It is rare that I can blog on a patent issue in China that has implications reaching far beyond intellectual property, to property rights and civil law, WTO and TRIPS, and even the role of the courts.  These recently released draft amendments to the patent law, however, have a much broader scope of impact.

The ink is hardly dry on the 2008 “Third Amendments” to the patent law, so why is China changing the rules yet again?  To understand the significance of the changes from this proposal, it is necessary to step back a few years. The Patent Law amendments were intended to address China’s needs in light of the 15 year Science and Technology Plan (2006).    China had also revised its Law on Progress of Science and Technology (2007) which further codified China’s efforts to develop a “ Bayh Dole” type  regime, such as was originally adopted in the United States to encourage  commercialization of government funded R&D, and it provided a statutory authorization for preparation of the National IP Strategy.  Even the Antimonopoly Law (2008) looked directly towards the development of competitive technology markets in China.

Much of the inspiration and legal lifting on the patent developments came from SIPO, including former DG of Law and Treaties, Yin Xintian.  As I was at the US Embassy at the time, I can also recall certain personal milestones:  I accompanied  Former Senator Birch Bayh on his 80^th birthday to a hero’s welcome at SIPO, where he discussed his eponymous Bayh Dole Act; a visit by former Commerce Secretary Gutierrez to SIPO, to exchange views on China’s National IP Strategy,  convening meetings with industry stakeholders and SIPO to discuss various provisions of the draft law in a highly transparent discussion process, and numerous meetings with the courts with Chief Judge Rader of the Federal Circuit to discuss the role of the courts and the contribution that a national appellate patent court could make to China’s patent system.

The dialogue on innovation and patents was so important to China and the United States that USPTO was able to maintain the discussion with SIPO even after a WTO case was filed against China for weaknesses in its enforcement system (2007), and despite the words of Vice Premier Wu Yi that she would “fight to the bitter end” with the United States.

Why now should SIPO call the Third Amendments into question at so early a stage?  The answer appears to be that senior leadership in China may be sensing some frustration in the pace of IP-related innovation.    As Denis Fred Simon, a leading academic at Arizona State University has noted at a July conference in San Diego, the July 2012 national science and technology conference in China demonstrated recognition of several “core problems” within China’s S&T system.  The announcement of these amendments in conjunction with recently announced revisions to China’s employee invention remuneration regulations, if Prof. Simon is correct, is hardly surprising.

I can imagine the State Planners looking at the raw data:  China is generating huge quantities of patents, yet the patents are frequently not being maintained throughout the useful life or commercialized.  China is still a net importer of technology.  Major Chinese patents are not being reflected in international standards activities, and overseas patent filings remain low.  Foreign products like the iPhone are capturing much of the value chain from IP rights.  Overseas patent filings in fact are dominated by a few companies, such as Huawei and ZTE.  Chinese companies are being named too frequently as defendants in overseas patent litigation.  Yet more and more money is being spent on R&D, on patent subsidies and grants, and more and more senior leadership time is focused on patents.   “Let’s focus on our strengths”, a planner might say, “Increase the incentives for employees — particularly at our state owned enterprises — to file patents, and find a more effective means within our vast administrative structures of enforcing them.”

The amendments do not affect substantive patent law, only enforcement. These are some of the key areas of concern in the proposed change in these amendments: the ability of local patent offices (LPO’s) to award damages and not simply fines or an administrative injunction to stop infringement; the availability of treble damages by the courts and administrative agencies for willful infringement; and the authority of SIPO to self-initiate enforcement cases when “market order” is adversely affected.

The changes strike me as a rather sudden about face in China’s march towards better civil protection of IP.  After all, it was only in May of this year that 1200 Chinese and foreign officials, including seven judges from the Court of Appeals for the Federal Circuit visited China, to discuss the importance of civil enforcement of patents, and the development of sound trial and appellate practices.    Moreover, that program brought high level attention, including from the Law and Politics Committee (政法委) of the Politburo to patent enforcement issues.   No one in that program openly expressed doubt that the civil enforcement system was key for patents.    In addition, SIPO had already covered the role of the courts and administrative agencies  in 2008 when SIPO announced in the Outline of the National IP Strategy that enforcement issues need to underscore the “primary role of the judicial enforcement system”, including consideration of a “national appellate patent court: to reduce local influence, and furthermore that a key concern was “coordination” (协调) between the judicial and administrative systems.   Moreover, earlier efforts at that time to provide more robust civil remedies in the administrative system had been rebuffed by the State Council in the patent law reform.

Simply put, there was nothing to suggest that the courts were going to be undercut, in the two ways this draft proposes: first, that the LPO’s might adjudicate civil patent disputes, and second, that, SIPO now proposes to give local patent offices added authority, thereby seeming to contradict the earlier goal of centralizing patent cases rather than a further devolution of authority to local LPO’s.  In addition, the wide-reaching role of the administrative agencies could also affect other areas, including the role of patent law in general market regulation (market order) in China.

The draft law also returns China to its state of IP affairs before WTO accession, when local IP offices, including patents and trademark officials, had the authority to award damages in administrative cases.  All of these provisions were removed from China’s IP laws at the time of the WTO rewrite, largely in response to domestic pressure to protect property rights in part through greater reliance on the civil courts.  For scholars like the late Zheng Chengsi, as well as Profs. Guo Shoukang, Liu Chuntian and Wu Handong, Intellectual property was primarily a civil right. Prof. Zheng noted in one his English language writings at WTO accession that a “major factor” in the “huge progress in intellectual property law enforcement in China” has been the development of the “Intellectual Property Tribunal” in the judicial system (Zhou Lin, China Court Cases on Intellectual Property Rights, at 1 [20010].  Prof. Liu of Renmin University also saw intellectual property as key to protecting the property rights of intellectuals.   As Prof. Liu has stated:

“In the past, intellectuals were attached to the powerful, rich and noble class. The western countries implemented the sponsorship system. In contrast, China had the imperial examination system, which promised some intellectuals the possibility of becoming officials in the future. At that time, the movable type printing had been invented, but not to make money. After industrial production emerged, the technology was given to investors to create the market and to reproduce the technology. Workers were hired to reproduce, which was a special part. Thus, intellectuals no longer depended on the powerful, rich and noble class.

In the industrialization process, it is the most important thing to settle the status of intellectuals. Now the western world has resolved this problem. How? In fact, it depends on the intellectual property system. We did not look at it this way in the past, but now we should be more and more aware of it.”

Prof. Liu and others even saw to it that the term for copyright in China was changed from banquan (publishers rights) to zhuzuoquan (authors rights), to refocus efforts on the individual rather than enterprises.

Let me be clear:  I do not believe that there is anything offensive under WTO rules about  administrative enforcement per se.  The US “Section 337” remedy is an example of an administrative IP remedy.   However the U.S. patent office does not hear Section 337 cases, nor does it file complaints before the body hearing these complaints on an ex officio basis.   In fact, the USPTO has no enforcement authority. This draft law would give the authority of the patent office to enforce patents, on its own instance, including pursuing treble damages, which is likely little known elsewhere in the world, and could call into question the independence and fairness of both the patent prosecution and enforcement systems.

What makes this even more troubling is that the local patent offices are already too involved in picking local favorites through providing subsidies and awards to patent filers in their region.  Moreover individual civil servants, including from LPO’s, can be promoted based on the patents filed and quotas achieved in their jurisdiction.  The local patent offices also may receive funding from the same source as the local companies that they are subsidizing.   LPO’s will inevitably be tempted to rule in favor of their own local companies.

The background for these amendments suggests additional reasons for concern.  In doing its research on how to improve the enforcement system, SIPO first reached out and relied upon information obtained regarding patent enforcement in Wenzhou and Hangzhou, which are jurisdictions where foreigners have suffered major losses (Schneider, Samsung) under questionable circumstances, in order to see how the system could be improved.  Beijing, which receives most of the foreign-oriented litigation, was not apparently as actively solicited for comments on how the law might be reformed.    Finally, the foreign community was not consulted while this draft was in the works over the past several months, and, indeed, the level of consultation has thus far been less transparent or open than when the Patent Law was amended in 2008.

The proposed amendments may also raise concerns under Article 49 of the TRIPS Agreement, which requires that, in order for administrative procedures to be WTO compliant, they must essentially follow civil procedure rules.  For me those rules would likely include WTO disciplines and China’s commitments regarding transparency, reliance on evidence, and independence of the arbiter of the dispute.  China had previously taken the position at the WTO that providing copies of administrative decisions and the interpretations of law being undertaken in enforcement actions is not an intellectual property matter under the WTO (TRIPS Council Meeting of December 1-2, 2004, IP/C/M/46 11 January 2005).  A further explanation of how these amendments would comply with the TRIPS agreement and how they would be coordinated with China’s existing civil remedies would likely be very helpful in the future.

There are other areas of concern.  In terms of ex officio enforcement, the draft clarifies that SIPO can take a role at a national level when the “market order” is affected.  “Market order” is itself a term that is frequently used in anti-counterfeiting and product quality supervision. The Ministry of Commerce itself has a website devoted to its “Department of Market Supervision” [Market Order] (市场秩序师).   As this website makes clear, one of the key principles of “market order” protection is protecting against monopolies in the market place.  Will SIPO now take up the role of intellectual property antitrust enforcer by self-initiating infringement or validity cases?

The bottom line: although intellectual property litigation has grown dramatically in China over the past 10 years, the draft patent amendments could erode the 10+ year understanding that China was evolving to a system that would primarily protect IP as a private property right through relying upon an increasingly expert civil judicial system.   With the patent civil system being the first on the chopping block, could trademarks, copyright and perhaps other civil rights such as product liability, be far behind?

Comments on the draft are due at SIPO by Sept 10.
Update: Managing IP has a post today reporting similar concerns by Professor Liu Chuntian about the draft amendments.

Note that these are the personal views of Mark Cohen and may not represent the views of any entity or government agency.