Government's role in process warrants close study

The State Intellectual Property Office of China reports that China received more than 1.6 million patent applications last year, 33 percent more than the previous year, making China the largest patent-filing country.

Among these applications, 526,000 were for invention patents, up more than 34 percent from the previous year, indicating that overall patent quality has improved in China. The numbers for applications for utility models and design patents were 585,000 and 522,000, up 42 percent and 23 percent respectively from 2010.

A report of the intellectual property office indicates that these increases in patent filings were in large part due to financial support from the government. Yet critics maintain that the number of unqualified or even bad-faith patent applications is also rising. Such applications have been filed by companies purely to obtain government financial support or to enable them to file malicious patent infringement lawsuits later.

Some argue that local government agencies have implemented such favorable policies with self-interested motives, as increases in the number of patent filings would potentially be looked upon favorably in performance evaluations. Some agencies are now even requiring a minimum number of patent filings for each company. Some local government agencies are now allowing the use of either invention patents or utility models, instead of just the substantively examined invention patents, in the qualification process for "high and new technology enterprise" status.

This is significant because utility-model and design applications can be granted just a few months after filing because they do not go through a substantive examination by the State Intellectual Property Office. Invention patents, on the other hand, are subject to substantive examination so applicants must wait a lot longer before they are granted. So some companies have been allowed to take advantage of the benefits of high-new tech enterprises (which includes, among other things, tax subsidies and local residence certificates for employees) by using the lower-quality utility model patents only. These problems have led some to call for reform, or even the outright elimination, of such local government support.

While it is important that unqualified and bad-faith patents are reined in, eliminating government financial support for patent filing alone will not resolve the problem. In fact, eliminating support may in fact hamper innovation. Instead, government support policies should be carefully examined and reformed to ensure filings are properly scrutinized and penalties are imposed where unqualified or bad-faith filings are identified. In general, patent filings are based on many corporate strategic considerations, including:

Protecting research and development results by stopping third-party infringement and making money by licensing patents to third parties;

Strengthening the intellectual property portfolio in order to effectively compete, including filing counter-suits when facing litigation;

Better promoting innovative products;

Improving corporate image, especially for publicly listed companies;

Meeting requirements for applying government preference policies on tax treatment and employee benefits;

Suing competitors by using patents, including utility-model or design patents.

For the purposes just outlined, many companies naturally want to file high-quality patent applications, even without government support. Since government financial support encourages companies to further invest in research and development and pursue patent protection for their research results, this is obviously the good result that government policymakers are trying to bring about with such policies, and rightfully expect to see.

However, it is entirely possible, under the current system, to achieve the purpose of promoting innovative products in the market by filing unqualified patents. This enables these unqualified applicants to apply for and obtain "high and new technology enterprise" status (assuming other requirements are also met) and other preferential government treatment. At the same time, these applicants, who eventually become patent owners, may use these otherwise unqualified patents to create practical threats to competitors by, for example, filing malicious lawsuits against competitors. Such bad-faith infringement lawsuits may go on for several years even if such patents are ultimately invalidated in parallel proceedings filed by defendants before the China Patent Re-examination Board.

As a practical matter, the harm caused by such unqualified patents to otherwise legitimate defendant companies on business opportunities could be significant. Yet there is no effective deterrent or practical penalty against such malicious lawsuits under the current system. In order to significantly reduce the number of unqualified patents, the system should be reformed to further scrutinize which types of patents may be used to apply for government financial support and to verify how much due diligence must be required by patentees in order to utilize such patents to file lawsuits. Moreover, effective penalties must be imposed on bad-faith or malicious patent applications and lawsuits.

While government financial support may be one of the factors contributing to the rise of unqualified patents, it is not the only reason. In fact, government support has not only brought the increase in patent filings, it has done the following, and will continue to do so:

Raised awareness of protecting patent rights as well as respecting patent rights of others. In recent years local government agencies have staged numerous intellectual property-related training programs and activities to promote government support policies in order to encourage patent filings. As a result, today more and more local companies and even individuals are filing patent applications, signifying the recognition of patent rights by local communities;

Stimulated investment in research and development, which in turn strengthens the corporate ability to survive and compete. It is reported that research and development spending in China reached 868.7 billion yuan ($138 billion; 108.2 billion euros) last year, up 23 percent from 2010;

Nurtured small and medium-sized enterprises to develop and grow. For instance, in Tianjin about 2,800 small and medium-sized companies started filing patent applications in the past two years, probably encouraged by local-government support policies;

Encouraged more companies to file foreign patent applications. China has already become one of the largest foreign patent-filing countries, and may soon become the largest;

Accumulated patent filings and building strong corporate patent portfolios, which can better help companies to confront competition inside and outside China.

In short, the current Chinese patent system is still developing, so government support is still needed to help it advance. Government assistance to raise social awareness regarding patent protection and to help the development of patent portfolios will in turn further improve the patent system.

Even though some companies may have abused government support by filing unqualified patent applications, such applications are not the norm. Last year most filings were for invention patents, as opposed to lower-quality utility-model patents. Among the invention patent applications, Chinese companies (which include solely Chinese-invested enterprises as well as foreign-invested ones) filed more than 410,000, or 78 percent, of all invention patent applications. So government financial support is likely to have played an important role in such a significant increase of invention patent applications by local companies, reflecting a big improvement in Chinese patent quality as a whole.

Nevertheless, government financial support programs could be more effective if the following reforms were considered:

Increasing (or not reducing) subsidies for Chinese invention patent and foreign filings, while reducing (or even eliminating) subsidies for utility-model and design applications;

Requiring a minimum number of invention patents to qualify for preferential policies, such as those for "high and new technology enterprise" status (and invention patents should not be replaced by utility models or designs), but reducing or even eliminating the use of utility-model patents in such a qualification process, and in the meantime expediting the substantive examination process for invention-patent applications so companies have a greater incentive to apply for invention patents.

Creating a mechanism that would be a real deterrent to those who file bad-faith patent applications or lawsuits, by, for instance, copying existing prior art and using the same in litigation.

Obviously, the ways in which government support may be best used to encourage innovation and patent protection in China deserves much further study. A stronger Chinese patent system will undoubtedly benefit all businesses operating in China, foreign and Chinese alike.

Xiang Wang is a partner of Orrick Herrington & Sutcliffe LLP, Beijing representative office. Shelley Zhang is a senior associate in the office. The views do not necessarily reflect those of China Daily.

(China Daily 12/07/2012 page8)