First, the Legislative Affairs Office of the State Council of China has recently released the latest draft of Amended Patent Law for Public Opinions (2015.12 Draft). This indicates China is making a substantial step to move forward with amending the Patent Law. China enacted its first Patent Law in 1985 and has amended it three times since. The current fourth amendment of the Patent Law is the most significant one since the previous 2008 amendment.

Second, the Supreme Court of China just announced it has approved the amendments to its judicial interpretation on patent litigation (new court rules), which had been pending for at least five years. The judicial interpretation is de facto black letter law controlling the way the judges interpret claims, handle evidence, determine infringement, and award damages. The new court rules went into effect April 1, 2016.

Third, in the Chinese courts, two large Chinese Internet rivals, Sogou.com and Baidu.com, are in litigation over more than eight patents. Sogou claimed patent infringement against Baidu for its Chinese input software, with a claim up to RMB 80 million. Many believe that if Chinese firms cannot enforce patents, foreign firms will never be convinced that patents are consistently enforceable in China. High-stakes cases like Sogou v. Baidu are real tests.

These three developments are signs that China is making genuine efforts to change its patent enforcement system, although no one knows what the final outcome will be. China places encouraging innovation as its primary policy priority, with a hope that technology innovation will help China move to the next level of growth. Enhancing the patent system is becoming a preferred policy choice.

This article examines several key sections in the latest draft amendments to the Patent Law and analyzes the potential implications to foreign companies and practitioners. We also point to some new court rules that are most relevant to patent infringement lawsuits.

Administrative Enforcement

At the center of debate of the China Patent Law amendment is something quite unfamiliar to the outside world: administrative enforcement of patents. Understanding what is behind this will give some insights about the dynamics between courts and administrative agencies.

The dual-track approach of patent enforcement in China is unique. A patentee may choose between judicial and administrative remedies for patent enforcement, although in practice few patent owners rely on the administrative enforcement approach. One common issue, as patent owners and practitioners have often noted, is local patent offices do not have enough manpower and frequently use a mediation approach to resolve disputes.

In this fourth amendment, the State Intellectual Property Office of China (SIPO) seems to add significantly more utility to the administrative enforcement mechanism. In the 2015.12 Draft, the local intellectual property offices of provincial and municipal levels have jurisdiction to investigate and make determinations on patent infringement cases (article 3).

There has been some concern the expansion of administrative enforcement powers may expose companies to much bigger risks of frivolous patent lawsuits, including those filed by nonpracticing entities. Some people argue that China’s patent enforcement should be centralized into the hands of judges, rather than allowing patent disputes to be handled by patent offices across the country. Court judges openly raise concerns about the patent administrative enforcement system, which may become a separate patent court system outside the regular courts.

Design Patents

One of the most exciting changes in the proposed amendment relates to designs. SIPO proposes that China should allow partial designs to be patentable. If allowed, it would be a significant improvement. The scope of design patent is expanded from merely the design of a product to partial design of a product (article 2). This would further promote industrial designs, especially graphical user interface designs.

China plans to sign the Hague Agreement Concerning the International Registration of Industrial Designs, by which the protection term of a design patent is extended to 15 years. In addition, a domestic design patent application is entitled to enjoy a priority of six months, which gives foreign and domestic applications equal treatment. Industry experts have proposed that China should consider following the U.S. practice, giving a one-year grace period to patent applicants without imposing harsh conditions.

With respect to design infringement determination, the new Supreme Court rules will strive to provide clarity. For example, if a design patent involves a set of products, the accused product would be considered an infringement if it is identical with or similar to one of the designs in the set. If a design patent involves a product with changeable states, the accused designs must have all such states, which are either identical or similar. Graphical user interfaces are not covered by this rule.

What is particularly useful is the new court rules introduce a concept of “design space,” which refers to the extent of freedom of creation in designing relevant features. The bigger the design space, the less likely a consumer may notice “small” differences between an accused product and the patented design. For a product having very limited ways of designing (“small” design space), even small changes in the design may result in a noninfringement defense.

The fact that the proposed amendments to the Patent Law and the new court rules have substantially dealt with design patents reflects the increasing importance of design innovation.

Damages

Another significant improvement in the 2015.12 Draft relates to damages. Punitive damages of up to three times more for willful infringement are introduced. Statutory compensation is significantly increased from RMB 10,000–1,000,000 to RMB 100,000–5,000,000 (article 68), although the lower side RMB 100,000 is not meant to be a requirement. Considering that in practice the statutory compensation is adopted by a court in most patent infringement cases, the change in statutory compensation may be good news to patentees. Some small to medium enterprises raise a concern that statutory damages of RMB 100,000 may be burdensome and even unfair if the scale of infringement is small.

Similar to what we have seen in the China Trademark Law, the proposed amendment sets a mechanism regarding the burden of proof. After the infringement litigation is concluded, if the patentee tries its best to collect evidence on damages, a court may shift the burden of proof to the infringer to provide evidence, such as account books (article 68). The failure of compliance may result in the adoption of the plaintiff’s evidence in determining the damages. This provision regulates evidence concerning the profits of the infringer. Considering that in practice it is difficult for the patentee to collect evidence about the profits of the infringer, the proposed amendment shifts the burden of proof to the infringer. This is a very interesting development to watch.

Additionally, as it will take a few years to enforce the amended Patent Law, the new court rules propose similar ways to shift the burden between the litigants. If the patentee provides preliminary evidence about the profits of the infringer, the court may order the infringer to produce account books (article 27 of the new court rules).

Indirect Infringement

The China patent community has been discussing the indirect infringement liability in the Patent Law for the last two decades. In practice, some courts made some judgments concerning indirect infringement. For example, in 2006, the Shanghai Second Intermediate People’s Court held that manufacturing and selling molds dedicated to the infringing product was indirect infringement in the case concerning Chinese patent No. 94192808.X. In 2005, the Jiangsu High People’s Court affirmed indirect infringement for manufacturing and selling a key component dedicated to the infringing product involving Chinese patent No. 92112424.4. In 2001, the Beijing High People’s Court acknowledged the rule of indirect infringement in its local guidelines. However, none of these practices became law. In fact, the third amendment of the Patent Law in 2008 dropped the idea of indirect infringement, as judges and scholars believed it was premature to introduce such rules into the law.

However, SIPO seems intent on reviving this idea through the new draft. In the 2015.12 Draft, anyone who knowingly provides raw materials, intermedium, components, and equipment that are specifically designed for infringing a patent will bear liability with an infringer. Any party inducing others to infringe a patent also will bear liability with an infringer (article 62). This provision not only regulates indirect infringement clearly but also expands the scope of indirect infringement, and further may provide broader protection to patent holders.

Similarly, to combat online patent infringement, SIPO proposes that if an Internet service provider knows or should know an infringer uses its Internet service for patent infringement, but does not timely take any action to stop the infringement, the Internet service provider will bear liability with the infringer (article 63). The proposed rule is borrowed from the copyright law sector, where the Supreme Court has proposed very detailed rules. It is somewhat surprising that SIPO wishes to impose contributory liability in the online space in the patent law. Major Internet platforms such as Alibaba.com may strongly object to this.

The Supreme Court seems to push for endorsing indirect infringement rules as well. The new court rules provide that any party who, for commercial purposes, knowingly provides materials, devices, and components to others for their having committed the direct infringement should be liable. Both contributory liability and inducement infringement are covered. It seems clear here that the Supreme Court does not require that the direct infringer must be named as a codefendant in order to proceed with the indirect infringement claim. We expect to see more cases involving indirect infringement in the near future.

Standard Essential Patents

It is somewhat surprising that SIPO intends to deal with standard essential patents (SEPs) in the proposed amendment, as SEPs are generally considered part of the antimonopoly law. China’s various antimonopoly regulatory agencies are currently addressing SEP-related issues through their drafts of intellectual property (IP) misuse guidelines, which may not be finalized by the State Council until the end of 2016 or 2017. SIPO probably hopes to have its own footprint in this area and at the same time avoid most of the controversial issues.

In the proposed amendment, SIPO specifically adds that the exercise of patents must not hurt public interest or be used to eliminate or restrict competition in an unreasonable manner. When it comes to SEPs, SIPO proposes that if a standardization participant fails to disclose its SEPs, a default licensing commitment is presumed for such SEPs. The royalty rates are subject to negotiation or otherwise left to SIPO or the courts to determine. SIPO stopped short of referring to FRAND (fair, reasonable, and nondiscriminatory) in the amendments.

In comparison with what SIPO attempts to do with SEPs, the Supreme Court is more active in dealing with standards-related patent issues. One specific area is injunctive remedies. While the issue of “unwilling licensee” is often at the center of the debate whether SEP owners are entitled to injunctions, the Supreme Court seems to look at both sides. Under the new rules, the courts will look at (1) whether the licensor “intentionally” violates its FRAND obligations, which leads to failure in concluding the license; and (2) whether the licensee has no “obvious fault,” which appears to be close to a standard of gross negligence. No published decisions have been available to verify whether the courts have actually applied such rules or thinking behind decisions.

In determining whether the licensor “intentionally” violates FRAND, we suspect that the courts will focus on the royalty rate. The new rules seem to show that the Supreme Court is interested in stepping into licensing negotiation, which may not be such good news to the licensing parties. The same new rules allow either party to bring a lawsuit to ask the court to decide on licensing terms, including the royalty rate, if the negotiation fails. The new rules state that the courts will look at (1) the “degree of innovation” of such SEPs and the role of SEPs in the standards—reminiscent of the rule of apportionment, (2) technical fields, (3) the nature of the standards, and (4) how the standards are implemented and related to the licensing terms. We raised a question to a prominent judge who decided the Huawei v. InterDigital case as to whether the Chinse courts really want to be involved with licensing negotiations. The judge replied that he believes the court should do so if there is a sense of injustice in the negotiation. This answer seems to echo what the Supreme Court intends to do in the future.

Prosecution Estoppel

The proposed amendments to the Patent Law do not address the issue of prosecution estoppel, although the doctrine of estoppel has been widely used in practice. SIPO probably left this area to be handled by the courts.

In fact, the Supreme Court clarified the rules related to estoppel in a judicial interpretation issued in January 2010. The Supreme Court stated that if the patent applicant or patentee has abandoned a technical solution through amendment to claims and/or specification or making remarks during the prosecution or invalidation process, the People’s Court should not provide protection for the abandoned scope of protection. Soon after this, the court ran into a case where the litigants argued whether remarks or claims amendments made for the divisional applications should be counted in the scope of estoppel. The new court rules therefore responded to this change. Under the new rules, the written materials filed by the applicant or the patentee in the course of patent examination, reexamination, and invalidation; office actions; interview records; oral hearing records; effective patent reexamination decisions; and invalidation decisions are all counted.

The practical meaning is that a patent applicant needs to be mindful of the patent prosecution of the related patents in China. What is said in a divisional application may come back to hurt your enforcement of the parent patent.

Liability of Bona Fide Third Party

The current Patent Law provides an exception for a bona fide third party who uses, sells, or offers to sell infringing goods/methods under article 70. Any party who, for production and business purposes, uses, offers to sell, or sells a patent infringement product, without knowing that it was made and sold without the authorization of the patentee, will not be liable for damages if the party proves that the product is sourced from a legitimate channel. Such a bona fide third party must still stop using, selling, or offering to sell the infringing product.

The proposed Patent Law amendment retains the same rule. But what is interesting is that the Supreme Court’s new rule carves out a new exception. Those parties who use the infringing goods but paid reasonable consideration do not even need to stop the usage. This new exception arguably conflicts with the current Patent Law. It is still unclear whether the new rule is final in the resolution of the Supreme Court. The conflict signals to practitioners and patent owners about potential loopholes.

Service Invention

The controversial topic of service invention does not surface in the proposed amendment. In recent years, the issue of service invention remuneration has been heatedly debated. SIPO is currently working on the service invention regulations under which inventors must be compensated for their inventions through a statutory scheme, although the regulations allow the employers and employees to contract around. The ambiguities and uncertainties in the draft regulations make both international and domestic companies worry whether the contract-around approach will work at all.

The proposed amendment to the Patent Law went one step further by ensuring that employers owe a duty to compensate or remunerate inventors for inventions that are not service inventions by definition but have been agreed upon by the employees to belong to the employers.

On a related note, the proposed amendments give more freedom to university researchers to exploit their service inventions. As long as the ownership of service invention patents remains in the hands of the universities, the researcher-inventor may exploit the invention on his or her own or license it to others, subject to the agreements made with the universities. This is consistent with the pro-innovation policy as announced by China.

Conclusion

The Supreme Court Research Center released a report in mid-March about the IP case filings in 2015. What is striking is that patent lawsuits grew by 20 percent at the first instance, reaching up to 11,000 cases. In comparison, the unfair competition cases increased by 50 percent, most of which are related to Internet companies.

The data probably indicates some trend in the near future. Chinese firms definitely step up patent battles. To some extent, the amendments to the Patent Law are still very modest, and the entire process may easily take another two years. What is interesting is the way the Supreme Court uses judicial interpretations and other approaches to place new rules to guide litigants, as demonstrated by the analysis of the new court rules in this article. Being designated to pilot judiciary reform programs, the Beijing Intellectual Property Court already calls for research on a “case precedent” system, which somehow borrows from the common law doctrine of stare decisis. The judges cite prior cases in their reasoning in the decisions. Although none of us anticipates that China will adopt a case law system, IP judges will definitely try to lead the reform trend by emphasizing the role of precedents. The international IP legal community may want to pay closer attention to what Chinese IP judges will do in some high-stakes cases in coming years.