By Ram Deshpande

The People’s Republic of China is already a hub where key players from every industry have – or are likely to have in the near future – a strong presence. Unfortunately, China is also known as a place where unprotected technology is likely to be copied. If a company wants to manufacture – or sell – its products or services in China, it must protect its intellectual property in the country. Although filing patent applications is not a strategy in itself, it is an integral part of any well-developed strategy.

In 2007, the Chinese Patent Office (the State Intellectual Property Office or the SIPO) received a total of 694,153 patent applications, which represents a growth rate of 21.1 percent over the previous year. 245,161 out of the total number of applications were invention patent applications (20-year patents). This number of invention patent applications filed with the State Intellectual Property Office (SIPO) already ranks China third in the world with respect to patent application filings, which clearly suggests that filing in China has become an intrinsic part of most multinational companies’ IP strategies. Furthermore, if the growth rates of the filing of 20-year patent applications with the SIPO and of 20-year patent applications with the United States Patent and Trademark Office (USPTO) continue at their current rates, China will overtake the US by 2012. This also means that the patent protection system in China will be tested more rigorously. Therefore, for the Chinese government, developing an efficient patent-protection system is no longer ‘good to have’ but ‘must have’.

Another form of patents in China is the Utility model patent (10-year patent). Ease of grant and the low cost of filing make these 10-year patents very popular with Chinese companies, which have also developed innovations and inventions but usually do not have the money or time to invest in pursuing 20-year patents. Therefore, domestic Chinese companies generally file 10-year patent applications. Foreign companies do not file many 10-year patent applications, partly because this form of patent protection is not allowed in other countries, such as the United States, and partly because while entering the national phase through the Patent Co-operation Treaty (PCT) route in China, most applicants prefer 20-year patent applications over 10-year patent applications.

Chinese Strategy to Make the Most of Utility Models (10-year patents)

Some Chinese companies have adopted a strategy that involves filing 10-year patent applications and 20-year patent applications for the same invention on the same day, thereby ensuring the same priority date with the SIPO. Since a 10-year patent application is granted within a year (without substantive examination), the company can start producing, marketing and selling its “patented” product in China. If the corresponding 20-year patent is granted by the SIPO, the Chinese company can simply abandon the 10-year patent and enjoy a longer period of protection, whereas if the corresponding 20-year patent application is not granted by the SIPO after a substantive examination, then the Chinese company can still continue producing and marketing its product on the strength of the utility model it owns (unless it is challenged by another party and the 10-year patent is re-examined by the SIPO).

The effects of this strategy have been weakened in the latest version of SIPO’s “Guidelines for Examination” that was implemented on July 1, 2006. According to Chapter 3, Section 6.2.2, Part II of ‘Handling of One Application and One Patent’ of the Guidelines for Examination, when an invention patent is going to be granted, the assignee needs to submit a written declaration to abandon the corresponding utility model application from its filing date (as though the utility model application was never in existence). With this modification, the period between the grant of the 10-year application and the publication of the 20-year patent (usually 8 to 12 months) is no longer protected under the rights of the 10-year application.

A possible loophole in the utility model (10-year patent) system is the lack of substantive examination, which can enable an applicant to copy a patent owned by another company in another country, and then enforce this 10-year patent against any other company in China (including the foreign company that owns the original patent in the other country). The amendments proposed in 2006 include a provision for penalizing patentees that are found to be indulging in such “patent counterfeiting”. This amendment will help in reducing, if not eliminating, the copying of prior art.

Against this backdrop, foreign companies have started to recognize the importance of 10-year patents and are actively formulating their IP strategies around such patents in China. In fact, their change in mindset may partly be a result of the outcome of the litigation between the Chint Group of China and Schneider Electric of France – a case that has been in the headlines recently.

The Chint versus Schneider Case

In this case, The Chint Group alleged that Schneider Electric infringed on one of its 10-year patents. The Wenzhou Intermediate People’s court ruled in favor of The Chint Group and awarded damages worth CNY 330 million (approximately USD 48 million), which is believed to be the highest award for damages with respect to intellectual property infringement in China. Schneider Electric has since appealed to a higher court, but regardless of the outcome, it would have accrued considerable expense and trouble that could have been probably avoided had it invalidated this 10-year patent before The Chint Group filed its lawsuit.

Lessons from the Schneider Electric versus Chint Group Case

• Damages relating to a patent litigation do not always have an upper limit: A popular myth about patent enforcement in China is that even if infringement has been established, damages are capped at CNY 500,000. In reality, damages are calculated based on a) losses incurred by the plaintiff and b) the profits made by the defendant from the sale of the infringing product. In the event that there is no evidence available to ascertain these two amounts, statutory damages within a compensation limit of CNY 500,000 can be awarded. However, patent license royalties can also be used as a reference to calculate damages. These damages could be between one and three times the amount of such royalties. The damages may also include expenses incurred by the plaintiff to investigate and prevent the said infringement. In summary, with increasing awareness of enforcement of patent rights in China, the amount of money paid by companies in out-of-court settlements and in patent license fees is bound to increase in the near future.

• Chinese prior art cannot be ignored: Given the exponential increase in the number of filings with the SIPO, it is prudent for every company operating in China to review Chinese patent prior art. One of the best practices may be to regularly review patent application filing activity in the country within a given field of interest. As always, forewarned is forearmed. Proactive measures towards invalidation of granted patents (especially 10-year patents) may also be a good way to avoid possible litigation.

• Seek the help of Chinese patent research professionals: Foreign companies should try to identify Chinese patent professionals who can help them analyze Chinese patents and other prior art. The primary reason for this is that the majority of Chinese patents are only available in Chinese languages (particularly Mandarin). Searching the Chinese patent database is easy, since all patents and published applications are available online, but the search has to be carried out in Chinese. Furthermore, simply translating English keywords to Chinese (or vice versa) may not work because Chinese languages have many variations that cannot be captured in English. Machine translations cannot be relied on for semantic, cultural, and contextual reasons.

• Utility model (10-year) patents should figure in every company’s China IP strategy: In view of the unique position of 10-year patents in China’s intellectual property scenario, any company producing or selling its products in China cannot afford to ignore these patents. After the changes to the patent law proposed in 2006 have been implemented, foreign applicants may need to choose between an invention patent and a utility model if they want to enter the national phase in the country through the PCT route.

Ram Deshpande, Senior Manager Intellectual Property at Evalueserve.