CNIPA’s Notice on Cancelling Patent Subsidies: A Deeper Dive

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” (Notice on Further Strictly Regulating Patent Application Behavior)” (The “Notice”) for which comments are due February 25, 2020.  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  (征求意见稿).  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.

  1. Article IV (2) stipulates the time frame for completely ending patent subsidies and funding:

四、(二)调整专利资助政策。2021年6月底前要全面取消各级专利申请阶段的资助。各地方不得以资助、奖励、补贴等任何形式对专利申请行为给予财政资金支持。地方现有资助的范围应限于获得授权的发明专利(包括通过PCT及其他途径在境外获得授权的发明专利),资助方式应采用授权后补助形式。资助对象所获得的各级各类资助总额不得高于其获得专利权所缴纳的官方规定费用的50%,不得资助专利年费和专利代理等中介服务费。对于弄虚作假套取专利资助的,应限期收回已拨付资金。“十四五”期间,各地方要逐步减少对专利授权的各类财政资助,在2025年以前全部取消。各地方要着力优化专利资助相关财政资金的使用管理,强化专利保护运用,重点加大对后续转化运用、行政保护和公共服务的支持。

Translation : 

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.”

  1. 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。

四、(三)…各类涉及专利的奖励不得简单将专利申请、授权数量作为主要条件。

Translation: 

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: 

四、(四)加强专利申请领域信用监管。修改专利法实施细则, 依法推动将该类申请行为作为失信行为纳入知识产权信用监管。各级知识产权部门在制定知识产权信用监管政策文件时,应着重考虑将该类申请行为纳入监管范围。加强对严重违法失信代理机构的协同治理,对因代理该类申请受到处罚的专利代理机构,在有关激励奖励政策、行业评优评奖等方面予以联动约束,强化监管效果。

Translation: 

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 (  ), 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.

USPTO/SIPO Program on Patent Licensing and Technology Transfer – A Quick Readout on a 41 Billion Dollar Business

A China-U.S. Joint Seminar on Patent Licensing and Technology Transfer was jointly hosted by SIPO and USPTO at SIPO’s China Intellectual Property Training Center in Beijing on April 15, 2015.  The focus of the program was on contractual and non-antitrust aspects of technology transfer.  Program speakers included an economist discussing the economic reasons for licensing and current trends, an accountant on tax planning for licensing transactions, Chinese and American lawyers and officials, as well as wide spectrum of company representatives primarily in the IT sector, but also including the life sciences.

Here are my personal, general observations of the points made by the speakers:

To begin, speakers  addressed difficulties in understanding the data on technology transfer.  According to China’s Statistical Yearbook on Science and technology (2007-2014), the value of technology import contracts into China was 41.09 billion USD for 2013, nearly triple of what it was in 2005.   Patent license fees accounted for 15.4% of the total and proprietary technology was 37.7%.  Technology consultation and services were  29.7%.  However, many speakers also noted the difficulty in collecting comprehensive data.   Moreover, payment mechanisms such as extensive use of tax havens and transfer pricing in licensing technology further distorts data on bilateral technology flows.

Several speakers introduced the range of regulations in China affecting technology transfer.  These regulations included the Contract Law, Technology Import /Export Regulations, rules on registering patent licenses, restricted areas of technology trade, license registration rules, and taxation rules.

Many foreign speakers expressed concerns about obligatory provisions of China’s Technology Import/Export Regulations (“Regulations”), including provisions regarding whether the foreign licensor needs to indemnify a licensee against third party infringement, as well as other provisions on grant-backs, no challenge clauses, etc.  Article 24 of the Regulations was noted several time by Chinese and foreign speakers alike, including its conflict with article 353 of the Contract Law, which would give authority to negotiate indemnities if the contract did not involve a technology import into China.  Several Chinese speakers thought that the Contract Law, as superior legislation, may govern any conflict between the two.  However there were significant contrary arguments, including the fact that the Regulations were both more recent and more specific (I tend to side with this argument).  Many felt that these Regulations were out of date and not suited to China’s current circumstances, particularly in light of China’s desire to become a technology trade player, as well as the difficulties of mandtory indemnity provisions in technology imports from start-up companies or in litigtion dense technologies (such as smart phones).

There was a general consensus of a need for more information on the impact of indemnity/grant back and other clauses on licensing transactions.  The Regulations are a source of concern even if they are of uncertain legal impact.  One speaker noted that the uncertainty caused by the Regulations had generated considerable legal work over the years.  Some speakers noted that they thought it would be helpful if the courts provided additional guidance on the Technology Import/Export Regulations and the Contract Law provisions on technology contracts in order to achieve greater assurances about how best to structure technology transfer agreements.

A few speakers suggested that an appropriate strategy in handling mandatory indemnities is to conduct a freedom to operate analysis and negotiate risks, perhaps by reducing them to a liquidated amount in a contract.   Another speaker thought that a way to bypass the warranty provisions of the Regulations is by arbitrating outside of China under New York or other foreign law. However, there was also concern expressed about whether arbitral decisions would still be governed by Chinese policy, or arbitral awards might not be enforced within China.    Many speakers noted that choosing foreign law could lead to uncertain results.  Moreover, if enforcement of some kind is needed in China, choice of foreign law may be sub-optimal as Chinese courts will not enforce foreign judgments and it will be impossible to obtain preliminary injunctions or other immediate relief.  Note that I have discussed the issue about using foreign choice of law in technology transfer contracts elsewhere on this blog, as well as problems that arise if US law is used to enforce the contract in the United States.

Another proposal of a speaker at this program was, where possible, to change the cost of the technology to zero and place more value in to service contracts.  However, one speaker thought this alternative also posed risks, including the possibility of being considered a joint infringer in the event a law suit is brought against the “licensee”/ purchaser.

The Regulations also appear to have an uncertain jurisdictional scope.  One speaker mentioned that one way to avoid application of Chinese law is by licensing foreign technology to an overseas subsidiary of a Chinese company, and then having this company license the technology back to China.  Another speaker suggested that transactions such as these might not be viewed as an import of technology into China which should be governed by the Regulations.  At the same time, regulatory officials have viewed a transfer of technology within China by a foreign-invested company to a Chinese company as a technology import notwithstanding that the transaction occurred solely within China.

Speakers discussed difficulties in differentiating improved licensed technology which belongs to the licensee and the actual licensed technology under China’s mandatory grant back regime.  Another source of concern was determining when the technology has caused infringement if the licensed technology was proprietary in nature and was to be maintained as a trade secret.

Judicial settlement agreements and covenants not to sue were also discussed as alternatives to license agreements.  For example, under what circumstances when one settles a litigation would such an agreement no longer constitute a technology transfer agreement?    Is a covenant not to sue not a technology transfer agreement? I had the opportunity to raise the question of whether the  Regulations governed settlements of technology infringement cases of a senior Chinese judge at another conference – and the quick answer I received is that the answer is — unclear.

Speakers were generally optimistic about future prospects of enforcing audit clauses particularly in light of recent changes in China’s civil procedure law, judicial practices, and proposed changes to China’s patent law regarding production of documents and provisional measures.

Former Chief Judge Rader of the CAFC also provided a useful update on US case law involving no-challenge clauses, and smallest saleable unit as a basis for calculating damages.  He noted that in fact in some cases he now believes the market value of the infringing product should prevail, although the SSU doctrine was originally of his creation.

The role of registering contracts with MofCOM or assignments with SIPO was discussed, as well as MofCOM’s continued supervision of contracts when it registers a contract.  Several speakers also discussed an earlier MofCOM  (or perhaps MofTEC) notice which established an “unoffical cap” of royalties equalling 5% of net sales.  The experience of several speakers was that MofCOM will not say that there is a 5% cap, and that the contract needs to be “fair and reasonable.”  One speaker thought that this unofficial cap was not necessarily a deal breaker, although there remains a persistent belief that 5% is fair and reasonable.  This cap is of especial concern as data from the Licensing Executive Society suggests that average royalties for high tech sectors are 6%, and for life sciences about 5%.

Tax planning in licensing was also discussed, including indirect licensing from tax havens such as Belgium, Holland, Luxemburg and Ireland, as well as advantages to owning IP or technology locally in order to benefit from local Chinese incentives (such as High and New Technology Enterprise or R & D deductions).  An accountant noted that transfer pricing is of increasing concern in China – imposing a burden on licensors and licensees to prove that a transfer is priced at fair value.  It is likely that going forward third country licensors may not be able to obtain special incentives unless one controls and orchestrates the IP from the onward entity.   Moreover, a State Administration for Taxation Announcement (no. 16) provides that if you are paying from China to an overseas entity and the entity just owns the legal rights but doesn’t conduct substantive activities, the tax deduction may be completely denied, and they will reopen 10 years of tax returns.  This Announcement builds upon a previous announcement (146) of 2014.

China’s High and New Technology Enterprise program offers numerous incentives but also contains numerous restrictions, including regarding IP ownership, sufficiency of R & D conducted in China, and percentage of R & D of total turnover or percentage of profits derived from HNTE profits.   An accountant noted that this deduction is of declining use due to aggressive tax auditing when the incentives are used.   Moreover, there is a tension between transfer pricing and HNTE status.  One speaker noted that changes to the HNTE program are due in 2015.   This speaker noted that there is also an R&D super deduction is available, which is more readily obtained, but is also a strong audit risk.  Another HNTE risk is that if a company is developing core IP further and your original IP is no longer necessary, one could lose HNTE status.   Moreover, licensors may risk establishing a permanent establishment in China, particularly if the licensor is engaged in onshore trading.

All speakers and attendees I spoke with believed that this topic is nonetheless of increasing importance.  One academic privately noted to me that she thought licensing was not adequately discussed in academia, and that there was not enough focus by industry and government.   Attendees were also unanimous in wanting to see more programs of this nature going forward.

The preceding is an unofficial summary and should not be construed as a substitute for professional legal advice.  I hasten to add that one should also seek a tax professional for advice on tax planning.

Update of May 4, 2020:  Scott Kennedy of CSIS published a blog concerning US government data on licensing transactions with China.  I completely agree with Scott’s suggestion that data such as this can be used to support a less anecdtoal approach to issues around IP licensing, including legitimate, forced and stolen technology.  Difficulties exist in US government data, including the nomenclature used, the possibility of licensing through tax havens and avoiding direct payments to the United States by licensors, lack of clarity around defined categories related to technology such as what constitutes an industrial process or an affiliated entity, and how to evaluate other country’s data  – particularly China.  I also agree with Scott that when the increase is compared to China’s role as a high tech exporter, there appears to be a dramatic shortfall.  Moreover, since US companies license their technology to China for global and not just local (territorial use), US licensing receipts should also account for sales from China to global markets in addition to the United States.