (i) it does not apply to designs; (ii) it applies to anyone (including foreign entities and individuals); and (iii) it also applies to later foreign filing of an invention which is first filed in China. Moreover, a foreign filing in violation of the security review provisions can result in serious consequences: refusal of the corresponding Chinese application or invalidation of the pertinent granted patent.

    Unfortunately, the term “made in China” (also translated as “completed in China”, as in CLP's translation on page 34) is not defined anywhere in the law. The law is vague as to whether a technology solution developed partly in China and partly in other countries is an invention “made in China” within the meaning of the law. This is particularly troublesome to biotech and pharmaceutical firms. For a novel compound developed in foreign countries, if all essays for the chemical were performed by a contractor in China, it is unclear from a literal reading of the law whether the compound will be construed as “partially” made in China, and if so, whether the invention is subject to security review.

    Article 8 of the new Implementing Rules further explains the term as “an invention or utility model for which the substantive contents of the technical solution were made[/completed] in China”. Although still leaving open questions as to other circumstances, the new rule to some extent clarifies that certain scenarios, such as essays or efforts to obtain experimental data for the technical effects of a chemical conducted by a CRO (contract research organisation) in China, without anything more, are unlikely to be considered as a main contribution or substantive technical solution. It remains to be seen whether Sipo or the courts will interpret the term in the future as “conception” or “reduction to practice” as adopted in US practice. The bottom line is that if there is any doubt in this regard, the applicant should request security review regardless of the nationality of the inventor(s), applicant(s) or owner(s) of the invention.

    The timeliness of the security review procedure raises other concerns from international applicants. One worry is the possible leak of confidential information in an application during review. Another is that a delayed review may result in a first filing by a competitor.

    The Implementing Rules, in Article 9, stipulate detailed procedures for the progress and feedback of a security review request. This Article requires a description of technical solution submitted with the request for security review but makes no mention of the format of the description. A complete specification seems not to be necessary. Since the Revised Law took effect in October last year, Sipo has accepted outlines of inventions with the format of a normal specification as the description of technical solution for security review. This may ease some concerns regarding the leak of confidential information. However, Sipo's new Guidelines for Patent Examination (Guidelines) appear to point to a complete application for security review. The new Guidelines provide that the content of the description of technical solution should be “consistent with that of the pertinent foreign patent application”, the format of which can refer to that of a regular Chinese patent application. The language is vague as to whether the requirement means the description has to be identical to what is to be foreign filed.

    A notification will be issued within four months from the filing of the request if the invention is found to possibly trigger national security issues; and a decision as to whether or not the application should be handled as confidential will be made within six months. If Sipo fails to meet these time limits, the applicant may legally file its application in any foreign country or with an international organisation. As to concerns that the four- and six-month waiting periods are still too long, Sipo has explained that these are maximum time periods designed for extreme cases. From practice observed since last October, for example, Sipo usually has been able to grant foreign filing clearance on the Official Filing Receipt within a few days to two weeks if the invention is determined not to involve national security or secrets.

    If an application is first filed in China and foreign filing is planned, the applicant should be prudent by requesting the security review well before the bar date for foreign filing to avoid possible loss of the right to claim priority. If the first filing is a Patent Co-operation Treaty (PCT) filing to Sipo as a Receiving Office, it is deemed that the applicant has simultaneously requested security review. If no national security or confidentiality issue is triggered, Sipo normally can notify the applicant in about one month, or even two weeks.

    Notably, under separate Measures for the Administration of Registration of Technology Import and Export Contracts (技术进出口合同登记管理办法), certain technologies are prohibited or restricted from export. Lists of such technologies are published and updated from time to time, and are available from the Ministry of Commerce.

    When a foreign filing is denied, it is not clear in the Revised Law or new Implementing Rules whether the applicant is given a chance to request reconsideration. The answer is likely affirmative under general legal practice in China.

    When planning foreign filing first under the Revised Law and new Implementing Rules, one should calculate the possible delay of security review and bear in mind that the description of the technical solutions must be in Chinese (except for those filed under the PCT).

    As a final note, while similar to foreign filing practice in the US, security review procedure does not provide a retroactive fix for non-compliance as available under US practice.

3. Information of genetic resources: what should you care about, and when?

The Revised Law and new Implementing Rules related to genetic resources are unique in comparison to those in other jurisdictions. They should be scrutinised because the price of non-compliance can be very heavy.

    The Revised Law stipulates, in Article 5, that no patent right shall be granted to an invention where genetic resources are obtained or used in violation of laws or administrative regulations and the completion of the invention relies on such genetic resources. The Revised Law, in Article 26, further requires that for an invention relying on genetic resources, the applicant should describe the direct and original source of the genetic resources or state reasons if the original source cannot be provided. Notably, while illegal acquisition or use of genetic resources is a new ground for invalidation of a granted patent, non-compliance with the disclosure requirement is only a ground for final rejection of a patent application.

    The Revised Law is silent on which laws and regulations are relevant to genetic resources, but fortunately a list of the “relevant laws and administrative regulations” is provided in the new Guidelines. The Revised Law does not define “genetic resources” or “an invention relying on genetic resources”. As such, a method of using corn to make gasoline or even a process of cooking vegetables may be literally construed as relying on genetic resources (plants). Article 26 of the Implementing Rules clarifies that the relevant invention must be “completed using the genetic function of a genetic resource”. The same Article also defines genetic resources as “a material containing functional units of heredity derived from the human body, an animal, plant or micro-organism and that has actual or potential value.

    The new Guidelines further explain that using the genetic functions of the genetic resources means “isolating, analysing and treating the functional units of heredity to complete the invention-creation and realise the value of the genetic resources”. The new Guidelines also provide detailed interpretations for the terms “genetic functions” (“the ability of transition of the traits and characteristics to next generations of an organism by propagation, or the ability of reproducing the whole organism”) and “functional units of heredity” (“a gene or DNA or RNA fragment with genetic function of an organism”). Thus, the new provisions regarding genetic resource are clearly not applicable to inventions that do not use genetic functions of materials taken from plants or animals, such as a method of using corn to make gasoline, or cooking vegetables.

4. Compulsory licence: more operational for a possible grant

Available in law, compulsory licensing has never been granted in China. It deserves more attention now because, with the changes made in the Revised Law and Implementing Rules, granting of a compulsory licence becomes feasible and more likely.

    The Revised Law under Article 48 permits a qualified entity or individual to request Sipo to grant a compulsory licence for exploiting a patent, if (i) the patentee, without justified reason, fails to sufficiently exploit the patent for three years from the grant or for four years from the filing; or (ii) the court or government determines that the patentee has abused the patent right in a monopolistic manner and the compulsory licence is granted to alleviate such anticompetitive misuse of patent.

    Article 73 of the Implementing Rules defines “fails to sufficiently exploit the patent” as “the manner or scale that the patentee as well as the licensee exploit the patent fails to meet domestic demands for the patented product or process”. However, the Revised Law and Implementing Rules leave a large grey area as to what constitutes a “justified reason”. According to an unofficial explanation from Sipo, the time period of conducting tests by pharmaceutical companies in preparation for government approval may be considered justified.

    Article 49 (unchanged in the Revised Law) authorises Sipo to grant compulsory licence in the event of national emergency or where it is in the public interest. Article 50 (a new provision) provides an additional ground for granting compulsory licence, which is similar to the provisions in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). Article 50 provides that for the purpose of public health, Sipo may grant a compulsory licence to “patented pharmaceuticals” to be made in China and exported to nations or regions prescribed in international treaties of which China is a signatory or member. The term “patented pharmaceuticals” may be broadly construed to include drugs and certain medical devices. Under Article 73 of the Implementing Rules, “patented pharmaceuticals” include not only patented products or products directly obtained from patented processes in the medical and pharmaceutical field required to solve the public health issues, but also patented active ingredients needed for manufacturing the products and patented diagnostic articles needed for using the products.

    It remains to be seen how the Sipo will exercise its authorisation to grant a compulsory licence. One possible ground is under Article 48, meeting domestic demands for certain new technologies, for instance, those related to clean technology and environment protection. Another possible area may be in pharmaceutical patents under Articles 49 or 50. For instance, a compulsory licence to drugs for HIV/Aids, cancer or heart disease for the public interest (Article 49) or a compulsory licence to H1N1 flu drugs under either Article 49 (national emergency or public interest) or Article 50 (upon requests from countries asking China to export the drugs).

5. Novelty standard: bar raised to fix loopholes

The new Implementing Rules throw out the old definition of “prior art.” This is consistent with perhaps the most dramatic change of switching to absolute novelty standard in the Revised Law, which has been widely welcomed by foreign IP owners. Under the previous Article 30, prior public use or other non-publication means of prior disclosure outside China was not considered prior art and therefore did not constitute a novelty bar. As such, one was able to obtain a Chinese patent by copying an invention seen, for instance, at an exhibition in a foreign country. For inventors or applicants, the six-month grace period under the old law is still available for certain acts (such as a qualified international trade show) as “exceptions to novelty bar”. The new Article 30 of the Implementing Rules clarifies that international exhibitions recognised by the Chinese government are those that are registered at or recognised by the BIE (Bureau of International Expositions) pursuant to the Convention Relating to International Exhibitions.

6. Double patenting: compromised practice but no double bites