On January 27, 2021, the CNIPA issued the “国家知识产权局关于进一步严格规范专利申请行为的通知(征求意见稿)” (Notice on Further Strictly Regulating Patent Application Behavior” (The “Notice”). The Notice has already been the subject of blogs by Aaron Wininger and Toby Mak. As Toby Mak noted, the Notice was published shortly after the USPTO released its report Trademarks and Patents in China: The Impact of Non-Market Factors on Filing Trends and IP. In addition, there was the recent decision of the Guangdong Administration for Market Regulation to sanction two firms for abnormal filing activities, and the incorporation of a “good faith” obligation in patent prosecution in the revised Patent Law (Art. 20). “Good faith” had been a “sleeper issue” in bilateral trade discussions but as is evident from reform efforts at SAMR and by the courts, it has become an increasingly important aspect of China’s IP regime.
The Notice addresses three important concerns: the time frame for completely cancelling patent subsidies and funding; a prohibition against using patent quantity as the main condition for departmental evaluation or awards; and amendments to the Implementing Regulations of the Patent Law and strengthening credit supervision in the field of patent applications.
- Article IV (2) stipulates the time frame for completely ending patent subsidies and funding:
IV. (2) Adjust patent funding policies. By the end of June 2021, subsidies for patent applications at all stages should be completely abolished. No locality may provide financial support for patent applications in any form, such as financial aid, awards or subsidies. The scope of existing local funding shall be limited to granted invention patents (including invention patents granted overseas through PCT or other means), and the funding shall be in the form of post-grant subsidies. The total amount of funding of various levels and types received by the recipients shall not be higher than 50% of the official fees paid for obtaining the patent rights, and the patent annual fee and patent agency service fees shall not be subsidized. For those who falsify and arbitrage patent funding, the allocated funds shall be withdrawn within a time limit. During the 14th Five-Year Plan period, local governments should gradually reduce various types of financial support for patent authorization and eliminate them all by 2025. All localities shall focus on strengthening patent protection and use, and emphasizing increasing support for subsequent transformation and use, administrative protection and public services.”
- Articles IV (1) and IV (3) establish that patent quantity shall not be taken as the main condition for departmental evaluation or awards.
四、（一） 避免将专利申请数量作为部门工作考核的主要依据。不得设置专利申请量的约束性考核评价指标，不得以行政命令或者行政指导等方式向地方、企业和代理机构等摊派专利申请量指标。不得相互攀比专利申请（包括 《专利合作条约》（PCT） 途径专利申请）数量。一经发现以上行为，视情取消国家知识产权运营项目申报资格、国家知识产权局授予的示范城市等各类称号和优惠政策等。
IV. (1) …avoid taking the number of patent applications as the main basis for department performance appraisal. No binding evaluation indicators for the number of patent applications shall be set, and no quota for the number of patent applications shall be assigned to localities, enterprises and agencies by means of administrative orders or administrative guidance. The number of patent applications (including patent applications through the Patent Cooperation Treaty (PCT)) shall not be compared with each other. Once the above behavior is discovered, various titles and preferential policies, such as the qualifications to apply for national intellectual property operation projects, the “model IP cities” designation granted by the CNIPA, etc., will be cancelled as appropriate.
IV. (3) …All kinds of awards involving patents shall not simply take the number of patent applications and the number of patents granted as the main conditions.
3. Article IV（4）mentions amending the Implementing Regulations of the Patent Law and strengthening credit supervision in the field of patent applications:
IV. （4）Strengthen credit supervision in the field of patent applications. Amend the Implementing Regulations of the Patent Law to consider including such non-trustworthy application behaviors into intellectual property credit supervision in accordance with the law. Intellectual property authorities at all levels should emphatically consider including such application behaviors into the scope of supervision when formulating policy documents on intellectual property credit supervision. Strengthen the coordinated governance of agencies that are seriously illegal and untrustworthy. For patent agencies that have been punished for acting for such applications, they will also be limited in terms of incentives and rewards, industry evaluation and awards, and supervision effectiveness will be increased.
Although the Notice, on first glance, is reacting to the USPTO Report and is transformative in nature, it in fact builds upon prior efforts of CNIPA and other agencies, and does not completely address issues involving market externalities, such as subsidies, in patent filings. The impact of these market externalities have been detailed in various blog postings of mine over the past 9 years here, as well as in a book edited by Prof. Dan Prud’homme and Hefa Song.
The Notice may also be viewed as an extension of other policies. Patent firms have been sanctioned for filing “abnormal” patent applications at least as far back as Dec. 29, 2007 (see Liaoning Province IPO Punishment Decision of 2007, in Chinese and English translation). More recently, the “Opinions on Improving the Quality of Patents in Colleges and Universities and Promoting the Transformation and Application” (教育部国家知识产权局科技部关于提升高等学校专利质量促进转化运用的若干意见) , released by the Ministry of Education, CNIPA and the Ministry of Science and Technology (“MoST”) in February 2020 (the “Opinions”), require universities to stop granting awards for patent applications, drastically reduce and gradually cancel awards for patent authorization, and mandate that universities with resources shall conduct pre-application evaluations. As previously noted, there had also been efforts to eliminate subsidies for design and utility model patents.
Patent subsidies and other non-market externalities are deeply rooted in China’s IP system, and extend beyond subsidies for patent applications. For example, on the same day of issuing the Notice, the CNIPA released the Main IP statistics for 2020 ( “知识产权统计简报 –2020 年年度知识产权主要统计数据”), which said that “as of the end of 2020, the number of invention patents in China was 3.058 million, of which, the effective number of domestic (excluding Hong Kong, Macao and Taiwan) invention patents was 2.213 million, and the number of invention patents per 10,000 people reached 15.8”. CNIPA also published a report about the IP statistics from China IP News,我国知识产权事业发展再上新台阶（知识产权报）, in which the Deputy Director of the Patent Office of the CNIPA said that China’s main IP statistics in 2020 are in line with expectations, and the development of IP rights has reached a new level. As the preceding suggests, CNIPA still regards the total number of patents and the number of patents per 10,000 people as important IP developmental indicators. The impact of the number of patents has been internalized into the government’s evaluation system. Although patent subsidies will be suspended, the pursuit of the number of patents will not change in the short term.
Other ministries may also continue to utilize patent data for their own planning purposes and subsidize patent filings. For example, on December 20, 2020, MoST issued the notice of its Development Plan for the Construction and Development of the Yangtze River Delta Science and Technology Innovation Community”(长三角科技创新共同体建设发展规划”), which stipulates that, by 2025, “the intensity of R&D investment will exceed 3%, the number of effective invention patents for 10,000 people in the four provinces of Shanghai, Zhejiang, Jiangsu, and Anhui in the Yangtze River Delta will exceed 35, PCT international patent applications will reach 30,000, cross-provincial domestic invention patent cooperation applications in the Yangtze River Delta region will reach 3,500, and cross-provincial patent transfers will exceed 15,000.” As the above paragraph indicates, government agencies are still pursuing increased patent applications as an indicator of innovative strength.
The Notice is directed to the Intellectual Property Offices of all provinces, autonomous regions, municipalities directly under the Central Government, the Intellectual Property Office of Xinjiang Production and Construction Corps, the Sichuan Provinical IP Servcie Center, the Guangdong IP Protection Center, all CNIPA departments, all departments of the patent bureau, and all units and social organizations directly under the bureau (各省、自治区、直辖市及新疆生产建设兵团知识产权局，四川省知识产权服务促进中心，广东省知识产权保护中心；局机关各部门，专利局各部门，局直属各单位、各社会团体). It is not directed to sub-provincial level local intellectual property departments, nor is it directed to government agencies other than CNIPA. As the Notice was not promulgated by the State Council nor is it a part of NPC legislation, it may not bind other government agencies. Indeed, it may not even bind CNIPA’s parent agency, SAMR, which is superior to CNIPA itself.
Because of the issuance of the Notice, some funding rules of the local government, however, may be faced with cancellation or modification either because they are legally compelled or because they follow national government examples. For example, one recent article takes the Guangzhou Municipal Intellectual Property Work Special Fund Management Measures《广州市知识产权工作专项资金管理办法》穗知规字〔2020〕2号 as an example, and lists a number of subsidies that may face cancellation/continuation of support. Nonetheless, it is important to note that not all subsidies are given by CNIPA or by local provincial-level IP agencies. As pointed out in the PTO Report, municipalities and sub-municipalities, or local governments are issuing subsidies for patent filings (PTO Report fns. 31, 35, 36). Moreover, under the Law on Legislation, the Notice, as an administrative rule, is inferior to local legislation and national regulations (Arts. 63, 71). There may be other non-monetary incentives as well, including reduced jail sentences and local residency permits based on patent filings. For these reasons, reactions to the Notice suggesting that all direct patent subsidies issued by governments in China will be ended may be premature.
Indirect subsidies which are not issued by CNIPA will also likely remain relatively unaffected.
As an example of an indirect incentive, MoST, in conjunction with the Ministry of Finance and the State Administration of Taxation, has enacted policies to encourage patenting, including at least one program for recognition of High and New Technology Enterprises (HNTE’s) which indirectly subsidizes patent applications by providing for income tax reductions based on patent filings. Under the “Administrative Measures for the Recognition of High and New Technology Enterprises” 科技部财政部国家税务总局关于修订印发《高新技术企业认定管理办法》的通知, qualified high-tech enterprises enjoy a preferential corporate income tax rate of 15%, when the prevailing rate is 25%. HNTE’s need to satisfy a number of requirements, including owning core technologies with independent intellectual property rights.
Company behavior may also not change greatly due to these changes. In the past several years, many subsidies for the patent applications have been reduced or cancelled, but there has been no major reduction in the number of patents. One possible reason is that the government’s evaluation indicators for enterprise technology are related to patents. This has led enterprises to avoid greatly reducing their patent applications even without subsidies. The cost of maintaining the status quo is not large, but reducing patent application quantity may result in big potential losses, such as the impact on taxation, company listing, and applications for participation in governmental projects.
The Notice may, however, be foreshadowing additional corresponding changes. On February 1, 2021, in the influential journal Seeking Truth ( 求 是 ), Xi Jinping published an important article, “Comprehensively Strengthen Intellectual Property Protection, Stimulate Innovation and Promote the Construction of a New Development Pattern”, (习近平：全面加强知识产权保护工作激发创新活力推动构建新发展格局 ). In that important article which discusses a comprehensive vision for intellectual property protection in China, Xi Jinping acknowledged that high-quality and high-value innovation was still relatively limited and warned that intellectual property protection at home was being outpaced by the rapid growth of new technologies and businesses. At a recent conference hosted by Duke University, Prof. Cao Cong pointed to the increasing importance of highly cited scientific research to China’s own evaluation of its technological strength. Perhaps there will be accompanying subsidies or other support for high quality research that supports high quality patenting in China in the future.
As the PTO Report points out, abolishing subsidies may reduce the burden of evaluating low quality or no quality applications. This could also help facilitate examination by helping to clear up databases and registries. However, removing patent subsidies does not necessarily insure the provision of market-based incentives to file higher quality patents. Market-based incentives might include adequate opportunities for commercialization, fair compensation by the courts for infringement, limited antitrust regulation, and the ability to freely use patent rights to encourage investment including as a basis for cross-licensing or collaborative research. These incentives do not rely on subsidies of any kind, but are instead a key to a flourishing and competitive IP regime in China.
Written with the support of Dr. Xiaofan Xu.
Note: All translations are provided for readers’ convenience only, are unofficial, and do not carry any representations as to accuracy.