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Foreign businesses worried China’s Patent Law changes are too modest

In-house counsel say they would have preferred to have seen more robust changes in the fourth amendment to China’s Patent Law as well as better predictability of rulings

The draft of the fourth amendment to China’s Patent Law includes several modifications from the previous version, including an increase in the damages awarded for wilful infringement, term extensions for design patents, and a shift in the ownership of patent rights from employee to employer.

Statutory damages for infringement will increase from between RMB10,000 to RMB1 million ($145,000) to between RMB100,000 to RMB 5million. Punitive damages have been introduced that raise the amount for wilful infringement to up to five times the amount of a rights holder’s loss.

While these changes are welcomed by Western companies with experience litigating in China, sources say that they do not go far enough to provide adequate IP protection for foreign companies.

“Your main driver is not the money. You want to get the infringer off the market. What we really want to do is get companies to settle, because enforcement of a ruling is the issue for us,” says Claude Kaplan, head of IP commercialisation for Benchmark Holdings, a UK biotech company.

Whether or not companies get one million dollars or five million dollars in damages does not matter, according to Kaplan. The only real advantage of a damages increase for a foreign company facing an IP violation is if the threat is enough to deter infringement.

“It is a signal to international companies to say that their patent infringement damages are on par with other developed countries, but as an international company, it’s not that big of a deal,” he says.

Oliver Pfaffenzeller, principal IP counsel for Siemens in Germany, agrees that the draft changes are trying to send a signal to Western companies, but wishes the changes could go further: “To put an increase in damages into the law is a very clear sign they want to be sure the amount of damages is going up and companies are really getting compensated.

“All the same I am pretty disappointed by the present draft, not only because there are some things missing, but because I think it is not business-friendly enough.”


Further changes

Lack of predictability remains one of the biggest concerns for litigating in China. When courts issue a ruling, the justification is not often publicly available, leaving the parties wondering how judges arrived at their decision.

“Opening up their court system by making it more transparent would be helpful so we can understand how they came down on one side or another. This is very important,” says a senior vice president for IP of a Silicon Valley-based telecommunications company.

He says the main concerns for any company working with a foreign country’s IP system are certainty and predictability.

“It feels like every three or four years IP ambassadors make the journey across the pond and say they will change the system. But if they want real change to happen they need to make an emphasis on how the system works, and there is just so much uncertainty they need to deal with and changing things around is not the answer,” he says.

Another desired change to the draft amendment is a modification to utility models. According to Pfaffenzeller, the bar for inventive step is much lower for utility models, and they are granted without examination.

“This is something that gives us a headache and is really a burden for companies. The Chinese are filing huge numbers of utility models, and the potential risk for foreign companies is very high. My favourite thing would be to see inventive step requirements to be the same [as they are] for normal patents,” he says.

“The worst case scenario for the amendment to the Chinese law is that it does not address the problem of utility models which I feel is not to the advantage of Western companies,” he adds.

Proving wilful infringement also remains a burden for companies trying to protect their IP rights. The new draft amendments do not directly address how companies can obtain proof and instead rely on an interpretation from a 2015 Supreme People’s Court ruling allowing companies to get an evidence production order.

“The importance of introducing regulations helping with evidence production in patent law-specific regulations is mostly that such regulation would be a signal that courts are meant to apply them in patent cases,” says Pfaffenzeller.

Jeff Yu, head of manufacturing company Thyssenkrupp China, wishes the draft would directly address the concerns of foreign companies with clear explanations of how the burden of proof shifts to the alleged infringer.

He says: “It isn’t clear yet how to prove this violation. There is no clear explanation in the amendment on how to get the relevant information to prove infringement. We expect more rules on how to get information and evidence.”

Kaplan of Benchmark Holdings agrees and says it is incredibly difficult to get proof in China without conducting a raid, which can be very difficult to obtain from local authorities.

“Clearly, shifting the burden of proof for wilful infringement to the alleged infringer would be a big deal, assuming the law is implemented. In many cases we cannot prove there has been infringement unless we do a raid, but in many countries that is quite hard to get,” he says.

Sources would also like to see changes to the design system. The current law states that the entire design for an invention must be patented rather than the relevant inventive parts.

“Patenting the entire design is not something we would like to do in every situation. You want to protect the relevant parts of a product. This was in the fourth draft but was taken out for some reason,” says Pfaffenzeller.


Enforcing the law

While Western companies want a stronger IP law on the books, better enforcement of existing laws and rulings on a national and regional level would be a good way to send a signal to the world that China cares about protecting IP rights.

“It’s not the national government, but the regional government that is the problem because they won’t enforce the ruling. We don’t have this problem in most countries, but in China we do,” says Kaplan.

With the escalation of President Trump’s trade war with China, the senior vice president of IP is worried that foreign companies operating in China might get unfair rulings compared to domestic rivals.

“It’s not going to be a quick fix and I think they shot themselves in the foot by changing the law rather than making enforcement predictable. That is the one thing most people care about. People have questions about the system. We want a transparent system with certainty and predictability, and enforcement,” he says.

How the Chinese government decides to modify the patent law, more reliability is needed to make foreign businesses feel confident that their rights are protected.

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