Biopharma IP Issues in China

NJIPLA & NJCCA Joint Conference

Hyatt Regency, New Brunswick, NJ

Yong ZhaoMerck IP Group

May 9, 2013

Disclaimer

Not views of Merck

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Current IP Environment in China

IP Protection in China

Chinese Government’s 12th Five Year Plan: Transform Chinese economy from made-in-China to created-in-China; build up Biopharma ecosystem with the following goals:

30 NCEs in 5 years

Improve R&D output (No. 3 in patents; 300,000 scientists, …)

Improve IP system, shorten patent exam period, incentivize employees and companies

Cooperate with foreign entities and talents, absorb foreign technology and re-innovate

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Total Patent Filings – SIPO Data

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

For-eign

47087 57249 74864 93107 102836 107419 111184 99075 112858 128677 138498

Domes-tic

205544 251238 278943 383157 470342 586498 717144 877611 1109428 1504670 1912151

Total 252631 308487 353807 476264 573178 693917 828328 976686 1222286 1633347 2050649

250000

750000

1250000

1750000

2250000

Numbers of Patent Applications

Invention Patent Filings – SIPO Data

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Source: SIPO

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Foreign

40426 48549 64347 79842 88172 92101 95259 85477 98111 110583

117464

Domestic

39806 56769 65786 93485 122318

153060

194579

229096

293066

415829

535313

Total

80232 105318

130133

173327

210490

245161

289838

314573

391177

526412

652777

50000

150000

250000

350000

450000

550000

650000

Numbers of Applications for Invention

First Instance IP Litigation Stats

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2007 2008 2009 2010 2011 2012

668 1,139 1,361 1,369 1,321

17,39523,518

30,509

41,718

58,201

83,850

17,87724,406

30,626

42,931

59,612

87,419Foreign-related Decided Cases Decided Cases New Cases

IP Issues Related to Collaborations with Chinese

Partners

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Collaborating with Chinese Partners

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Drivers for Biopharma contracts in China: Generating returns with low cost

Accessing local talents and expertise

Market access and penetration

Leveraging partner’s familiarity and experience with Chinese Government

» Seeking new pipeline and innovation

» Desire to improve Biopharma R&D prowess

Collaborating with Chinese Partners

Typical Standard Form MNC Biopharma Contract:

Arbitration and/or choice of law and venue provisions (e.g., designating a US state law and a US court)

Grant-back of IP rights to improvements

Standard warrantee/indemnification clauses

Written in English

Potential issues when used for China?

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Legal Framework for Technology Contract

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Relevant Chinese Laws Include:

Contract Law (1999)

Technology Import and Export Regulation (2002)

Foreign Trade Law (2004)

Antimonopoly Law (2008)

Patent Law, 3rd Amendment (2009)

Supreme People’s Court’s (SPC) Judicial Interpretation on Technology Contract Disputes (2005)

Consequences of Violating Relevant Laws

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Any contract that violates mandatory Chinese laws or regulations is null and void (partial or full invalidity)

(Art. 52 of Contract Law)

Difficult to circumvent Art. 52 Chinese courts are unlikely to enforce such contracts Public policy is to curb anti-competitive provisions

Technology Import & Export Regulation

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Scope of the Regulation

Covers assignments of patent rights, patent licensing, collaboration contracts, exchange of data, etc.

Technology import/export amounts to foreign trade and requires foreign trade license

Three categories of technologies under the Regulation

Prohibited, Restricted & Permitted

Most pharmaceuticals fall into Permitted category

Registration of contract is required for Permitted tech contract Registration may also have litigation implications

Common Pitfalls in Biopharma Contracts

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Limiting counterparty from making improvements to a transferred technology

Anti-competitive Provisions Prohibiting counterparty from challenging validity of patent; Royalties for patent beyond patent term; Imposing conditions unnecessary for utilizing the transferred technology

Any technology contract which illegally monopolizes technologies, impedes technological progress, or infringes upon technological achievement of others shall be void. (Art. 329 of Contract Law)

Common Pitfalls in Biopharma Contracts

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IP Ownership on improvements made by counterparty requires payment

Art. 354 of Contract Law:

Improvement is owned by the party who developed it unless specifically stipulated in the contract

Art. 10 of SPC Interpretation on Technology Disputes:

Improvement should be paid for otherwise tech contract is void

Technology contract should make it explicit that improvements have been paid for

Common Pitfalls in Biopharma Contracts

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Have proper IP warranty provisions in contract

Non-infringement warranty – under default rule, Licensor is liable for 3rd party infringement claim

Licensor should specify a limit for total liability as Chinese law does not have a cap on such liability

Under default rule, Licensor is liable if the licensed technology is not correct, complete, effective or cannot reach the specified technological target

Re-visit Standard Form Contract

Standard Form Contract May Not Be Effective

Grant-back of IP rights to improvements – needs payment

Standard warrantee clauses – may lack IP warrantee

Arbitration and/or choice of law and venue provisions - may be ineffective

Written in English – needs Chinese translation before dispute arises

Chinese courts often consider issues according to relevant Chinese laws regardless of a foreign court’s decision or choice of law provisions in contract

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Collaborating with Chinese Universities

Identify the right legal entity as contractual party

Direct government funding may complicate IP Ownership

Address scope of collaboration and avoid misuse of transferred technology

Employee has pre-emptive right to acquire technology within 1 year after leaving Univ. (Art. 326 of Contract Law)

If joint ownership, provide manner of exploitation in agreement (Art. 15 of 3rd Amendment)

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Biopharma Patent Procurement Issues in China

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Patent Prosecution – First Filing

First Filing Requirement Where any entity or individual intends to file an application in a

foreign county for a patent for an invention … made in China, it or he shall first apply for a security examination.

(Art. 20, 3rd Amendment)

Failure to comply is ground for rejection/invalidation

Three options before filing outside China:

File security exam request (in Chinese)

File Chinese national application (in Chinese)

File PCT (can be in English) in SIPO as RO

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PCT Filings in China – SIPO Data

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2006 2007 2008 2009 2010 2011 2012

3,826

5,4016,081

8,000

12,917

17,473

19,926

Inventor Reward & Remuneration

Relevant Patent Laws and Regulations

An employer shall reward and remunerate its employee-inventors of a service invention (Art. 16, 3rd Amendment)

Implementing Regulation to the 3rd Amendment

Rule 76. An employer may enter into an agreement with its inventor, or provide in its policy formulated according to relevant laws, on the manner and amount of reward and remuneration.

Rule 77. In the absence of an agmt or a policy, the reward must be at least RMB 3,000 for an invention patent.

Rule 78. In the absence of an agmt or a policy, the remuneration must be at least 2% of profit upon exploitation of an invention patent; or at least 10% income from patent license.

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Inventor Reward & Remuneration

SIPO’s Draft Regulation on Service Inventions creates more questions than answers Lacks clarity on “reasonableness” standard

IP rights reversal to employees and first refusal rights

“Technical secrets” as basis for reward and remuneration

Compliance Strategies Have a reasonable company policy / IP agreement in place

to avoid default Rules Consider “reasonableness” factors when formulating policy

Comply with procedural requirements when implementing policy

Obtain informed waivers from employees

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Patent Prosecution – Amendment

Limited flexibility in making amendments during prosecution In general, voluntary amendments are not allowed after three

months from the substantive examination stage.

Even less amendment flexibility during invalidation Adding elements not present in the granted claims is not

allowed

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Patent Prosecution – Data Sufficiency

The Law:

The description shall set forth the invention … in a manner sufficiently clear and complete so as to enable a person skilled in the … technology to carry it out; ... (Art. 26.3, 3rd Amendment)

Disclosure of the following required for NCE application Chemical identification;

Preparation; and

Use and/or effect (biological activity data).

Post filing submission of data for enablement is not allowed

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Patent Prosecution – Data Sufficiency

Implications of SIPO’s 26.3 practice

Lack of biological activity data is one of the major reasons for rejections in NCE applications

SIPO’s practice is inconsistent with other IP5 jurisdictions despite similar laws

Current examination guidelines (effective 2006) retroactively applicable to patents granted pre-2006?

Implications – increased risk of invalidations?

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Patent Invalidations at PRB

Invalidation proceedings occur at Patent Re-examination Board (PRB) of SIPO Overall, about 50% invalidated and 50% maintained

About 20% of PRB decisions were appealed to courts About 75% affirmed and 25% reversed

Straw man as invalidation requesting party Potential misuse especially in light of 26.3 practice and weak

patent linkage system

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Biopharma Patent Enforcement Issues in China

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IP Litigation Headline Stats

Overall plaintiff win rate: 84%; foreign plaintiff win rate: 88% (Based on published > 15,000 IP cases between 2006 – 2011)

China’s Current IP enforcement landscape is generally plaintiff-friendly

Average damage awards Invention/utility model patent: ~ RMB 193,830 (~ $30,000) Design patent: ~ RMB 56,264 (~ $9,000)

Trademark: ~ RMB 100,275 (~ $15,000)

Unfair competition: ~ RMB 94,546 (~ $15,000)

Copyright: ~ RMB 30,034 (~ $5,000)

Average time to get a first instance trial: 5.3 months

Source: Rouse & Co. & www.ciela.cn 28

IP Litigation Stats – Win Rate by Venue

Source: Rouse & Co. & www.ciela.cn

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Current IP Enforcement Environment

Beyond the headlines, IP enforcement in China remains a challenge, especially for Biopharma patents

Biopharma patent plaintiff win rate ~50% (process cases ~20%)

PI in Biopharma patent cases rarely issued

No discovery - hard to prove infringement and/or damages

Statutory damages low (< ~ $150,000; Art. 65 of 3rd Amend.)

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Weak Patent Linkage System

In China, all drugs must be approved by State Food and Drug Administration (“SFDA”) before marketing

The Law on “patent linkage”:

An applicant shall provide the information on patent and its ownership … in respect of the drug applied for registration, … Where another party owns the patent in China, the applicant shall provide a statement of non-infringement. The drug regulatory department shall publish the information … on its official website.

(Art. 18, Measures for the Administration of Drug Registration (2007); SFDA’s official website: www.sfda.gov.cn)

Generic applicants can file for generic drug application only within two years of patent expiry (Art. 19, Measures (2007))

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Weak Patent Linkage System

Arts. 18 & 19 in Action SFDA’s patent database lacks accuracy and transparency

No automatic stay upon filing of infringement suit by NDA holder

Generics often provide non-infringement statement in disregard of valid patents with little to no consequences

Secondary patents generally ineffective in preventing SFDA approvals (silver lining: compound patents effective)

No Orange Book type patent linkage system in China

Efforts to improve patent linkage system

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Being Proactive and Working with SFDA

Preventing generic’s SFDA approval is the best option Being proactive before approval and working with SFDA is key

Infringement action against generic after SFDA approval Plaintiff’s win rate ~ 50%; permanent injunction generally

granted

SFDA does not automatically revoke a drug approval even infringement is found Should seek a court order to cancel drug approval as a remedy

in each infringement action

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Conclusions

The pending 4th Amendment and SPC’s new Judicial Guidance may improve IP enforcement in China

Policy developments on improving patent linkage system, if successful, may enhance Biopharma IP environment

Developments in inventor reward and remuneration and 26.3 issues counter the current overall positive direction

Biopharma R&D in China requires an IP strategy for compliance

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History of Chinese Patent Laws

1984: First Patent Law, effective April 1, 1985

1992: First Amendment, to implement Sino-US IPR Memorandum of Understanding; added pharmaceutical compounds as patentable subject matter

2000: Second Amendment, to comply with TRIPS Agmt

2008: Third Amendment, driven by internal considerations

2012: Fourth Amendment, seeking public comments

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Chinese Court System

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