huawei-economist patent protection and enforcement in the prc 20140128

Patent Protection and Enforcement in the PRC

28 January 2014

Including analysis from

A report commissioned by Huawei Technologies

Contents

Introduction ........................................................................... 4

Executive Summary ................................................................ 5

Legal Landscape in the PRC ................................................... 6

Foreword ......................................................................... 6

1. Legal framework ........................................................7

2. Patent protection and prosecution ............................ 9

3. Patent Enforcement ................................................. 13

Conclusion ..................................................................... 23

An Assessment of Developments over the Last Decade ........ 24

Foreword ....................................................................... 24

1. Introduction ............................................................ 25

2. Patent prosecution .................................................. 25

3. Patent enforcement ................................................. 34

Conclusion ..................................................................... 42


Written by Bird & Bird LLP 4

Introduction

This report aims to provide an in depth description and assessment of the current status of the

protection and enforcement of intellectual property rights (IPRs), more specifically patents, in

the People's Republic of China (PRC).

The first chapter, authored by Bird & Bird LLP, provides a qualitative analysis of the legal

framework governing patents in the PRC, including its evolution, legislation in the making and

remaining areas for improvement. On certain topics, comparisons have been made with the EU,

German and US legal systems to provide a broader context and perspective to an assessment of

the PRC legal system.

The second chapter, authored by The Economist Intelligence Unit, offers a quantitative analysis of

how patents are actually protected and enforced in the PRC through the analysis of key statistical

data. These data have been validated through structured interviews with legal practitioners

experienced in patent registrations and/or enforcement in China. The methodology and the data

used are explained in more detail in this chapter.



Executive Summary

Previous studies already showed the significant progress booked with respect to IPRs'

protection and enforcement in China1. This dual survey by Bird & Bird, an international

law firm, and The Economist Intelligence Unit, the world's foremost provider of country,

industry and management analysis, shows that progress has continued and that we are

probably nearing the point where China's protection and enforcement regime is only

different in some respects, but not any more of a lesser standard, as compared to many

other countries.

On paper, the law contains all the elements, at administrative and judicial levels, which

are needed to allow proper procurement and enforcement of patents (other types of IPRs

were not surveyed).

On the enforcement front, all usual measures are now available in China, including

nullity and infringement procedures, but also sometimes less obvious declaratory

judgments and interim injunctions. China is now also compliant with the WTO

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS

Agreement). Damages remain on the low side, but the introduction of punitive

damages in the coming amendment to the Patent Law should hopefully strengthen

enforcement.

In fact, figures clearly show a tremendous and continued increase in patent filings, in

almost all categories and sectors. Feed-back shows that quality of the examination and

prosecution is now considered to be at a very good level, probably not the least as a result

of Chinese examiners having been trained by, amongst others, European Patent Office

(EPO) specialists.

Enforcement is increasingly sought through administrative cases as they are quicker and

more efficient in simple patent cases. Civil procedures continue to be used resulting

notably in injunction and damages (including for loss of profit).

Of course some elements could be improved further, such as the absolute level of

damages granted, the technical competence of the judges and the discrepancies between

provinces as to the uniformity and quality of court decisions.

A very important element identified by The Economist Intelligence Unit is that even if

damages awarded to foreign plaintiffs may on average still be lower, statistics show a

higher proportion of foreign companies winning their intellectual property cases in

China.

1 A. Cox, K. Sepetys, “Intellectual Property Rights Protection in China: Trends in Litigation and Economics Damages”, NERA Economic Consulting, 2009, http://www.nera.com/extImage/PUB_IPR_Protection_China_0109_final.pdf



Legal Landscape in the PRC

by Bird & Bird LLP

FOREWORD

In this part of the report we aim to provide the reader a general sense of the legislative

framework on patent in China, to review the recent developments in patent prosecution

and enforcement, and to compare the status achieved today with international practices.

Modern intellectual property (IP) laws in China have a short history of 30 years. They are

a complete rebuild based on international treaties with elements modelled after the legal

systems of other countries, most notably Germany.

The three pillars of PRC IP laws: Trademark Law, Patent Law, and Copyright Law, have

all undergone two to three major amendments since their inception. China continues to

assimilate the experience of other countries, including US, Europe, and Japan, with the

stated goal of creating an IP regime that encourages innovation. The speed of change is

remarkable.

The idea that China’s legal system is distinct from that in the West is usually overstated.

In a recent interview with Managing IP Magazine, UK High Court Judge Colin Birss

commented that it was the similarities rather than the differences between the Chinese

and the UK patent systems that caught his attention during his visit to China. In a

discussion on preliminary injunction, Mr Justice Birss observed that China's Supreme

People's Court (SPC) were wrestling with the same concerns and balancing similar

interests as a UK judge would have done.



1. Legal framework

1.1 Sources of patent law

The PRC Patent Law was first enacted in 1984 and became effective on 1 April 1985. The

PRC Patent Law has been amended three times since then. The First Amendment in 1992

was driven by the Memorandum of Understanding on the Protection of Intellectual

Property signed between China and US. Some scholars described this as a “quantum

leap” in the law to stimulate technology transfer into the country. The Second

Amendment in 2001 was enacted to meet China’s obligations under the TRIPS

Agreement, in preparation for China’s accession to the World Trade Organization. The

Third Amendment in 2010 was prompted by issues peculiar to China, both in an attempt

to encourage indigenous innovation and to strengthen patent protection. Just two years

after, the State Intellectual Property Office (SIPO) released the draft for the Fourth

Amendment for public consultation in August 2012, and the next draft is forthcoming.

With each amendment to the PRC Patent Law, the Implementing Regulations of the PRC

Patent Law are also updated, elaborating and supplementing the provisions of the PRC

Patent Law.

In addition to the PRC Patent Law and its Implementing Regulations, judicial

interpretations and opinions issued by the SPC are another source of legal authority in

China. Judicial interpretations and opinions mainly serve two functions. First, the SPC

uses this as an opportunity to answer questions from lower courts regarding disputes

with common fact patterns. Secondly, it aligns the application of the law by different

courts. In the patent arena, the most important judicial interpretations issued by the SPC

are the “Guidelines on the Application of the Law regarding Trials of Patent

Infringement Cases” (2001 Judicial Interpretations) and the “Interpretations on Several

Issues Regarding the Application of Law in Patent Infringement Disputes” (2010

Judicial Interpretations).

Moreover, to promote judicial consistency in patent cases, the Higher People’s Courts in

several provinces also issue comprehensive trial guidelines from time to time. For

example, the Beijing Higher People's Court issued the latest "Guidelines on the

Determination of Patent Infringements" in September 2013. The Guidelines have 133

sections covering aspects of claim interpretations, infringement analysis, as well as

defences.

By Article 3 of the PRC Patent Law, the SIPO is empowered to promulgate administrative

regulations. The SIPO rulemaking encompasses “Examination Guidelines” and other

measures relating to patent administration such as “Measures for Compulsory Licensing

(2012)”, “Measures on Patent Marking (2012)”, and “Measures for Administrative

Enforcement of Patent (2010)”.



1.2 Administrative system

Founded in 1980 as the Chinese Patent Office, SIPO is responsible for patent

examination, invalidation and maintenance. SIPO has its central office in Beijing and

regional accepting offices in 26 cities. It has seven technology divisions: mechanics,

electricity, telecommunication, pharmaceuticals and bioscience, chemistry,

optoelectronic technology and materials engineering.

Internationally, SIPO is a member of IP5, which is a forum of the five largest intellectual

property offices in the world set out to facilitate the examination process for patents

worldwide.

Sitting within SIPO, the Patent Re-examination Board (PRB) is responsible for

reviewing patent applications rejected by SIPO examiners and presiding over patent

invalidation proceedings. PRB panels are selected from SIPO’s more experienced

examiners. The PRB decisions are subject to administrative appeal to the Beijing No. 1

Intermediate Court and on further appeal to the Beijing Higher People’s Court.

1.3 Judicial system

China has a four-level court system, comprising Grass-Root Courts, Intermediate

People’s Courts, Higher People’s Courts and the SPC. By Article 2 of the 2001 Judicial

Interpretations, only designated courts would have first-instance jurisdiction over patent

cases. By the end of 2012, there were 83 intermediate courts that are so designated.

Given the importance attached to cases involving foreign parties, the threshold of

monetary claim is lower for foreign-related disputes to be brought in a higher level of

courts when compared with domestic disputes. For example, in Beijing, if the patent

dispute is between domestic parties, the amount of monetary claim needs to exceed RMB

200 million in order for the case to begin at the Beijing Higher People's Court rather than

the lower courts, whilst the threshold for foreign-related dispute is RMB 100 million.



2. Patent protection and prosecution

2.1 Scope of protection

There are three types of patents recognized under Chinese law, namely, invention, utility

model and design patents. The term of protection for invention patents is 20 years from

the filing date. Utility model and design patents are both protected for 10 years.

In line with Article 27 of the TRIPS Agreement, Article 25 of the PRC Patent Law sets out

subject matters that are excluded from patent protection in China. They are: scientific

discoveries, rules and methods for mental activities, methods for the diagnosis or

treatment of diseases, animal and plant varieties, and substances obtained by means of

nuclear transformation and designs of two-dimensional printing.

(a) Novelty

By Article 22 of the PRC Patent Law, a patent must be novel, inventive, and have

practical applicability in order to qualify for protection. Novelty requires an invention to

be new compared to the prior art. As regards the test on novelty, the Third Amendment

of the Patent Law adopts the absolute novelty standard under Article 22(2), which

expands the scope of prior art to worldwide publications, public use or disclosure.

(b) Inventive step

The test on inventive step is set out in Part 2, Chapter 4, Section 3.2.1.1 of the

Examination Guidelines. It requires the examiner to conduct a three-step analysis: (i)

determining the closest prior art, (ii) determining the distinguishing features of the

invention from the prior art and the objective technical problem solved by the invention,

and (iii) determining whether or not the invention, starting from the closest prior art and

the objective technical problem, would have been obvious to a person skilled in the art. In

this way, China has adopted the same test as the European Patent Office's problem and

solution approach to inventiveness.

By contrast, the respective tests adopted in Germany and the US are slightly different.

The German Patent Office draws a comparison of the claimed invention to the prior art

considering the totality of knowledge as disclosed in the prior art. It then evaluates

whether the person skilled in the art could have easily obtained the claimed invention

when considering the prior art without being inventive himself. What is decisive is the

overall effect of the invention (so-called “Gesamtwirkung der Erfindung”). The German

approach is less formalistic than the problem and solution approach applied by the

European Patent Office. In the US, the US Supreme Court set out the following factors

(Graham et al v John Deere Co., of Kansas City et al., 383 U.S.1 (1966)): (i) the scope

and content of the prior art, (ii) the level of ordinary skill in the art, (iii) the differences

between the claimed invention and the prior art; and (iv) objective evidence of non-

obviousness.



Similar to the US, China also takes into account the objective evidence of non-

obviousness in assessing inventive step. The list of the so-called "secondary indicia to

inventiveness" (as distinguished from the primary test set out above) can be found in

Part 2, Chapter 4, Section 5 of the Examination Guidelines, being evidence that the

invention (i) solves a long-felt but unresolved technical problem, (ii) overcomes technical

prejudice, (iii) produces unexpected technical effect, or (iv) achieves commercial success.

In the European Patent Office, similar secondary indicators for inventiveness are defined

in Part G, Chapter VII, 10.1 to 10.3 of the Examination Guidelines. The secondary

indicators are similarly applied by the German Patent Office and the German Court when

assessing inventiveness.

(c) Practical applicability

Article 22(4) of the PRC Patent Law requires that “the invention or utility model can be

made or used and can produce positive results”. The requirement is analogous to the

industrial applicability requirement under the European Patent Convention (EPC).

The practical usefulness constitutes a mandatory requirement of the invention as defined

in Section 1 German Patent Act (PatG) and article 52 of the EPC, i.e. the invention must

satisfy a need whereas completely useless proposals cannot be regarded as patentable

even if they turn out to be novel and inventive. Technical curiosities may however not be

regarded as useless, as they can for instance serve for entertainment purposes (c.f.

Schulte/Moufang, Article 52 EPC, margin-no. 47).

US patent law does not have a separate requirement on practical applicability, but the

basic statement of what is patentable can be found in Section 101 of the patent statute,

which requires that the invention be "new and useful". "Useful" has been held to mean

that it provides some identifiable benefit and is capable of use.

2.2 Patent examination procedure

Procedures and rules relating to examination of invention patents are set out in details in

the Examination Guidelines issued by SIPO.

The administrative procedures for patent examination and invalidation are similar to

that in the other major patent offices. The following comparison graph is taken from

www.fiveipoffices.org:

http://www.fiveipoffices.org/



2.3 Pilot programs to leverage fast-track patent examination

To facilitate work sharing with other patent offices, a Patent Prosecution Highway (PPH)

has been implemented among major patent offices. SIPO has actively participated in the

pilot programs, reaching PPH agreements with patent offices in Japan, Korea, USA,

Germany, Russia and Canada. Consequently, for applications claiming a priority from

those countries, an applicant may request for accelerated examination under the

agreements if it receives a written opinion that at least one claim has satisfied

patentability requirements.

In 2012, SIPO also issued “Measures on the Administration of Priority Review of

Invention Patent Applications” that allow applicants to seek accelerated examination,

aiming to complete examination within one year after the approval of the applicant’s

priority examination request.



2.4 Efforts to promote transparency

Statistics on patent filing, invalidation and maintenance have been frequently updated

on the SIPO website at http://www.sipo.gov.cn/tjxx/. The PRB also maintains a website

providing access to the invalidation decisions at http://app.sipo-

reexam.gov.cn/reexam_out/searchdoc/search.jsp.

To substantiate this effort of promoting transparency, SIPO has released drafts of

administrative measures and examination guidelines on its website for public

consultation before the enactments.

2.5 Utility models

Article 2(3) of PRC Patent Law defines utility model as “any new technical solution

relating to the shape, structure or their combination, of a product, which is fit for

practical use”. It has a shorter term of protection (10 years) but is a faster way to get a

fully enforceable patent right. To obtain a utility model patent, there is no need to go

through substantive examination on whether the patent is novel or inventive. This is

identical to the practice in the German Patent Office, as the utility model regime is

largely borrowed from the German system to provide a low cost alternative of patent

protection.

The utility model regime has attracted concerns in recent years. They have been

criticised as “junk patents” due to lack of substantive examination before grant. SIPO has

actively responded to this criticism. Specifically, the 2010 Examination Guidelines

provide that if utility model applications clearly lack novelty, examiners are encouraged

to conduct patent search on their own initiative. In order to fully address the quality

issue, SIPO has engaged in another round of amendments to the Examination

Guidelines. In a draft released in February 2013, relevant provisions have been revised

such that examiners are encouraged to conduct prior art search in examining utility

model applications.

2.6 Scope of amendments

Of the list of common complaints by the patent owners, one of which used to be that the

SIPO examiners and the PRB have traditionally adopted a mechanical approach to

allowing amendments pre- and post-grant. Article 33 of PRC Patent Law was interpreted

very strictly. Pre-grant amendments are only allowed if they can be directly and

unambiguously derived from the original specification. Post-grant amendments are only

allowed if they are merely a combination or deletion of individual claim in the original

wording as granted.

http://www.sipo.gov.cn/tjxx/

http://app.sipo-reexam.gov.cn/reexam_out/searchdoc/search.jsp

http://app.sipo-reexam.gov.cn/reexam_out/searchdoc/search.jsp



However, two recent SPC cases, Ink Cartridge case (2012) and Simcere case (2012),

relaxed rules on permissible amendments pre- and post-grant. The SPC affirmed that the

underlying principle of Article 33 is to ensure that applicants have an opportunity to save

their patent applications by making amendments in light of newly identified prior art.

The SPC held that if the amendment is obvious to one skilled in the art, it should be

deemed within the scope of the original disclosure.

3. Patent Enforcement

Modelled after the German Patent Law, China employs a bifurcated system for patent

litigation, under which patent validity and infringement are adjudicated separately.

There are three routes of enforcing a patent in China, namely judicial, administrative, or

criminal route, whilst validity is determined centrally by the Patent Re-examination

Board (PRB).

3.1 Scope of Protection

(a) Claim construction

China mostly borrows claim construction doctrines from the US, such as the doctrine of

equivalents, file wrapper estoppel, and construction of means-plus-function claims. The

2010 Judicial Interpretation issued by the SPC codified rules for claim construction

under Articles 1 to 7. The Higher People’s Courts in provinces in Beijing and Jiangsu have

also issued patent trial guidelines, which promulgate uniform rules within the province

to promote judicial consistency.

Article 59 of the PRC Patent Law states that the scope of protection for invention or

utility model patents is defined by the patent claims. Article 2 of the 2001 Judicial

Interpretation stipulates that the content of the claim is determined by the

understanding of a person skilled in the art after reading the specification and drawings.

Article 3 goes on to state that extrinsic evidence such as reference books and textbooks

may be used in cases where the meaning of a term cannot be clearly determined

intrinsically, i.e. by using the specification, drawings, relevant claims and examination

file wrapper. Those general principles on claim construction are consistent with claim

construction law in other countries.



(b) Doctrine of equivalents

Article 7 of the 2010 Judicial Interpretation recognizes both literal infringement and

infringement by equivalents. Literal infringement arises where the alleged infringing

technical scheme includes all the technical limitations of the asserted claim, whilst the

doctrine of equivalents extends this to catch infringement by feature as one that “uses

basically the same means, perform basically the same function, and produce basically

the same result as the stated technical features, which can be contemplated by one

skilled in the art without any inventive labour”.

The doctrine of equivalents was first recognized under Article 17 of the 2001 Judicial

Interpretation, using the same test as that under the US law. The SPC has discussed the

application of doctrine of equivalents in a number of recent cases. It also cautioned

against mechanical application of the doctrine of equivalents. Most recently, Articles 41

to 55 of the Beijing Patent Infringement Guidelines delineate detailed rules regarding the

doctrine of equivalents to be applied by lower courts in Beijing.

(c) File wrapper estoppel

Modelled after the US claim construction jurisprudence, file wrapper estoppel is codified

under Article 6 of the 2010 Judicial Interpretation. Under a file wrapper estoppel, a

patentee is estopped from claiming one construction in prosecution or invalidation stage

and later claiming the contrary in an infringement suit.

3.2 Restricted acts

In line with Article 28(1) of the TRIPS Agreement, the PRC Patent Law provides under

Article 11 that it is an infringement to manufacture, use, offer to sale, sell, or import a

patented product. In relation to a patented process, it is an infringement to use the

patented method, or to use, offer to sale, sell or import the product directly obtained

through the patent process. The scope of restricted act under Article 11 is commensurate

with what is required under Article 28(1) of the TRIPS Agreement.

3.3 Defences

Article 30 of the TRIPS Agreement stipulates the basic principle that member countries

may make provision for limited exception to patent rights. In addition to the defence of

non-infringement, the PRC Patent Law also sets out a list of affirmative defence

including prior art defence, prior use, exhaustion of rights, temporary entry into China,

scientific research and experiments, clinical trials, entitlement of a compulsory licence,

and violation of the Anti-Monopoly Law.



The list of defences is largely similar to that available in Germany and in the US. In the

US there is a further possible defence, inequitable conduct by the patentee during patent

prosecution making the patent unenforceable. However, recent developments have made

this defence harder to establish.

3.4 Administrative Procedures

China provides a unique patent administrative enforcement regime. Pursuant to Article

60 of the PRC Patent Law, administrative authorities for patent affairs are empowered to

enforce patents. Such administrative authorities comprise SIPO on national level and

local intellectual property bureaus on provincial and city level. Administrative

enforcement is intended as a cost and time efficient alternative for patent holders to

eliminate infringement, especially for those straightforward patent cases such as utility

model or design infringement.

According to the Measures for Administrative Enforcement of Patents promulgated by

SIPO in 2010, a patent holder may submit a patent infringement complaint with its local

intellectual property bureau for investigation and enforcement. However, a patentee that

has already brought an infringement suit before the civil court would be barred from

using the administrative route.

Upon finding infringement, the local bureau may order the infringer to cease the

infringement and order the destruction of infringing products and/or tools and

equipment employed to manufacture the same.

An administrative order is subject to appeal to the People’s Court within 15 days from

receiving the notification of the order.

3.5 Court Procedures

Article 28 of the Civil Procedure Law provides that a court designated for adjudicating

patent disputes would assume jurisdiction if it sits in the province of the locus of

infringing acts, or the domicile of the defendant. Article 5 of the 2001 Judicial

Interpretation in turn defines the locus of infringement as the place where the alleged

infringer manufactures, uses, sells, offers for sale, or licenses the infringing product, or

the place affected by said infringement. For cases involving more than one defendant,

Article 21 of the Civil Procedure Law stipulates that the court’s jurisdiction over one

defendant will be extended to all other defendants. The great majority of cases are filed

in Beijing, Shanghai and Shenzhen owing to the experience of the patent judges there.

This is similar to Germany. In Germany, patents are enforced in legal actions before Civil

Courts. In total 12 Regional Courts have jurisdiction for patent infringement disputes.

The great majority of cases are filed in Düsseldorf, Mannheim, Munich and sometimes

Hamburg. This is due to the acknowledged expertise and experience of the respective

judges. Usually, the jurisdiction is determined by the place where a tortious act was

committed which provides the plaintiff a free choice if the infringing product is offered

Germany-wide, e.g. on the internet.



By Article 6o of the PRC Patent Law, a patentee or an interested party has the right to

bring infringement proceedings. Moreover, an exclusive licensee can bring an

infringement suit in its own name and without giving prior notice to or obtain

permission from the patent owner. This is also true of exclusive licensees in the US and

in Germany.

The PRC Civil Procedure Law governs the patent infringement proceedings before the

civil courts. A patent holder may commence an infringement proceeding by filing a

complaint with a People’s Court. The court will issue a notice of acceptance to the

plaintiff if the complained subject matter is within its jurisdiction and the complaint

complies with the filing requirements. The court is required to serve the named

defendant within five days from accepting the case. Where the defendant resides outside

of China, the court usually makes extraterritorial service under the Hague Convention.

The time limit for a Chinese defendant to file a defence is within 15 days of receipt of the

complaint. For foreign defendants, the response deadline is 30 days. Jurisdictional

objection, if any, must also be brought with the court within the same defence period.

Article 153 of the new Civil Procedure Law allows immediate appeal of adverse decisions

regarding case acceptance and jurisdictional objection.

Once the defendant has been properly served and/ or timely responded, the lawsuit will

proceed to the stage of evidence submission and exchange. The court will usually set a

time limit of 30 days for evidence exchange from the later of the service of the defence or

the acceptance of the case. An extension of time is possible upon application with the

court.

After the evidence exchange hearing, the court will schedule a date for trial hearing. Trial

usually occurs within six to twelve months from filing the complaint for simple cases, but

can take up to years for complicated cases. At the hearing, both parties formally present

their arguments and evidence through opening statements, evidence examination,

debate and closing statements. The court may order for further trial hearings if the case

involves complex or novel issues. A judgment can be expected within a few months from

the trial hearing, depending on the complexity of the case.



If the defendant intends to challenge the validity of the patent and uses that as a basis to

apply for a stay of the infringement proceedings, it must file the invalidation petition

with the PRB during the defence period, which is 15 days from the receipt of the

complaint (or 30 days for a foreign defendant). An invalidation proceeding before the

PRB is usually presided by a panel consisting of three SIPO examiners. During the oral

hearing, the PRB panel examines each ground of invalidation and evidence supporting or

refuting the same, often by questioning both sides. The PRB usually renders a decision

on the validity of the patent within six to eight months from the commencement of the

invalidation proceeding. It may uphold or invalidate any or all of the claims requested in

the invalidation proceeding or allow post-grant amendments.

One criticism amongst the court users (both domestic and foreign) is the lack of

consistency in case schedule. By Article 136 of the Civil Procedural Law, a party is only

required to be given three day advance notice before the trial hearing. This causes

problem on the part of the parties to plan their case preparation properly, and is a

concern faced by both domestic and foreign litigants.



In a patent infringement action before a Chinese court, the procedural rules are relatively

simple compared to other jurisdictions. A trial hearing could usually be expected within

eight to twelve months from the commencement of the lawsuit. In some simple cases, it

could be as fast as four months, whilst in some complicated or heavily disputed cases

there could be delays up to two years or more. This is similar to Germany, where an oral

hearing can take place as soon as six to twelve months after the complaint is filed, but in

some cases, it may take almost two years.

By contrast, most US patent litigation is conducted in the federal courts, and validity and

infringement are tried together. Either party has the ability under the US Constitution to

request trial by jury, and over half of all patent cases are decided by juries. However,

claim construction is solely the role of the judge and carried out in a pre-trial hearing

called "Markman hearing". The average time to trial is two and a half years, although in a

few federal districts a patent case can come to trial in about a year. The other venue for

patent cases is in the International Trade Commission (ITC) which deals with imported

goods. Currently about 90% of ITC cases relate to patents. There are statutory time limits

for ITC cases, which are tried by a judge alone and typically go from filing the complaint

to Commission decision in 18 months. All patent cases, district courts and ITC, are

appealed to the Court of Appeals for the Federal Circuit (CAFC), which usually hears

and decides appeals in less than a year.

3.6 Basis of declaratory judgment actions has been affirmed by the SPC

Alleged infringers may institute declaratory judgment action of non-infringement in

limited circumstances pursuant to Article 18 of the 2010 Judicial Interpretation. Such

action is nonetheless only viable where the patent holder issues a warning against the

declaratory plaintiff but fails to bring an infringement suit within a reasonable period of

time after the alleged infringer reputes infringement.

In Germany, the plaintiff has to show a special interest in a declaratory judgment. A

positive declaratory proceeding is generally not admissible, because a full infringement

action would discuss the same questions and has a legal priority as the more effective

means. A negative declaratory action requires a legal relationship between the parties

and the plaintiff’s interest in the requested declaration. These requirements are usually

met only in cases where the patent holder alleges infringement, e.g. by way of a warning

letter or another binding allegation. Before such activities, a negative declaratory action

is inadmissible.

The criteria for bringing an action for a declaratory judgement of non-infringement

and/or invalidity in the US are less strict than in Germany. None of the restrictions

listed in the previous paragraph apply, but the action must satisfy the constitutional test

of the presence of a “case or controversy” as the courts will not answer hypothetical

questions. A 2007 Supreme Court decision widened the basis for bringing such actions,

so that an express threat of litigation is not necessary. Once the constitutional test is met

an action can be filed immediately.



3.7 Interim measures

Interim reliefs including preliminary injunctions, asset preservation orders and evidence

preservation orders are available under Articles 66 and 67 of the PRC Patent Law. The

new Civil Procedure Law, which came into effect on 1 January 2013, provides a basis for

such interim measures in a civil action generally.

According to Articles 100 and 101 of the Civil Procedure Law, all three types of interim

measures may be sought before or during a civil proceeding. To apply for a preliminary

injunction, a patent holder bears the burden to prove that an infringer is carrying out or

is about to carry out the alleged infringing acts; and that without the injunction it would

suffer irreparable harm. As for evidence preservation orders, a court requires the patent

holder to show that the evidence will likely be lost or become difficult to obtain in future,

or that the plaintiff is otherwise unable to collect the evidence. Asset freezing orders are

granted against a potential defendant to ensure that there will be assets to satisfy the

judgment if ultimately granted. The court is responsible for the execution of the interim

measure if so granted.

The issues faced by the Chinese courts in deciding applications for preliminary

injunctions are similar to that in the other countries. It is understood that the SPC is

working on another judicial interpretation on this topic.

3.8 Stay in utility model and invention patent cases

In a patent dispute involving concurrent proceedings before both the Court and the PRB,

the infringement court may or may not grant the stay pending the validity decision to be

issued by the PRB. Utility model and invention patent cases have been treated differently

in this regard. To alleviate problems relating to potential abuse by utility model patents,

there is a stronger presumption towards stay in utility model cases. By Article 9 of the

2001 Judicial Interpretations, stay in utility model infringement cases is required subject

to three limited exceptions.

By contrast, stays are more difficult to obtain in invention patent cases, as it is a matter

of judicial discretion under Article 10 of the 2001 Judicial Interpretations. However, in

practice, even if the Court does not formally grant the stay, the pending invalidation

proceeding may still influence the timeline and outcome of the concurrent infringement

proceeding.



3.9 Mechanism of expert witness

Although there is no formal mechanism of expert witness in patent litigation in China,

the Civil Procedure Law has recognized two types of experts, expert appraiser and expert

assessors. For complex technical issues including infringement, courts often rely on

court-appointed experts or reports from neutral Judicial Appraisal Centres. Courts will

usually seek both parties’ assent prior to the appointment of a Judicial Appraisal Centre.

On the other hand, expert assessors are non-parties with specialized knowledge in

scientific or technical fields. By allowing expert assessors to explain the technical

background of the underlying dispute, courts are better informed about the technical

issues for adjudicating patent cases.

There has been criticism from both domestic as well as foreign parties on the mechanism

by which technical evidence is assessed. Judges without technical background tend to

put a lot of weight on reports produced by judicial appraisal institutes. However, in some

technical fields, only a small number of judicial appraisal institute and specific testing

institutes within China are qualified to opine on the subject matter, and there are

concerns with their independence. There are also criticisms from both domestic and

foreign users in relation to the quality, costs and length of time required by these

institutes to produce their reports.

The Civil Procedural Law has already introduced new provisions allowing one party to

cross examine the content of the judicial appraisal reports by appointing its own expert.

Nonetheless, it is hoped that better guidelines would be issued in future on how expert

testimony would be introduced and assessed, and discretions could be given to the

judges to accept analytical reports produced by internationally recognised testing

institutes outside of China.

3.10 Remedies

(a) Damages

By Article 65(1) of the PRC Patent Law, a defendant that is found liable for patent

infringement shall compensate the patent holder for the actual losses suffered because of

the infringement. Article 65 provides a hierarchy of bases for ascertaining the actual

losses, (i) patent holder’s lost profits, (ii) infringer’s illegal profits, and (iii) one to three

times the amount of reasonable royalties. Article 16 of the 2010 Judicial Interpretation

clarified that when damages are calculated based on infringer’s profits, apportionment

must be exercised, i.e., profits of the infringer that are attributed to factors other than

employing the patented technology shall be excluded.



Article 65(2) of the PRC Patent Law stipulates that where the actual damages are not

ascertainable, the Court may impose statutory damages ranging from RMB 10,000

(approx. EUR 1,212) and RMB 1,000,000 (approx. EUR 121,184). In determining the

amount of statutory damages, Article 65(2) requires the Court to examine factors such as

types of patent rights and nature and circumstances of the infringing act. Moreover, the

SPC stated in a judicial opinion that if the evidence shows that the defendant’s illegal

profits exceed the upper limit of statutory damages, an appropriate amount beyond the

statutory maximum could be assessed. Lower courts have followed this guidance in

judicial practice, although the general level of damages awarded is still considered to be

low.

The draft Fourth Amendment of the PRC Patent Law has proposed the introduction of

punitive damages against wilful patent infringement. This is a common feature proposed

in the next amendments to the majority of intellectual property laws, and the concept of

punitive damages is already introduced in the Third Amendment of the Trademark Law

passed in August 2013.

(b) Permanent injunctions

Upon a determination of patent infringement, permanent injunction would almost be

invariably granted under Article 134 of the Civil Procedure Law. In a 2009 judicial

opinion, the SPC suggested that in some exceptional circumstances, sufficient

compensation may be granted in lieu of an injunction. The Chinese courts so far have

only exercised this power to deny permanent injunction request in two patent cases

notwithstanding a finding of infringement, both on the basis of environmental concerns

and public interests.

(c) Recovery of costs and attorneys’ fees

Recovery of costs and attorney’s fees are available upon request in some circumstances.

Article 65(1) of the PRC Patent Law provides that the damages paid to the aggrieved

patent holder may include reasonable expenses incurred in stopping and eliminating the

infringement. In addition to attorney's fees, reasonable expenses usually also cover

investigation costs, notarization fees and translation fees. The attorneys’ fees granted by

the courts are still relatively low, though this also needs to be considered in light of the

relatively low average salary level in China.

In Germany, the costs of proceedings depend on the so-called “value under dispute”

which should reflect the economic interest of the plaintiff in the case. On basis of this

value under dispute the statutory court costs and lawyer’s and patent attorney’s fees are

calculated. In infringement cases as well as in validity proceedings the total costs include

the court costs, which the plaintiff has to advance, and the lawyer’s and patent attorney’s

fees of each party. Typical values under dispute in patent infringement and nullity

proceedings are e.g. EUR 250,000 for a minor case and EUR 1,000,000 for a medium

case. With a value under dispute of EUR 250,000 the court fees would amount to EUR

5,268 while the lawyer’s fees and patent attorney fees would amount to EUR 20,300 per

party. With a value under dispute of EUR 1,000,000, court fees would amount to EUR

13,368 while lawyer’s fees and patent attorney fees would amount to EUR 22,412 per



party. However, fee arrangements on hourly fees as alternatives are usual. Generally the

statutory costs and fees are recoverable form the losing party.

In the US in general only costs, such as filing fees, witness fees and copying costs, are

recoverable by the winning party. The largest part of litigation expenditure, lawyers' fees

are not recoverable except in special circumstances. In patent cases there is a provision

in the patents statute, 35 USC §285, which provides for an award of attorneys' fees to the

prevailing party in patent litigation “in exceptional circumstances”; this is rarely used.

One of the most expensive parts of the US litigation process is discovery; this has been

made much worse by the advent of electronic documents and there have been attempts to

discourage excessive e-discovery requests by putting the cost on the requestor. In most

cases the US cost compensation approach is seriously inadequate.

3.11 Sanctions for breach

The courts’ lack of practice to hold litigants in contempt has rendered enforcement of

court orders a problematic area in China civil system. It is nonetheless promising to see

that certain regulations started to impose specific monetary sanctions for breach of court

orders.

3.12 Publication of court judgments

Article 156 of the new Civil Procedure Law mandates that the public shall have access to

judgments issued by the people’s courts except where national secrets, trade secrets or

matters of privacy are involved. The SPC has maintained the official portal for selective

intellectual property judgments of all levels at http://ipr.court.gov.cn/ since 2006. In

addition, the SPC recently enacted a regulation requiring all of its judgments to be

published online.



CONCLUSION

The PRC Patent Law has evolved remarkably in the past 30 years, particularly in the last

decade.

With the astronomical market growth and the national strategic plan to turn China into a

knowledge-based economy, there is a huge demand to make the IP system work and for

it to work better.

In addition to already being compliant with the TRIPS Agreement, China law has learned

and absorbed from the EU and US patent law jurisprudence.

There is still work to be done and hope for improvement, and the authority is conscious

of the problems. As the majority of the patent system users are now domestic rather than

foreign, the pressure for change comes from both within as well as outside China. In

many aspects leading Chinese companies are indeed restricted in the same way by the

system's inadequacies, and share the same vested interests in seeing the system

improved.

On most aspects where it could be argued that Chinese law still lags behind other (but

not all) legal systems, measures have been taken (amendments to the law, increase of

resources) to improve the efficiency of IP protection and enforcement. To some extent,

these still need to be translated into practice.


Written by The Economist Intelligence Unit 24

An Assessment of Developments over the Last Decade

by The Economist Intelligence Unit

FOREWORD

This report has been commissioned by Huawei and independently researched by The

Economist Intelligence Unit. Its main objective is to explore the developments in the

intellectual property (IP) patent protection and enforcement landscape in China over the

past decade.

The views expressed here are based on the official data published by sources such as the

State Intellectual Property Office (SIPO) and the World Intellectual Property

Organisation (WIPO), as well as the IP consultancy specialist Rouse's CIELA database

covering civil IP litigation, although it is important to note that the latter is based only on

published IP judgments from 94 courts in the 35 leading Chinese cities. The data have

been validated through structured interviews with legal practitioners experienced in

patent registrations and/or enforcement in China, of which a total of 12 were interviewed

in September-October 2013. The aim of these conversations was to validate the trends in

the official data with interviewees' experiences, and to provide a more in-depth

understanding of the underlying situation.

The views expressed in this report do not necessarily reflect those of the sponsor.



1. Introduction "Competition in the future will be competition in intellectual property" - Wen Jiabao,

2004.

In Tianjin, a city in north-east China, every primary school has an IP tutor and children

are taught that "stealing someone’s intellectual property is like stealing their mind". In a

country where copying historically showed respect and admiration, the move by

provincial authorities to educate those in their formative years in IP theory shows the

country’s significant shift in attitude to the rights of innovators.

From its adoption of patent law 29 years ago, China has sought to improve prosecution

and enforcement by identifying flaws, inviting expert opinion and revising the letter and

apparatus of the law. The targets and guiding principles in the State Council’s 2011

National Patent Development Strategy and the former president Hu Jintao’s comments

that he wants to see "made in China" become "created in China" make it clear that IP is

of increasing importance to the nation’s leaders.

This report found that although many areas still require improvement in the prosecution

and enforcement structure, on the whole, China’s patent laws and prosecution and

enforcement infrastructure have improved over the past decade.

2. Patent prosecution The increase in patent applications in China has drawn attention in recent years. In 2011

a total of 1,111,879 applications were received, a fivefold increase on 2003, and a figure

that vaulted China past the US to become the largest patent office in the world, according

to data from SIPO. The number of patents granted rose at a similar pace, from 106,060

to 580,223, over the same period.



Figure 1. Number of patent applications received domestically and abroad

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2003 2004 2005 2006 2007 2008 2009 2010 2011

Total Chinese Non-Chinese

Note. Invention refers to any new technical solution relating to a product, a process or an improvement thereof. Utility model refers to any new technical solution relating to the shape or the structure, or their combination, of a product, which is fit for practical use. Sources: SIPO Annual Report; calculations by The Economist Intelligence Unit.

Government initiatives have played a part in spurring applications from domestic firms.

For a company to qualify as a "High/New-Tech Enterprise", which allows a reduction in

corporate income tax from 25% to 15%, it has to show that it is sufficiently innovative,

and whether the enterprise holds an invention patent—a patent for any new technical

solution relating to a product, a process or an improvement, which provides 20-year

protection from the date of filing; they are subject to substantive examination unlike

patents for utility models. Application costs for Patent Co-operation Treaty (PCT)

patents, which allow an applicant to protect his invention in contracting states, are

subsidised by the central government if certain conditions are met. In state-owned

companies, employees are rewarded with bonuses or a promotion if they apply for

patents, according to Alex Zhang, a partner at King & Wood Mallesons.

Patent applications from foreign companies have also increased, more than doubling

between 2003 and 2011, a higher pace of growth than in the US, which saw overseas

applicants increase by 67% over the same period, according to figures from WIPO.

Interest in China is buoyed by the country’s relative immunity to the global downturn

and confidence in its long-term economic clout. "In the past, we would be asked to file

internationally, for example, in the US, EU and Japan. Now we’re more often than not

being asked to do so in China in preference to countries such as Japan, which perhaps

historically would have been of more interest to our clients," said David Clark, a partner

at Appleyard Lees, of his British clients.



2.1 Trends in invention patents

Trends in applications for invention patents, rights that are only granted after

substantive examination, are different from those for utility models—a patent for any

new technical solution relating to the shape or the structure, or their combination, of a

product, which is fit for practical use; these provide ten-year protection from the date of

filing, and are not subject to substantive examination nor require the same extensive

investigation. In fact, patent applications are not spread equally across sectors.

For example, applications for invention patents in the "electricity" category, which

includes telecommunication and IT innovations, have outnumbered those in other

sectors between 2003 and 2011. The number of applications increased by 390% over this

period to 93,992, according to SIPO, making the electricity sector the fourth fastest

growing category out of the eight set out in the graph below.

Figure 2. Patent applications for inventions and utility models by industry category

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

-

50,000

100,000

150,000

200,000

250,000

2003 2004 2005 2006 2007 2008 2009 2010 2011

Total Human necessities

Performing operation & transporting Chemistry & metallurgy

Textiles & paper Fixed constructions

Mechanical engineering Physics

Electricity

Note. The industry categorisation is based on that of the International Patent Classification (IPC). Source: SIPO Annual Report.

Some of the leading PCT applicants in this industry are telecoms companies. ZTE

Corporation led the PCT patent applicant charts in 2011 with 2,826 applications, almost

1,000 more than its closest competitor, Panasonic Corporation, while Huawei followed

in third position with 1,831, according to WIPO statistics. Many of those interviewed for

this report consider these applications testament to the sector’s innovative capacity and a

signal to competitors of intent to take to the international stage.

Meanwhile, invention patent applications in the chemistry & metallurgy category, which

covers pharmaceutical innovations, has increased at a slower pace, by 350% to 75,129



over the nine-year period to 2011, according to SIPO. However, the sector continues to

receive the third-highest number of applications. The slower growth of domestic

pharmaceutical applications is in part down to the complexity of chemical innovation.

The research and development process of a pharmaceutical product requires a significant

amount of financial investment and is a long-term endeavour. China has not

accumulated sufficient experience and time in the sector, given its relatively recent

appearance on the world stage, to move away from manufacturing generics.

There is concern that SIPO is making it increasingly difficult for foreign applicants in this

sector to get their patents approved, by raising unreasonable objections and using other

unfair delaying tactics. Practitioners allege that it is following policy instructions from

the central government to protect indigenous pharmaceutical companies. The lawyers

interviewed as part of this report also raised other examples of bias towards local

companies in protected industries. For example, there is a route, called the Green

Channel, on which certain Chinese patentees are fast-tracked and receive validation

before foreign applicants. Such preferential treatment is not limited to China, however.

Several practitioners confirmed that they had experienced similar cases in other parts of

the world, including in Europe and North America.

In contrast to the chemistry & metallurgy category, the number of invention patent

applications in the areas of performing operation & transporting and mechanical

engineering have grown by 509% to 68,335 and 500% to 39,155 respectively in the nine-

year-period, according to SIPO. The fast growth of Chinese applications in these sectors,

which includes automotive innovation, may also be down to the lower barriers to entry in

the industry. Moreover, mechanical innovation tends to be easier to achieve in a short

timeframe in comparison with other categories of innovation.

Although foreign firms were granted double the number of invention patents in 2003 in

comparison with domestic players, this trend reversed in 2009, and in 2011 Chinese

companies were granted almost double the number of patents, at 112,347, than their

foreign counterparts, with 59,766, according to SIPO.

2.2 Trends in utility models

Chinese companies are often portrayed in the media as being mainly interested in filing

utility models, as such patents do not require substantive examination. The data,

however, do not support this depiction. In 2003 the ratio of utility model to invention

patent applications filed by Chinese companies was 1.9:1. In 2011 it fell to 0.7:1,

according to SIPO. Although domestic companies are still pursuing utility model

applications, with numbers increasing by 439% to 405,086 in the period from 2003 to

2011, the pace of growth of invention patent applications was higher still, at 632%.



Many in the industry are critical of China’s utility model system, originally adopted from

the German model and still in use in many countries. Those dismissive of the model

argue that the lack of substantive examination allows patents of little value to be granted,

affording protection to "junk" patents. It is argued that the low bar encourages and leads

to the flooding of the market with low-value patents, which hampers efforts to prosecute

genuinely novel ideas as prior art searches take longer.

Furthermore, the system is easily hijacked by those who prosecute patents maliciously to

extort money from innovators who have not yet protected their rights. "The problem for

third parties is when they find a registered utility model for something that they were

selling ten years ago. Even though they have evidence that the utility model is invalid, it

would take time and money to go through the invalidity procedure, which ultimately

means that utility models can be disruptive to companies," said Laura Ramsay, a

partner at Dehns.

Although the system is vulnerable to exploitation and provides fewer quality safeguards

than the invention patent process, focusing on the existence of "junk" patents obscures

the strengths of the system. Indeed, in order for a decision to be made on the validity of a

patent, an investigation into international prior art has to be conducted, experts may

have to be consulted and litigation can often take a number of years. Without expending

resources and time analysing the content of China’s patents, it is difficult to conclude, as

many have done, that most utility models have little or no merit.

In addition, many commentators believe that the volume of patents granted must

indicate inherently a lack of merit, but quantity does not necessarily denote a lack of

quality. "Because we cannot judge in advance what inventions will make money for us,

we file patents to cover everything. Even multinationals engage in this strategy,

because they recognise their inability to predict the future," said Benjamin Bai, a

partner at Allen & Overy.

Moreover, the utility model system is useful for small and medium-sized enterprises,

which use it to get on the innovation ladder. It is cheaper and quicker than the invention

patent process, which can take up to three years. In contrast, a utility model can be

granted in six months. "From a developmental economics perspective, it makes sense

for a country that is trying to build up its industrial base to allow the Dysons of the

future to get onto the invention ladder. A mere scintilla of improvement will suffice to

sustain a utility model; with smaller inventions having valid protection in countries

such as China," said Elliot Papageorgiou, a partner at Rouse. Furthermore, the low bar to

utility models is a way to encourage familiarity with the concept and practice of patents.

Given that the utility model system is often criticised and that the majority of utility

model holders are local firms, it might be expected that foreign firms would not make

use of the system. However, overseas companies are increasingly using the system. In the

period from 2003 to 2011, there was a 128% increase in foreign firm application numbers

for invention patents, but a 227% rise in utility model claims, according to SIPO.



2.3 Patentable subject matter

Whether a patent system covers a wide enough range of subject matter is often a point of

discussion in patent offices around the world. China’s patent scope is narrow but

standard in a global context; however, practitioners were divided on whether it should be

widened.

The limited scope of patentable subject matter is in part due to the relative youth of

SIPO. Legislating on what constitutes patentable subject matter is difficult and it takes

time to build up guidelines to help examiners understand the boundaries. However,

there is a view that a relatively narrow scope is beneficial, in that it avoids issues with

business method patents, to cite one example.

One area of contention is software. Currently, algorithms are not patentable per se in

China but can be protected if combined as one invention with the equipment on which it

runs to achieve further technical effects, which is how software is commonly patented in

Europe. Many lawyers do not think software should be patentable as they are concerned

that this will cause delays and consider it an unnecessary addition to an already

functioning system.

Equally, business methods are often not patentable either, which makes it more difficult

for some sectors to protect their revenue. Moreover, it is more difficult to patent certain

forms of chemical processes in China, which can have an impact on the pharmaceutical

industry.

2.4 Patent examiners

As applications have grown, SIPO has increased the number of examiners. From 2004 to

2009, the number of patent officers increased by over 200% to 4,464, according to data

from Chinalawinfo Co.



Figure 3. Number of patent examiners in SIPO

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2004 2005 2006 2007 2008 2009

Note. 2008 figure is a forecast for the number that were planned to be hired. However, because the recruitment plan is set via a strict political process, it is not easily changed, so the data should be very close to the actual in that year. Source: Li Hongjiang, "Enhance SIPO by improving review and examination capacity", 2009, Chinalawinfo Co.

Although this rate of expansion is substantial, statistics show that pendency times have

not improved significantly in the past five years. A study from the Intellectual Patent

Office on patent backlogs and mutual recognition from 2010 outlines how pendency

times in China declined substantially between 2001 and 2005, falling from 53 months to

under 23, yet increased again to 26 months in 2007. A SIPO presentation on Baidu, a

Chinese web services company, similarly shows how, in 2005, the time between the filing

of an invention patent application and action being taken by SIPO was 24 days. By 2009

it had increased to 26 days. In comparison to pendency rates in Europe, Japan and the

US in 2007, however, SIPO fares quite well, as is highlighted in the study from the UK

Intellectual Patent Office. In contrast, the case-closing period for utility models over the

same period fell to six days, from 11 days. Unfortunately, existing historical data on the

time it takes to process a patent from the application stage to the grant stage are limited

and inconclusive on whether recent trends are positive or negative. Practitioners are also

divided on whether times have improved.

Figure 4. Pendency of patent examination by type (in months)



Note. For the utility model, this refers to the case-closing period. Pendency is defined as the time lapse between the filing of a patent application and action being taken by the patent office. (The review period is calculated on a monthly basis. In terms of the review period for invention-related patents, it is defined as the length of time from the date on which the substantive review is initiated to the date on which the review is closed. A preliminary review system is adopted for utility model and design-related patents, where the review period runs from the application date and lasts for a relatively shorter period.) Source: SIPO Annual Report.

(a) Examiner expertise

Given the growth of patent offices in China, examiners vary in expertise. New examiners

have difficulties making judgment calls, which delays prosecution. Furthermore,

although some examiners use the phone to clarify matters, which is often the most

efficient way to clear up simple issues, others will issue a complete office action, which

adds to the cost and causes delays. Furthermore, some examiners are not very good at

articulating what they require or suggesting what patent wording they are prepared to let

through.

However, we found that there is a clear perception of improvement in the overall

expertise and professionalism of examiners. "Five to ten years ago there was less

training, and language skills were limited. Now they get regular training, all graduate

from a good university and have good language skills. Some of the examiners are also

trained in foreign countries such as in the US, so the situation is pretty good," said

Fabio Giacopello, a partner at HFG Law Firm.

The European Patent Office (EPO), which has been involved in the training of Chinese

examiners, has also helped to improve the system. As a result, many EPO practitioners

find the Chinese process and examination strategy to be very familiar. For example, a

significant number of the objections and the way the examination reports are structured

are found to be similar to those in the EU.



There is a sense that examiners are meticulous. "I’ve been working in this field for over

20 years in a range of countries. I’ve encountered patent prosecution in many other

countries, and my general view of Chinese patent examination is that it is one of the

most thorough," said James Cleeve, a partner at Marks & Clerk China. Indeed, Chinese

examiners are reported to be very thorough when seeking out and reviewing supporting

information. A patent claim usually comprises an independent claim and dependent

claims that add various other limitations. In many countries, the patent office will only

examine the independent claim, whereas in China, all other claims are examined.

Moreover, Chinese examiners carry out a search for prior art outside of China, which is

not common practice for many other patent offices. Finally, when they are considering

applications for a patent that has already been granted in a different country, examiners

will look at that nation’s file to investigate the foreign examiner’s process. According to

practitioners, this is not always carried out in other patent offices and serves to make the

examination more comprehensive. Whereas in Europe, patent officers often only look at

abstracts, Chinese examiners go into the actual body of the text, so are citing more

documents.

(b) Number of invalidation actions and re-examination cases

The table below shows that the total number of invalidation actions being brought

against granted patents has remained stable over the years (around 2,200 invalidation

cases) and the total number of actions lodged by patentees with the PRB when their

applications are being rejected (re-examination cases) has grown quite significantly. The

surge in re-examination cases is in line (and even slightly exceeds) the overall surge of

patent applications mentioned earlier in this report.

Figure 5. Number of patent invalidation cases and patent re-examination cases

0

2000

4000

6000

8000

10000

12000

14000

16000

2005 2006 2007 2008 2009 2010

Total re-examination cases

Total invalidation cases



Note. Data for 2005-07 and for invalidation cases in 2008 represent quotes from SIPO officials. Source: SIPO news, "Improvement of SIPO PRB in comprehensive capacities", published January 15th 2013.

Some interviewees believe that Chinese examiners’ attention to detail raises the bar of a

patent granted in China to a global standard. "If a patent is granted in China then I

would say that the claims that are granted there would have a good chance for those

claims as they stand of going straight to grant in Europe and also the US, but that is

not so the other way around. Patents in the US—it is very rare that I will see a claim

that is drafted in the US be allowed to stand in China," said Mr Cleeve.

Endorsing this statement at the international level is the EPO, which has proposed the

mutual recognition of work done by the patent offices of China, Japan, the US and

Europe. Future plans include the opening of a sixth patent examination co-operation

centre in Chengdu, the capital of Szechuan province. The centre, announced in October

this year, is slated to open at the end of 2018 and will employ 2,000 examiners who will

examine 110,000 invention applications annually. It is expected that additions such as

this will help to improve examination times.

2.5 Summary

In summary, we have found a near-unanimous sense that the Chinese prosecution

system has improved over the past decade and is now of a global standard.

Practitioners see the change of the prior art rules in 2009 as a watershed moment.

Before the amendment, only use of an invention within China counted as prior art. After

2009, prior use anywhere in the world became admissible, which brought the system

into line with international standards.

Another seminal advance was SIPO’s 2012 entry into the Patent Prosecution Highway

system, which is a collaboration between major global patent offices. It is considered by

some lawyers to be a turning point that will ultimately make it easier and cheaper for

Chinese companies to file patents in countries that have subscribed.

3. Patent enforcement

3.1 Trends in the use of the administrative route

There are three routes a patentee can take to enforce his rights: one is the administrative

route, which is overseen by SIPO; the second is by bringing an action in the civil courts;

and the third is by bringing a criminal action to the Public Security Bureau, but this last

route is rarely used. The number of cases handled via the administrative route by SIPO

has increased in recent years. Last year, the office administered 9,022 patent cases, twice

the number in 2011, according to data from Intellectual Property Protection In China, a

government body.



The increasing popularity of this channel is partly due to its being less expensive than

civil litigation, which is increasing in cost. Many practitioners also believe that the

process has become more structured and accessible. "Seven years ago, there were not

enough officials working in these offices. Five years ago, we were not carrying out any

enforcement through the administrative route. Now there is a structure in place. So

there has certainly been an improvement in the last seven years," said Mr Giacopello

from HFG.

The system is viewed as effective in certain situations. One practitioner said that 70-80%

of his cases ended with the infringer agreeing to stop the infringement, and that SIPO

was more often than not able to bring the violating party to the mediation process.

However, as some administrative authorities do not have the capacity to compel a party

to stop further infringement following a decision, these decisions are sometimes

disregarded. In addition, administrative route cases have to be brought in the

jurisdiction of the infringer, which allows the patentee less flexibility in determining the

forum.

The administrative route is used more by certain sectors than others. The dominance of

manufacturing and machinery disputes is due to the type of patents granted in the

sector, which are often simple mechanical ones. For such patents, which often describe

physical parts, an adjudicator can simply look at an infringing product and determine

infringement. The administrative route is rarely used for complex patents because the

officers lack the necessary technical competence to assess validity and infringement in

such cases.



Figure 6. Number of invention patent administrative appeals by industry (Patent type and industry)

0

50

100

150

200

250

300

350

2006 2007 2008 2009 2010 2011 2012

Total Manufacturing & machinery Chemicals & biotechnology

Pharmaceuticals & veterinary IT & services Apparel & textiles

Automotive Others

Sources: Rouse, CIELA database; The Economist Intelligence Unit calculations.

Figure 7. Number of utility model patent administrative appeals by industry (Patent type and industry)

0

50

100

150

200

250

2006 2007 2008 2009 2010 2011 2012

Total Manufacturing & machinery

IT & services Apparel & textiles

Automotive Pharmaceuticals & veterinary

Others

Sources: Rouse, CIELA database; The Economist Intelligence Unit calculations.



3.2 Trends in civil litigation

The total number of patent court cases, including infringement disputes, fake patents

and patent imitations, among others, has decreased. The number of filed cases relating

to invention and utility model patents declined from 3,124 in 2003 to 1,726 in 2007, only

to increase to 3,017 in 2011, according to SIPO. Data from CIELA shows case judgments

fluctuating within a range of 269 to 312 between 2006 and 2011.

As with cases handled via the administrative route, there has been a slight increase in the

number of invention patent infringement disputes relative to utility models. In 2006,

66% of patent civil infringement disputes were over utility models, whereas in 2011 this

figure had fallen to 56%, according to CIELA. In addition, in 2006-12, 89% of patent

infringement disputes were between two mainland parties.

Similarly to administrative route disputes, most civil cases are connected to

manufacturing and machinery patents. According to data from CIELA, 67% of civil cases

are connected to patents in this category.

3.3 Judiciary developments

To adequately staff its patent cases, China has been training and appointing new judges.

In addition, more courts are being given the authority to decide patent disputes: at the

end of 2012 the Supreme People’s Court had appointed 83 intermediate people’s courts

to handle patent cases, according to its white paper released in April this year.

(a) Judicial expertise

However, the judiciary is often found to be insufficiently trained in the more complex

types of technologies. In high-tech cases, conflicting technical testimony from each side

can render a judge incapable of making a decision. Judge paralysis in such cases often

leads to delays, posing a threat to the patent enforcement system. Although there are

many court systems where the decisions are made by adjudicators who are not

technically trained, for example in the US, where certain cases are decided by juries,

systems are exceptional when judges are scientists as well as lawyers.

The criteria on which judges are assessed add to their reluctance to make strong

decisions. If a judge has his judgment overturned by a higher court twice in a year, his

promotion prospects may suffer. In order to protect their performance ratings, judges’

decisions err on the conservative side. For example, in some instances, when a judge does

not understand the technical arguments, he will avoid making a ruling to avoid a later

reversal, which again causes delays. The Supreme People’s Court has issued directives to

the lower courts on this issue, but judges are not following directions, said a practitioner.



The high volume of cases is also having an impact on the perceived quality of judgments.

"The issue is that the volume of cases has caused a decrease in confidence in being able

to enforce patents effectively or get good decisions. Indeed, the volume has become so

high that judges are dealing with cases in a perfunctory way," said Mr Papageorgiou of

Rouse.

In contrast, judicial decisions on simple technology appeared to have improved, largely

as a result of training. Of the cases heard between 2006 and 2012, 67% have been in the

manufacturing and machinery sector, which tends to have simpler technology than many

other sectors, according to data from CIELA. "Better quality decisions are one of the

things that has changed a lot in the last decade. The everyday life of patent litigation

leans to the rule of law," said Mr Giacopello.

(b) Uniformity of judgments

Investigation finds that the quality of judgments do not appear to vary across sectors,

although the inherent complexity of certain sectors means it can take longer to get good

decisions on innovation in some areas than others. For example, decisions on simple

mechanical patents are easier to adjudicate on without expert opinion, whereas for

chemical inventions, an expert is always necessary.

Although the judicial system has improved, these advances originate from courts in a

small number of cities. Courts in Beijing, Shanghai and Shenzhen tend to apply the law in

the most uniform, impartial manner, whereas judges in smaller cities further away from

the eastern coast are seen as having less experience and being less professional. "China is

not a whole and unified concept. If you go to Shanghai, then it’s probably more

advanced than Italy, but not compared to Spain or Greece," said Mr Giacopello.

In the smaller provincial courts, local protectionism is also an issue. If a case is brought

in the home province of an infringer, that court may exhibit bias. Judges suggest that

cases be withdrawn without reasonable grounds and delay proceedings by requesting

unnecessary formalities, which work in favour of the local party. Smaller courts are more

likely to decide in favour of the home party, according to practitioners.

However, it must be noted that local bias is not exclusively a Chinese phenomenon.

"Parties will bring cases to their home jurisdiction. It's quite common in other countries

too. One may know the judge and be familiar with the style used; so it’s easier than if

you’re in a foreign country you’re not familiar with," according to Alex Zhang, a partner

at King & Wood Mallesons.

To avoid the impact of local protectionism, all lawyers interviewed advocate the need to

analyse the judgment history of the available courts in order to choose one that has

exhibited the least protectionist bent, which leads to the recommendation of the same

courts. Nonetheless, some feel that levels of local protectionism have fallen over the past

decade.



Meanwhile, foreign companies tend to hold a common misconception that overseas firms

cannot win in a Chinese court. Yet statistics suggest that foreign firms are more likely to

win than not. Of the invention patent civil infringement cases brought by a foreign party

against a mainland firm between 2006 and 2012, 77% were won by the overseas

company, according to data from CIELA. In contrast, if both parties were from the

mainland, the probability of the plaintiff winning fell to 52%. If utility model cases are

included in the calculations, 75% of cases are won by overseas companies in infringement

actions they bring, while 62% were won by the plaintiff in cases with two mainland

parties. "We need to break the myth that China follows its own rules and policies …

normal administration works here," said Paolo Beconcini, managing partner at Carroll,

Burdick & McDonough LLP.

Figure 8. Finding of infringements involving a foreign party (Patent type and party)

Source: Rouse, CIELA database.

(c) Duration of cases

There appears to be no concrete evidence that the duration of proceedings had changed.

Some practitioners felt that there had been no change, while others said they have seen

an improvement.



3.4 Damages

A significant issue with the court system remains the level of damages, which are still

very low and not comparable with those awarded in other jurisdictions. No increase in

levels of compensation can be discerned over the period from 2006 to 2012, according to

data from CIELA. Judges awarded larger compensation awards for invention patent

cases than for utility models. The mean compensation for invention patents was RMB

479,257 (US$78,615), with a standard deviation of RMB 3,079,981, while the mean for

utility models was RMB 104,774 (with a standard deviation RMB 138,775), according to

data from CIELA.

For invention patent cases, the largest proportion of the compensation was awarded

under loss of profit, rather than pursuant to statutory damages, licence base or illegal

income. The data from CIELA show that for invention patent cases, where the plaintiff is

foreign, levels of compensation are lower than when the patentee is a mainland company.

The mean compensation received by a foreign party in 2006-12 was RMB 236,961 (with a

standard deviation of RMB 538,938), while a local plaintiff was awarded a mean of RMB

395,542 (with a standard deviation of RMB 1,995,274).

There is a perception that judges award lower damages to foreign plaintiffs, which these

figures may support. However, given the relatively small number of cases reviewed, mean

figures can easily be skewed by one large award. Nevertheless, steps are being taken to

raise the thresholds.

(a) Civil procedure rules

Although rules determining compensation in China and Europe are very similar, awards

remain low because of evidential difficulties in ascertaining loss or profit under the

different categories of award. Statutory damages, which are awarded when it is difficult

to determine the level of loss, accounted for 94% of awards made between 2006 and

2012, according to data from CIELA—an indication that in the majority of cases, the

judge does not have enough evidence to make an independent assessment of actual loss.

A patentee can also claim under illegal income, but without a discovery or disclosure

process, it is difficult to compel an infringer to provide evidence on profits. Notably, only

two of the 582 cases reviewed between 2006 and 2012, 0.3%, involved awards pursuant

to disclosed illegal income, and one of the cases was a Chinese patentee bringing an

infringement action against a foreign company. Higher illegal income damages are often

awarded against foreign companies as they keep better records.

A claim for compensation can also be brought for licensee royalties, but this is only viable

for those patentees who have licensed their products. It is used rarely and only accounted

for 2% of compensation awards made between 2006 and 2012.



Only 3.8% of compensation awards are made under lost profits claims, according to data

from CIELA. Although evidence to support this type of claim is easier to provide, as it is

supplied by the patentee, in many cases the patentee has not sold products so there is no

claimable loss.

(b) Discovery

It is difficult to collect evidence of losses and profits, in part because there is no formal

discovery process. The absence of such a judicial tool in the country’s civil procedure laws

makes it difficult to increase the level of damages and enforce patent regulations. "Even if

you have good patent law, if you have bad civil procedure or bad administrative

procedure for patent infringement determination or administrative organs, it may not

be enough to have good patent law," said Mr Beconcini.

Another concern is the need to notarise and legalise evidence in order for it to be

admissible, which is time consuming and expensive. "It takes two months' worth of work

and a lot of money just for even a simple power of attorney," said Mr Giacopello. This

practice stems from judges’ lack of trust in the authenticity of documents brought to

court, leading them to request more evidence in support of contentious facts. High levels

of distrust originate from the unenforced and light sanctions for perjury. By comparison,

if a lawyer is discovered filing false evidence in Europe, he may lose his practice licence or

face criminal sanction if discovered.

To deal with the issue of endemically low damages and evidential difficulties, new

measures are being introduced. Punitive damages were introduced in the draft

amendments to the Patent Law circulated for comments in 2013 as another category

under which judges can award damages. Although the amount is still capped, it should

increase the exposure of the infringer and have a deterrent effect.

3.5 Summary

Despite the current shortcomings with China’s civil procedure laws, there has been an

improvement in the system since its inception. Judges are using the relatively new civil

procedure tools to enforce patent law. According to data from CIELA, 99% of requests for

injunctions are granted when infringement is found.

Many practitioners also spoke highly of the Supreme People’s Court’s endeavours to

improve civil procedure laws, such as the reforms that were introduced in August 2012

that reinforced pre-litigation injunctions among other things.

There is a common view that the Supreme People’s Court has done a commendable job

identifying issues with the system and implementing measures to address them. Most

recently, the Supreme People’s Court policy book, published in September this year,

requires the courts in each province, specifically the IP panels, to publish some of their

judgments. "This will make the process more transparent and stronger", said

Christopher Shaowei, a partner at NTD Intellectual Property Attorneys.



CONCLUSION

In conclusion, China's IP patent protection and enforcement system has substantial room

for improvement, and yet it has come a long way in just a decade.

With regards to improvements to be made, the infrastructure that facilitates the

enforcement of patents lags behind countries such as Germany, where patent protection

is considered world class. Insufficient damages for patentees suffering infringement, a

lack of judicial expertise in high-tech cases and inconsistent application of the law across

different courts undermine the protection afforded to rights holders. These concerns

relate primarily to the legal environment—and have an impact on all types of disputes—

rather than to imperfections in patent law. They will, however, need to be resolved before

China can claim that patent rights are adequately protected.

For the patent prosecution system, the most serious concern is the perception of bias

towards domestic companies applying for patents in protected industries (such as the

pharmaceutical industry). Although it is arguable that protection exists in all countries to

a certain extent, the persistence of discrimination is likely to continue to deter overseas

applicants.

Nevertheless, both patent prosecution and enforcement have improved significantly over

the past decade. SIPO and the SPC have engaged overseas experts, welcomed domestic

feedback and systematically sought to address concerns, which has honed both the

prosecution and the enforcement apparatus. Every practitioner interviewed for this

report believed China’s patent prosecution and protection had improved over the past

decade. Given China’s relatively nascent adoption of patent theory and practice, the

country is likely to continue improving at a fast pace towards global standards.



ANNEX

Table 1: Number of patent applications received domestically and abroad Table 1: Number of patent applications received domestically and abroad

Invention and utility model total 2003 2004 2005 2006 2007 2008 2009 2010 2011

Chinese 164.611 17 7 .364 231.57 0 282.315 333.059 418.524 537 .957 7 00.304 997 .132

Non-Chinese 49.822 65.594 81 .323 89.541 93.426 96.900 87 .387 100.7 09 114.7 47

T otal 214.433 242.958 312.893 37 1.856 426.485 515.424 625.344 801.013 1.111.87 9

Sources: SIPO Annual Report; calculations by The Economist Intelligence Unit.

Note. Invention refers to any new technical solution relating to a product, a process or an improvement thereof. Utility model refers to any new technical solution relating to the shape or

the structure, or their combination, of a product, which is fit for practical use.

Table 2: Patent applications by industry category Table 2: Patent applications by industry category

Invention and utility model total 2003 2004 2005 2006 2007 2008 2009 2010 2011

Human necessities 41.507 47 .17 3 57 .692 7 4.7 33 80.438 101.7 91 103.822 141.661 185.67 5

Performing operation & transporting 35.126 41 .558 47 .67 6 63.605 7 1 .136 98.214 110.998 149.97 1 218.086

Chemistry & metallurgy 18.939 21 .163 29.451 39.7 20 42.510 58.543 57 .267 7 7 .7 42 92.943

Textiles & paper 3.7 22 4.7 95 5.352 6.7 80 7 .353 9.531 10.059 13.381 18.415

Fixed constructions 12.313 14.67 1 16.015 21 .042 24.180 29.828 31 .686 44.87 1 59.27 6

Mechanical engineering 22.908 28.567 32.691 44.359 49.7 7 9 66.445 7 6.489 93.959 125.07 7

Phy sics 29.981 38.7 68 45.951 61 .225 64.7 51 7 9.556 83.299 105.432 141.502

Electricity 30.627 43.331 52.334 7 2.626 81 .229 97 .830 107 .225 127 .685 167 .87 0

T otal 195.123 240.026 287 .162 384.090 421.37 6 541.7 38 580.845 7 54.7 02 1.008.844

Note. The industry categorisation is based on that of the International Patent Classification (IPC).

Source: SIPO Annual Report.



Table 3: Number of patent examiners in SIPO Table 3: Number of patent examiners in SIPO

2004 2005 2006 2007 2008 2009

1.381 1.7 47 2.546 3.533 3.889 4.464

Source: Li Hongjiang, "Enhance SIPO by improving review and examination capacity", 2009, Chinalawinfo Co.

Note. 2008 figure is a forecast for the number that were planned to be hired. However, because the recruitment plan is set v ia a strict political process, it is not easily changed, so the data

should be very close to the actual in that year.

Table 4: Pendency of patent examination by type

Table 4: Pendency of patent examination by type

(in months) 2005 2006 2007 2008 2009

Invention 24 22 26 26 26

Utility model 11 9 7 6 6

Source: SIPO Annual Report.

Note. For the utility model, this refers to the case-closing period. Pendency is defined as the time lapse between the filing of a patent application and action being taken by the patent office.

(The review period is calculated on a monthly basis. In terms of the rev iew period for invention-related patents, it is defined as the length of time from the date on which the substantive

rev iew is initiated to the date on which the rev iew is closed. A preliminary rev iew system is adopted for utility model and design-related patents, where the rev iew period runs from the

application date and lasts for a relatively shorter period.)



Table 5: Number of patent invalidation cases and patent re-examination cases

Table 6: Number of invention patent administrative appeals by industry

Table 6: Number of invention patent administrative appeals by industry

Patent ty pe and industry 2006 2007 2008 2009 2010 2011 2012 Total

Invention 41 37 62 48 288 236 253 965

Manufacturing & machinery 17 15 32 27 138 112 120 461

Chemicals & biotechnology 2 5 5 6 47 28 30 123

Pharmaceuticals & veterinary 6 7 8 10 16 37 37 121

IT & serv ices 2 2 4 2 48 24 37 119

Apparel & textiles 3 7 15 17 42

Automotive 5 4 3 1 1 7 7 28

Food & beverage 1 2 8 10 4 25

Healthcare 2 4 13 2 21

Others 7 1 9 17

Publishing & printing 1 1 1 1 4

Sports & recreation 1 1 2

Entertainment 1 1 2

Source: Rouse, CIELA database .

Table 5: Number of patent invalidation and re-examination cases

2005 2006 2007 2008 2009 2010 2011

Total re-examination cases 3.000 3.000 3.000 4.364 9.195 14.780 15.695 Total of invalidation cases 2.200 2.200 2.200 2.200 2.257 2.411 n/a

Source: SIPO news, "Improvement of SIPO PRB in comprehensive capacities", published January 15th 2013.

Note. Figures in italics represent quotes from SIPO officials.



Table 7: Number of utility model patent administrative appeals by industry

Table 7: Number of utility model patent administrative appeals by industry

Patent ty pe and industry 2006 2007 2008 2009 2010 2011 2012 Total

Utility model 68 58 66 7 3 232 146 184 827

Manufacturing & machinery 45 47 55 58 165 101 124 595

IT & serv ices 3 6 4 4 29 13 25 84

Apparel & textiles 1 1 2 14 17 16 51

Automotive 5 2 2 4 5 6 6 30

Pharmaceuticals & veterinary 4 3 7 14

Healthcare 2 2 2 4 4 14

Food & beverage 4 1 1 2 2 10

Others 6 3 9

Sports & recreation 1 1 1 2 1 6

Publishing & printing 1 1 1 1 2 6

Entertainment 1 1 2 4

Chemicals & biotechnology 2 2 4

T otal 109 95 128 121 520 382 437 1.7 92




Table 8: Finding of infringements involving a foreign party

Table 8: Finding of infringements involving a foreign party

Patent ty pe and party 2006 2007 2008 2009 2010 2011 2012 Total

Invention

Foreign v mainland 82% 67 % 97 % 83% 68% 67 % 57 % 7 7 %

Win 23 20 28 15 17 10 4 117

Lose 5 10 1 3 8 5 3 35

Mainland v mainland 46% 55% 7 1% 63% 54% 31% 7 1% 52%

Win 33 46 63 53 43 38 5 281

Lose 39 37 26 31 37 83 2 255

Utility model

Foreign v mainland 50% 100% 50% 50% 50% - 0% 50%

Win 1 1 1 2 1 6

Lose 1 1 2 1 1 6

Mainland v mainland 7 0% 69% 65% 69% 61% 67 % 64% 67 %

Win 142 134 110 103 114 83 9 695

Lose 60 60 58 47 7 3 40 5 343



48

Credits and Contact Details

The first chapter of this report (Legal Landscape in the PRC) has been authored by Bird & Bird

LLP: Christine Yiu (Partner) and Yijun Ge (Associate), with the assistance of Hilary Pearson (Of

Counsel) and Nick Pearson (Associate) for comparative law aspects.

The second chapter of this report (An Assessment of Developments over the Last Decade) has

been authored by The Economist Intelligence Unit: Engen Tham (author and researcher), and

edited by Harald Langer (Senior Analyst) and Maya Imberg (Senior Analyst).

The overall report has been coordinated by Bird & Bird LLP: Paul Hermant (Partner) and Marie

Pètre (Senior Associate).

Contact details for Bird & Bird LLP:

[email protected]

[email protected]

Contact details for The Economist Intelligence Unit:

For enquiries regarding the report: [email protected]; [email protected]

For general enquiries: [email protected]

mailto:[email protected]






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