Patent boom: The cost of doing business

The Outline of the State Intellectual Property Strategy (国家知识产权战略纲要) in 2008 clearly explains China's policy of owning the IP for the century through indigenous innovation. “The boom really started from the effects of this policy in 2008 and has continued,” says Jonathan Yuan of Shangcheng & Partners in Beijing. The National Patent Development Strategy (2011-2020) (全国专利事业发展战略 (2011-2020)), added to this by seeking to “enhance China's capacity to create, utilise, protect and administer patents.”

These factors have hugely benefited domestic companies. For example, in 2010, domestic filings stood at 293,000, while foreign filings were at 98,000. But it is possible for foreign companies to tap into the range of subsidies on offer. As Yuan points out: “Foreign companies as R&D centres in China are considered Chinese entities – so they are eligible for the subsidies, at least in theory.” Yuan also recalls attending a conference where a US in-house counsel said in 2010 their company filed 300 patents in China, and the Shanghai Municipal Government paid all of the filing fees. These patents can also help some foreign companies to qualify for the tax-breaks that come with being certified as a high-technology enterprise. In practice, it is more difficult for foreign companies to enjoy the subsidies, but considering China's drive for innovation, there are still methods for foreign companies to benefit from the boom.

Harder to file

The dramatic increase in filings means it is harder for foreign companies to file their patents in China. “Examiners have heavy case loads and a short time to respond to each application – examiners can seem curt and tough for many companies and more so for foreign companies (because of the need for translation and to understand the Chinese patent system) to get their patents through,” says Geoffrey Lin of Ropes & Gray in Shanghai.

It is also rumoured that SIPO spends more time on domestic filings compared with foreign applications, which could create another obstacle for foreign patent holders. James Dyson, designer and inventor of household products, has found this to be the case with many of his patents. In an interview with the New York Times, Dyson says: “In China, it typically takes four or five years for a foreign company to get a patent approved. Domestic filers, usually get their patents approved in nine months or so.”

But there is some praise for SIPO, with Bai claiming that it is “probably the only patent office in the world that is devoting resources to proactively manage its docket”. Foreign companies can also find it hard to locate quality patent agents. “The filling process has gotten easier, because more people have greater experience in preparing, prosecuting and examining patents, but the cost and complexity has gone up. Proportionally, there are more patent agents, but finding quality patent agents is difficult” says Lin.

The search challenge

The patent boom has also made finding the right patent information more difficult. It has created a lot of overcrowding for many sectors and has made it much harder for multinationals to compete. It is difficult for them to invalidate patents. This congestion has also made it difficult for foreign companies to search the prior art or conduct freedom-to-operate searches.

“Ultimately there is no good way to search other than if you have Chinese language skills and better yet a team on the ground,” says Lin, whose recommendation is to outsource this task to a specialist company. This means risk assessment has become more expensive for foreign companies – an example of how China's patent boom is increasing the cost of doing business. With so many patents out there, companies want reassurance about how likely it is that their patent may be found invalid.

The litigation challenge

If companies do not search to see what is out there, they could find themselves on the wrong end of a lawsuit that could seriously affect their business not just in China, but globally. Domestic companies, armed with their patent portfolios, are now more than ever willing to enforce their IP rights. This can be seen through the large increase in patent litigation. China is the most litigious country in the world for patent litigation with about 7,800 patent cases filed in China in 2011 – more than twice as many as in the US. Judges are also becoming increasingly experienced in patent litigation. Despite China not being a common law country, judgments from the Supreme People's Court or higher people's courts can have binding effects on lower courts.

“The increase in litigation is a good thing, but the downside is there are still inconsistent judgments from the first instance courts,” says Lin. Foreign companies not only have to deal with an increase in litigation, but they also need to consider inconsistent judgments from lower courts. This is another financial penalty that foreign businesses have to take into account, because they then have to appeal to higher-level courts. “Armed with their patent portfolios, Chinese companies are suing foreign companies, creating many obstacles, but it has become part of the cost of doing business in China today,” said Wong.

A sophisticated regime

The IP landscape in China is changing and foreign businesses need to accept that they have to develop more comprehensive and expensive IP strategies to keep up. They will face greater challenges as this boom continues. At the same time, a complex and sophisticated legal system is emerging. It still has its faults, but practitioners and IP holders acknowledge the experience the administrative authorities and the judicial system is gaining from the boom. This is to be expected when considering: “what China is doing now is trying to accomplish something within 20 or 30 years, which has taken other countries 200 or 300 years,” says Yuan. SIPO's examination practices will improve and the lower courts will soon realise that inconsistent judgments show a lack of experience and understanding. The next step is for “China to develop a unified appellant court, similar to most of the more mature patent jurisdictions, which would make it harder for local courts to be partisan and provide consistency and exemplary judgments for all lower courts to learn from,” says Lin.

David Tring and Nickie Yeung