Under the old patent regime, inventions, utility models and designs created in China and held in the name of a Chinese party were subject to the first filing requirement. This requirement stipulated that the first patent application in respect of PRC inventions had to be made with the State Intellectual Property Office (SIPO). As the first filing requirement did not apply to non-Chinese parties, it was possible to bypass the first filing requirement by transferring the title in Chinese inventions to a non-Chinese party. Transfers of Chinese inventions for this purpose were quite common.

The new Patent Law has abolished the first filing requirement. However, it has introduced a secrecy examination, which applies to all Chinese inventions, irrespective of the nationality of the owner. An application for the secrecy examination has to be made before a patent application for a Chinese invention can be filed outside of China. If the owner fails to follow this process, the owner will lose the right to file a patent in China for the relevant Chinese invention.

Technology transfer and secrecy

The draft Patent Implementing Rules provides that the owner must apply for a secrecy examination of the Chinese invention in one of the following cases:

1. it wishes first to file the Chinese invention outside of China. In this situation, the owner must first apply for a secrecy examination at SIPO;

2. it first files a Chinese national patent for the Chinese invention and wishes to file a patent application for the same Chinese invention outside of China; or

3. it first files a PCT patent application in China. In this case, the patent applicant does not have to make an express request for a secrecy examination as such a request would be deemed to have been made by the owner at the time of filing the PCT application.

Based on the current draft of the Patent Implementing Rules, SIPO will issue a notice within three months from the date of filing a request for a secrecy examination. If an applicant does not receive any notice, it can proceed to file a patent application for the relevant Chinese invention outside China. If a notice is issued, the applicant may have to wait for up to five months for a final decision on whether the relevant Chinese invention has passed the secrecy examination. Similar to the first notice, if an applicant does not receive any decision within five months, it can proceed to file the relevant invention outside China.

One potential practical effect of this new process is that companies are encouraged to make their first patent filings in China for Chinese inventions in order not to lose time and priority pending the completion of the secrecy examination. Companies with research and development or collaboration activities in China may therefore have to review their technology transfer and patent filings strategies and practices in view of the secrecy requirement.

Co-ownership and collaboration

The old Patent Law and the current Civil Code provide limited guidance on patent co-ownership rights, other than the fact that co-ownership is recognised by Chinese laws.

Under the new Patent Law, if the co-owners do not have any agreement in respect of their co-ownership rights, any co-owner can use the patented technology and can license the patent to a third party, provided it shares the licence fee with the other co-owners. Any other dealing concerning the exploitation of the co-owned patent requires consent from all the other co-owners.

The default position provided for in the new Patent Law may generally not be adequate to govern co-owners' rights and to minimise the risk of disputes between co-owners on their respective rights of exploitation. Therefore, it would still be prudent to agree in writing appropriate contractual terms to govern the co-ownership relationship, including rights, obligations and restrictions on use and exploitation of the co-owned patent. This is particularly relevant for collaboration and co-development agreements.

For example, if a company sponsors or funds a university or a third party laboratory to conduct some joint research and development work and an invention is created as a result of the research and development work, in the absence of any agreement dealing with the scope of use of such an invention, the company may find that it may not be able to fully exploit the commercial benefits of the invention without the cooperation (or paying out) of the other co-inventor or co-owner.

Employee compensation

An invention made by an employee in execution of the tasks given by the employer or made by him mainly using the material and technical means of the employer constitutes an employee invention. An employer is required to reward an employee inventor for employee inventions. While guidance has been available on how a state owned enterprise should compensate an employee inventor for employee inventions, there is only limited guidance on how private companies should compensate their employee inventors.

The current draft of the Patent Implementing Rules introduces some guidelines that are applicable to all companies. Subject to any agreement between the employer and the employee, the employer would be obliged to compensate the employee: Rmb3,000 ($440) for each invention patent within three months of publication and Rmb1,000 ($146) for each utility model patent or design patent.

Upon the grant of the patent and after exploitation of the patent, the employer would be obliged to reward: 2% (for a utility model patent or invention patent) or 0.2% (design patent) of after tax profit a year (or pay in lump sum); or 10% of after tax assignment fee or licence fee (received from third party).

Any variation from the default position will require a written agreement between the employee and employer setting out the agreed formula for the level of compensation. Companies are advised to conduct a review of their internal policies and employment contracts in order to reduce the risk of unexpected liabilities to employee inventors.

Dispute resolution clauses

China's new Patent Law now formally provides that interim relief, such as injunctions and evidence preservation orders, will be available under the new regime. Before the new Patent Law came into effect, the ability to obtain such relief was previously provided for in a judicial interpretation issued by the Supreme People's Court.

The ability to obtain interim injunctive relief under the patent and IP regime in China may affect the dispute resolution provisions that parties wish to incorporate into their commercial agreements.

In general commercial contracts, most international companies choose dispute resolution outside China where they are able to do so under Chinese law (and their counterparty agrees) and, in particular, arbitration at a foreign arbitral institution. Arbitration is a popular method for resolving international commercial disputes for many reasons, but particularly because of the ability to enforce arbitration awards globally under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, which China has also signed, as well as to have the dispute resolved in a neutral forum.

Under Chinese law, parties to a contract with a foreign element are able to opt for dispute resolution outside China and, for example, to refer disputes arising under the contract to a foreign arbitral institution (see for example Article 128 of the PRC Contract Law 1999). A contract will have a foreign element when, among other things, one of the contracting parties is a foreign entity.

In the context, however, of an IP-related dispute, the ability to obtain and enforce orders for interim relief may outweigh a party's desire to have a dispute heard outside China. If such interim relief is important, the parties should consider having disputes resolved on-shore in China. This is because it is unlikely that: 1) Chinese courts have the power and/or will grant interim relief in aid of foreign litigation or arbitration proceedings; and 2) interim relief obtained in a foreign jurisdiction will be capable of being enforced in China.

The above analysis would to a certain extent also apply to the choice between resolving the dispute through Chinese litigation arbitration proceedings. This is because the ability to obtain interim injunctive relief does not appear to be available under the Chinese arbitration regime, on the basis that the PRC Arbitration Law 1995 provides only for asset and evidence preservation orders to be obtained. As such, if the parties consider that the ability to obtain interim injunctive relief will be important, they should consider opting for the resolution of disputes through court proceedings in China and thus taking advantage of the ability to obtain interim injunctive relief under China's IP regime, including the new Patent Law.

The new Patent Law should not be seen as being only of relevance to patent attorneys who are responsible for prosecuting and enforcing patents. Commercial lawyers who are helping companies to consider their commercial contracts should also be aware of the impact of some of the provisions of the new law.

Companies operating in China should review their standard templates and practices in order to ensure that they have addressed the different requirements introduced under the new regime.

Ling Ho

Audrey Shum

Kathryn Sanger

© Ling Ho, Audrey Shum and Kathryn Sanger 2009. Ling Ho is a partner of Clifford Chance in Hong Kong. Audrey Shum and Kathryn Sanger are senior associates in the same office