Highlights of the amended Patent Law and the draft implementing rules

This article gives an overview of the main changes to the Patent Law, and also discusses the currently proposed implementation of those changes in the provisional Draft Rules. We have previously reported on the First NPC Draft Patent Law and on the Second NPC Draft of amendments outlining the key proposed changes to the Patent Law.  The final amendments to the Patent Law are very similar to the Second NPC Draft, with the following, mainly pro-patentee highlights:

• Introduction of punitive damages for serious willful infringement (art. 71.1 Patent Law): this marks the first time that punitive damages are adopted in the Chinese Patent Law. Such punitive damages can reach up to five times the determined amount of direct damages.  It remains to be seen how the Chinese courts will interpret the two main conditions for punitive damages, namely the “seriousness” and the “willfulness” of the infringement.
   
• Higher cap for statutory damages (art. 71.2 Patent Law): statutory damages are discretional, lump sum damages granted by a court when the evidence to support the claimant’s loss or the infringer’s illegal gain is not sufficient or cannot be proven by the claimant.  As a matter of practice, it is by far the most frequently used manner of determination of damages by the courts in patent infringement cases in China, and the increased cap for statutory damages is therefore very important for patentees suing for patent infringement in China.  Under the amended Law, the range of the statutory damages, within which the court can exercise its discretion, is significantly raised from the current range of RMB 10,000 to RMB 1 million, to RMB 30,000 (USD 4,5k) to 5 million (USD 750k) under the amended Patent Law.

• Eased burden of proof for the patentee to establish damages (art. 71.4 Patent Law): The amended Patent Law contains a provision allowing for the shifting of the burden of proof relating to damages calculation from the patentee to the infringer.  According to this provision, when the claimant has exhausted its efforts to provide evidence, while the evidence needed to calculate the damages (e.g. accounting books and other materials) is held by the infringer, the court can order the infringer to provide such evidence. If the infringer refuses to submit it to the court when ordered to do so, or submits fabricated evidence, the court can determine the amount of damages based on the initial evidence and calculations of the patent owner and on the failure of the infringer to satisfy their burden of supplying contrary evidence. This is also largely a codification of existing judicial practice.
   
• Patent term compensation (art. 42.2 Patent Law): Patent term compensation is available if the grant of an invention patent is delayed and takes more than four years from the date of filing of the application, or three years after a request for substantive examination, and such delay is not attributable to the applicant. It should be noted that such compensation is not automatic and must be applied for by the patentee. The Draft Rules further propose that applications for patent term extension shall be filed within three months after the patent is granted, and that the compensation period is counted in days for the actual delayed period.  The Draft Rules don't mention whether the patent term compensation also applies to patents filed, but not yet published, by 1 June 2021.
   
• Patent term extension for pharmaceutical patents (art. 42.3 Patent Law): Similar to the legal regimes already existing in the European Union and United States of America, the amended Patent Law allows patentees of innovative pharmaceuticals to apply for a patent term extension of up to five years, if the effective term of the patent after obtaining marketing approval is less than 14 years. It should be noted that such compensation is not automatic, and must be applied for by the patentee. The Draft Rules further propose that the patent term extension applies to chemical, biological and Chinese herbal drugs.  The Draft Rules propose to restrict the eligible type of new drug to drugs with a new active ingredient that is granted market approval in China for the first time.  It also proposes that eligible types of patents would include patents protecting the compound, preparation process and medical use.  The specific term of extension would be fixed at the time period between the market approval date and the patent application date, minus five years.  (see Draft Rules art. 85, addition 4, addition 5, & addition 6). Similar to patent term compensation, the Draft Rules propose that a patent term extension for pharmaceutical patents shall be applied for within three months after the market approval.  Additionally, the patent for which an extended protection term is sought would have to have a remaining term of not less than six months.  Further, the Draft Rules propose that when an eligible drug is protected by multiple patents, extension can only be granted for one such patent, only one drug can be designated for extension when an eligible patent covers multiple drugs, and a patent can be extended only once  (see Draft Rules art. 85, addition 7). If these provisions in the Draft Rules are finally adopted, patentees would need to carefully evaluate and select the patents and drugs for which they will apply for extension. The Draft Rules furthermore propose a mechanism for a third party to challenge the granted patent term extension.  Under the system proposed by the Draft Rules, any third party could apply for the national patent authority to declare a granted extension invalid.  The CNIPA's decision on that request would be further appealable to the courts, where the CNIPA would be the defendant and the patentee would be a third party(Draft Rules art. 85, addition 8).
   
• Design patents: longer term of protection for design patents and protection for partial designs available (art. 2.4 and 42.1 Patent Law): the term of validity for design patents is increased from the current 10 years to 15 years under the amended Law. This is likely to bring the term of validity in line with the term of design patents required under the Hague Agreement Concerning Industrial Designs ("Hague Agreement").  A second major change to the design patent system is the protection of partial designs. Partial design protection will enable patent protection for part of the design of a product, instead of only the entire design of products (or separate parts of a product).  It allows entities to protect the “DNA”, or a unique product design element, in different products and exclude parts of a design that have less “design value”.  It also means that design patent infringement could extend to copying the patented part of the design of a product even if the overall visual effect of the entire product is different. The Draft Rules propose that partial design patents could be demonstrated through solid lines in combination with dotted lines, to show the design-protected part and the remaining part of the entire product.  The Draft Rules also propose that the protected part can be clarified in the brief description part of the design patent as needed (Draft Rules art. 27.2, 28.3). It is noteworthy that the Draft Rules also propose a new section to be introduced if China joins the Hague Agreement, which would be a very positive development for companies with a large quantity of design assets, as it may substantially reduce the fees and simplify the process to obtain design rights in China (Draft Rules new Chapter 11).
   
• Patent linkage (art. 75 Patent Law): the long-awaited patent linkage system is finally enshrined in the Amended Patent Law. Nevertheless, it remains unclear how the patent linkage system is going to interplay with marketing approvals for allegedly infringing drugs.  Patentees will need to carefully analyze the amended Patent Law as well as the upcoming rules which the Chinese state food and drug authority is likely to issue in the course of 2021, in order to develop a concrete playbook for China. The amended Patent Law provides that during the examination for market approval of a pharmaceutical drug, a patentee (or stakeholder) or the applicant can bring an infringement procedure before the court, while the drug authority can determine whether to hold the approval within a prescribed period according to an effective judgment.  A patentee (or stakeholder) can also petition CNIPA for a decision.  With respect to patent linkage, drafts of more detailed implementing rules and judicial interpretations have been issued by China’s drug and patent authorities, as well as by the Supreme People’s Court.  Those rules will likely be finally enacted as the amended Patent Law enters into force in June 2021.
   
• Employee - inventor remuneration with stocks, options and dividends (art 15 Patent Law): the amended Patent Law provides that companies are 'encouraged' to remunerate employee-inventors or designers in the form of stocks, options, dividends etc. as part of a company employee-inventor policy. The amended Law highlights the aim to enable inventors or designers to reasonably share in the proceeds of innovation. The Law remains relatively vague and the Draft Rules do not propose to further codify the ‘encouraged’ alternative ways of remuneration, other than cash awards and remunerations in the current law.  This could be left to specific regulations.
   
• Good faith and anti-patent abuse provision (art. 20 Patent Law): a new article is introduced to provide an explicit duty of good faith for both patent applicants and patentees in enforcing their rights. This provision is presumably most useful in cases where invalid rubber-stamp utility model and design patents (which are granted without substantial examination) are used to extort money from others. Other instances where the provision can be relevant is in proceedings brought by “patent trolls”, non-practicing entities and in standard essential patent litigation. The article moreover states that patentees cannot use their patents to exclude or restrict competition, but provides that abuse needs to be dealt with under the Anti-Monopoly Law (which is also under revision). This is beneficial as it avoids divergent interpretations under different laws. Further proposed implementing provisions in the Draft Rules show that the current proposal is not to let this good faith provision become a paper tiger, instead, the Draft Rules give teeth to the provision, as it would become a ground for both invalidating a patent and rejecting a patent application (see Draft Rules art. 44(1), art. 53(2), & art. 65.2).  As to what constitutes “bad faith”, the Draft Rules propose examples such as fabricating, faking, plagiarizing and cobbling together a patent (see Draft Rules art. 43, addition 1).  What remains unclear is whether the infringement of prior rights, such as theft of trade secrets, would also count as a bad faith behavior, based on which an invention or utility model patent can be invalidated.  We look forward to further clarification or development in the judicial practice.
   
• Open patent license system (art. 50-52 Patent Law): the amended Law sets up an open patent license system, presumably to boost patent utilization numbers. Under this system, a patentee can register a declaration with the Chinese patent office, stating that it is willing to grant an "open license" to any entity or person that accepts a license under certain pre-specified standard license conditions. During the "open licensing period", any candidate-licensee could obtain a license under the patent by sending a written notice to the patentee and paying the specified fees, with the caveat that the patentee isn't allowed to grant a sole or exclusive license under the patent during the term of the open license. The amended Patent Law further clarifies that during the open licensing period, a regular patent license can still be individually negotiated and agreed with the patentee. Moreover, in return for granting an “open license”, the amended Law provides that the patent annuities shall be reduced or exempted.  Under the Draft Rules, an offer for open patent license could be filed with the CNIPA upon grant of the patent and consent of all patent owners, with sufficient terms of license including patent number, licensor, license fee and payment terms, as well as license period.  The Draft Rules propose that a patentee could not make an open license available for patents that have already been licensed exclusively, for patents that are subject to an ownership dispute or a court order for injunction/preservation, if the annual fee payment for the patent is delayed or if the patent is subject to a pledge where the pledgee does not agree to an open license (see Draft Rules art. 72, addition 2 and addition 3).
   
• Statute of Limitations extended to three years (art. 74 Patent Law): the amended Patent Law increases the statute of limitations with an extra year, i.e. from two to three years, in line with the general statute of limitations adopted in China's new Civil Code. This will allow patentees to claim more damages in case the alleged infringement started more than two years before the date of the infringement procedure.
   
• Expanded choice of priority claims (art. 29.2 Patent Law): the amended Patent Law expands the availability of priority to cover prior domestic design patent applications, in addition to prior overseas applications for all three types of patents and domestic invention and utility models.  The time limits to claim overseas and domestic priorities are unified, i.e. twelve months if the prior application is an invention or utility model, and six month if the prior application is a design.  The Draft Rules propose the introduction of domestic priority claims for design patents, and also propose that a prior invention or utility model application could be the basis of priority for a subsequent design patent that covers the drawing of the prior application (Draft Rules art. 32.2).  This could provide opportunities for companies to expand the protection over the exterior designs of a newly invented product, within the time limitation. Notably, the Draft Rules propose a two months’ grace period for those having missed their time limit to claim for priority (Draft Rules art. 31, addition 1).  This rule would appear more lenient than the grace period provided under the Patent Cooperation Treaty (“PCT”) as it would not require the applicant to show it missed the deadline unintentionally or due to reasons not attributable to itself.  The more lenient rule would equally apply to PCT patents entering into the China national phase (Draft Rules art. 110, addition 1).  It will be interesting to see how this rule will develop throughout the consultation and amendment process of the Draft Rules, and whether it will be adopted in the final version of the implementation rules.
   
• Proposed additional options to enforce against infringers with administrative patent offices under the Draft Rules (art. 79 Draft Rules): the amended Patent Law did not change the basic legal regime for administrative patent enforcement against infringement through the local patent administrative offices—which have the power investigate and mediate patent infringement cases, but cannot impose confiscation or a fine.  However, we note that the Draft Rules still propose to expand the patent offices’ power, by proposing that the patent offices of larger cities and certain authorized ones at the county level would be granted the power to handle such enforcement requests.  Currently, these powers are granted only to the patent administrative offices at the national, provincial and certain approved larger-city level.  Patentees seeking to enforce their rights through administrative enforcement might therefore have additional weapons in their armory, should this provision be adopted in the final version of the implementation rules.   

Adapting your China IP strategies to the amended Patent Law

While it will take some time to feel the practical impact of the amendments to the amended Patent Law discussed above, it is fair to assume that the above changes will lead to increasing patent litigation numbers in China. The higher cap for statutory damages, the availability of punitive damages, the eased burden of proof for damages and the automatic award of a permanent injunction may incentivize filing of patent infringement claims on the one hand, but may, on the other hand, add urgency for companies to revisit how they assess potentially problematic patents in their product development processes to ensure the best chance of staying on the right side of risk management.  We also assume that the number of design and other patent filings will increase, given the benefits of longer patent life and patent term extension and compensation granted under the amended Patent Law.  In particular, for companies in the pharmaceutical sector, which has generally expressed some unease with the current insufficient IP protection for innovative drugs, it will be interesting to observe how the patent linkage system will pan out in practice, and whether it may fully address the current concerns in the sector.

 More to come?

The amended Patent Law will have a significant impact on China's patent practice and strategy when it takes effect on 1 June 2021. The Draft Rules propose a number of interesting provisions that are aimed at further clarification and detailed implementation of the amended Patent Law, and the public comment period for the Draft Rules runs through 11 January 2021. This offers all stakeholders an opportunity to voice support and/or suggest revisions to enhance the current version of the Draft Rules.

Should you have further questions about the amended Patent Law, or should you wish to submit comments on the Draft Rules through our China offices, please get in touch with our contacts listed to the right as soon as possible.

Authored by Julia Peng, Stefaan Meuwissen and Katie (Zhen) Feng.