Patent Strategies for Foreign R&D companies

December 17, 2008
By Junfeng Tian, Unitalen Attorneys at Law

In recent years, with the sustained rapid growth of the Chinese economy and the in-depth reform and opening-up of the country, the Chinese market has witnessed a rapid expansion, and its outstanding status in the global marketplace has become ever prominent. Numerous multinational companies, such as Microsoft, IBM, Lucent, Hewlett-Packard, Samsung, Philips, Motorola, Nokia, have established their R & D centers in China, respectively. Up to now, the number of foreign companies that have set up their R & D centers in China has exceeded 1000 in total.

Most of these companies are ranking world top 500. They established their R & D centers in China in order to meet demands for localization of products, technologies and services, and to promote their enterprise image as well, while sharpening their competitive edge in the local market by exploiting the rich human resources of technical professionals and taking advantage of the low capital costs. This has become an important part of their localization strategy.

Although these R & D centers are playing an ever-important role in technological innovation and making great achievements thereof, they have encountered all sorts of problems in the process of implementing their patent strategies so as to better protect their R & D achievements. One of the outstanding problems is how to transfer abroad their technological breakthroughs accomplished by their R & D centers in China.

Regarding this issue, there have been provided relevant provisions in the Chinese Patent Law, the Chinese Foreign Trade Law, etc.

Article 20 of the Chinese Patent Law stipulates that where a Chinese entity or individual intends to file an application in a foreign country for a patent for its or his invention-creation made in China, it or he shall file first an application for patent with the patent administrative organ under the State Council and, shall appoint a patent agency designated by the said organ to act as its or his agent, and shall abide by the prescriptions of Article 4 in this law. A Chinese entity or individual may, according to the international treaties concerned to which China is a party, file an international application for patent for its or his invention-creation. The applicant for the international application should abide by the provisions of the preceding paragraph.

According to the above-mentioned provision, a patent application for the R & D achievements made in China should be filed first in China, or filed first as a PCT application, in which at least China should be designated, before the Chinese Patent Office as the receiving offices, prior to the filing of a patent application in a foreign country in the name of the Chinese entity or individual who has made the invention.

A foreign R & D center in China is an enterprise established in the Chinese territory according to the relevant Chinese laws, and therefore is a Chinese entity as stated in the patent law and should be regulated by the above-mentioned provision.

Article 10 of the Chinese Patent Law stipulates that the patent application right and the patent right can be assigned. An assignment, by a Chinese entity or individual, of the patent application right, or of the patent right, to a foreigner must be approved by the competent authorities designated by the State Council.

The above-mentioned provision covers only the patent application right and the patent right, which are bestowed upon only after the filing of a patent application.

Article 8 of the Chinese Patent Law stipulates that for an invention-creation jointly made by two or more entities or individuals, or made by an entity or individual in execution of a commission for another entity or individual, the right to apply for a patent belongs, unless otherwise agreed upon, to the entity or individual which made, or to the entities or individual which jointly made, the invention-creation. After the application is granted, the entity or individual that applied for it shall be the patentee.

The right to apply for a patent mentioned in Article 8 means the right to apply for a patent for the R & D achievements. According to the above-mentioned provision, if a R & D contract is signed between the entity or individual which is assigned to carry out the R & D research projects and its entrusting party, and the contract indicate that the right to apply for a patent belongs to the entrusting party, then the right to apply for a patent shall belong to the entrusting party.

Therefore, prior to the R & D activities, i.e. before the technological achievements take shape, if a R & D contract is signed between the foreign R & D center in China and its parent company, indicating that the parent company is entitled to the right to apply for a patent for the invention made by the R & D center in China, then the R&D achievements can be transferred to its parent company, because such a contract is not related to the patent application right and the patent right, thus staying clear of the binding force of the present Chinese Patent Law. In practice, it is just in this way that many foreign companies have already transferred the R&D achievements made by the R&D centers in China to their parent companies.

The above-mentioned situation has aroused wide attention of the parties concerned. As can be seen from the discussion of the third revision of the Chinese Patent Law, this issue has become a heatedly debated topic as apparently reflected in the Draft Opinion on the Third Revision of the Chinese Patent Law (hereinafter referred to as “the first Draft”) and the Draft Opinion on the Third Revision of the Chinese Patent Law submitted to the National People’s Congress (hereinafter referred to as “the second Draft”).

A brief analysis of the amendments of some related provisions in the above two versions is provided as follows.

The first Draft
Article 10. The right to apply for a patent, the patent application right and the patent right may be assigned. An assignment, by a Chinese entity or individual, of the right to apply for a patent, of the patent application right or of the patent right to a foreigner, a foreign enterprise or other foreign organizations must go through relevant procedures according to laws and administrative regulations.

In the amendment of Article 10, the “right to apply for a patent” is added in parallel to the patent application right and the patent right, and the “foreigner” is further clarified as a foreign individual, a foreign enterprise or other foreign organizations, thus broadening the range of the assignees of the rights. The legislative purpose here is to emphasize that, whether before the filing of the patent application, after the filing of the patent application but prior to the grant of the patent right, or after the grant of the patent right, the above-mentioned rights must be subject to the binding force of relevant Chinese laws and regulations, so long as they are transferred from China to some one in a foreign country, be it a foreign individual or a foreign enterprise. The laws and regulations referred hereto include the Foreign Trade Law, etc., which is to be elaborated later on.

Article 20. Where any entity or individual intends to file an application in a foreign country for a patent for its or his invention-creation made in China, it or he shall file first an application for patent with the patent administrative organ under the State Council and shall abide by the prescriptions of Article 4 in this law.
Any Chinese entity of individual may, according to the international treaties concerned to which China is a party, file an international application for patent for its or his invention-creation. The applicant for the international application should abide by the provisions of the preceding paragraph.

In Article 20, the original term “Chinese entity or individual” is amended to “any entity or individual”, and the term “domestic” is amended to “China”. Such an amendment has broadened the coverage of the former R & D body. The legislative purpose here lies in that as long as the R & D achievements are achieved in the Chinese territory, the filing of a patent application in a foreign country must be made in conformity with the preceding provision, i.e. filing first a patent application in China, no matter whether the R & D body belongs to China or not.

Article 64. Where any entity or individual, in violation of the provisions of Article 20 of this Law, unauthorizedly files first in a foreign country an application for a patent for an invention-creation made in China, its or his patent application for the invention-creation filed in China shall not be granted a patent right. In case of divulging an important secret of the State, it or he shall be prosecuted for the criminal liability according to the law.

According to the current Article 64, where a person, in violation of the provisions of Article 20 of this Law, unauthorizedly files in a foreign country an application for a patent that divulges an important secret of the State, he shall be subject to disciplinary sanction by the entity to which he belongs or by the competent authority concerned at the higher level. In other words, only if he files in a foreign country an application for a patent that divulges an important secret of the State, shall he be subject to disciplinary sanction. If his action does not divulge an important secret of the State, he shall not be punished under such disciplinary sanction.

According to the above-mentioned Draft Opinion, where any person, be it a Chinese individual or entity or a foreign individual or entity, in violation of the provisions of Article 20 of this Law, unauthorizedly files first in a foreign country an application for a patent, he shall be subject to penalty, i.e. his patent application for the invention-creation filed in China shall not be granted a patent right, no matter whether he divulges an important secret of the State or not. Thus the enforcement of penalty is intensified in the sense of the Patent Law.

Second Draft
Article 10. The patent application right and the patent right may be assigned. An assignment, by a Chinese entity or individual, of the patent application right or of the patent right to a foreigner, must go through relevant procedures according to laws and administrative regulations.

In the amendment of Article 10, the original expression “must be approved by the competent authorities designated by the State Council” in the current Patent Law is amended to “must go through relevant procedures according to laws and administrative regulations”, which emphasizes that, the transfer of the rights must be subject to the binding force of relevant Chinese laws and regulations. The laws and regulations referred hereto include the Foreign Trade Law, the Regulations of the People's Republic of China on Technology Import and Export Administration and the Administrative Rules for Technologies Prohibited and Restricted from Export, which are to be elaborated later on.

Article 20. Any entity or individual may file an application in a foreign country for a patent for its or his invention-creation made in China, subject to the secrecy examination by the patent administration department under the State Council.
Any Chinese entity of individual may, according to the international treaties concerned to which China is a party, file an international application for patent for its or his invention-creation. The applicant for the international application should abide by the provisions of the preceding paragraph.

In Article 20, the original term “Chinese entity or individual” is amended to “any entity or individual”, “domestic” is amended to “China” and the expression “it or he shall file first an application for patent with the patent administrative organ under the State Council and shall abide by the prescriptions of Article 4 in this law” is amended to “subject to the secrecy examination by the patent administration department under the State Council”. Such an amendment has broadened the coverage of the former R & D body and clarified the territorial scope of the invention-creation made, while cancelled the regulation that the application for patent shall first be filed with the patent administrative organ under the State Council.

The legislative purpose here lies in two points: the first point is that any entity or individual may file an application for patent directly in a foreign country for its or his invention-creation made in China, without filing first with the patent administrative organ under the State Council in China; the second point is that as long as the R & D achievements are achieved in the Chinese territory, the filing of a patent application in a foreign country must be subject to the secrecy examination by the patent administration department under the State Council, no matter whether the R & D body belongs to China or not. However, according to Article 4 of the current Patent Law, where an invention-creation for which a patent is applied for relates to the security or other vital interests of the State and is required to be kept secret, the application shall be treated in accordance with the relevant prescriptions of the State, which means that under the current Patent Law, the application for a patent cannot be filed directly in a foreign country without filing first with the patent administrative organ under the State Council in China, but it is not required to perform secrecy examination for all the applications to be filed in foreign countries, it is required to perform secrecy examination only when the application relates to the security or other vital interests of the State and is required to be kept secret. While according to the above amendment, all the applications to be filed in foreign countries are subject to secrecy examination. Thus, the act of filing an application in a foreign country is further regulated in the sense of the Patent Law.

Article 64 in the second Draft remains unchanged. Corresponding to the above amendment to Article 20, however, Article 64 stipulates that where any entity or individual, in violation of the provisions of Article 20 of this Law, files in a foreign country an application for patent that divulges an important secret of the State, it or he shall be subject to disciplinary sanction by the entity to which he belongs or by the competent authority concerned at the higher level, where a crime is established, the person concerned shall be prosecuted for his criminal liability according to the law, which means that although any entity or individual may file an application for patent directly in a foreign country for its or his invention-creation made in China, it or he shall be subject to disciplinary or even criminal liability, if secrecy examination is not performed by the patent administration department under the State Council and thus an important secret of the State is divulged.

As can be seen from the proposed amendments to the provisions both in the first and the second Draft Opinion on the Third Revision of the Chinese Patent Law, the legislative purpose apparently shown herewith is to further regulate acts of filing the patent application for the invention-creation made in China and to make all relevant measures taken thereby more concrete and more accurate, though they are not yet finally approved with the examination of the legislative body.

Regarding this issue, other than relevant provisions of the Chinese Patent Law, the Foreign Trade Law and the Regulations of the People's Republic of China on Technology Import and Export Administration also contain the corresponding regulations. Based on this, the Administrative Rules for Technologies Prohibited and Restricted from Export further specify more regulations in detail.

Article 2 of the Regulations of the People's Republic of China on Technology Import and Export Administration stipulates that the technology import and export as referred to in these Regulations means acts of transferring technology from outside the territory of the People's Republic of China into the territory of the People's Republic of China or visa versa by way of trade, investment, or economic and technical cooperation.

The acts mentioned in the preceding paragraph include assignment of the patent right, assignment of the patent application right, licensing for patent exploitation, assignment of technical secrets, technical services and transfer of technology by other means.

As can be seen, the objective coverage defined in the Regulations is much broader than that of the current Chinese Patent Law. Apart from the assignment of the patent right and assignment of the patent application right, it also includes licensing for patent exploitation, assignment of technical secrets, technical services and transfer of technology by other means. The objects of transfer include the patented technology as well as the non-patented technology.

According to the Regulations of the People's Republic of China on Technology Import and Export Administration, China classifies technologies related to export of technology into 3 kinds: prohibited technology, restricted technology, and freely exportable technology, among which prohibited technology and restricted technology are published in the Catalogue for Technologies Prohibited and Restricted from Export, which is regularly updated.

As can be noted from Article 31, Article 32, Article 33 and Article 39 of the Regulations, technology prohibited from export shall not be exported. Technology restricted from export shall be subject to license administration, and shall not be exported without a license. Freely exportable technology shall be subject to the contract registration administration.

Article 46 stipulates the legal consequences of violating the regulations on export of technology: where a technology prohibited or restricted from export is exported without approval, it or he shall be prosecuted for criminal liability according to the provisions for the crimes of smuggling, illegal business operation, or divulging national secrets or other crimes under the Criminal Law. Where such export is not so serious as to be prosecuted for criminal liability, penalty shall be imposed according to the circumstances pursuant to the relevant provisions of the Customs Law, or the competent foreign trade department under the State Council issues a warning against it, confiscates illegal income and/or imposes a fine one to five times the illegal income. The competent foreign trade department under the State Council may revoke the foreign trade business license.

As can be seen, the legal consequences of the preceding provision involve smuggling, illegal business operation, or divulging national secrets or other crimes under the Criminal Law and the Customs Law. These penalties are much more severe than those stipulated in the relevant regulations of the Chinese Patent Law.

In summary, at present, if a foreign R & D center in China intends to transfer R & D achievements to its foreign parent company by signing an R & D contract with its parent company, indicating the right to apply for a patent for the R & D achievements belongs to its parent company, it or he can stay clear of the regulations of the Chinese Patent Law without violating the current Chinese Patent Law.

However, the above first Draft further specifies and restricts the transfer of the right to apply for a patent. If the above-mentioned amendments to the related provisions in the first Draft are finally approved by the National People’s Congress, then the acts of having an R & D contract signed between the foreign R & D center in China and its parent company for transferring the right to apply for a patent, and thus the patent application right and the patent right to a foreign country shall further be restricted. This will inevitably affect the foreign companies and their R & D centers in China with a great impact, thus invoking a major binding force on their acts.

on the other hand, although the above second Draft does not further specify and restrict the transfer of the right to apply for a patent, it restricts the above acts by adding the regulation of “subject to the secrecy examination by the patent administration department under the State Council” into Article 20.

Meanwhile, the above-mentioned practices shall be restricted by the current Foreign Trade Law, the Regulations of the People's Republic of China on Technology Import and Export Administration and the Administrative Rules for Technologies Prohibited and Restricted from Export.

Therefore, in a strict sense, if a foreign company and its R & D center in China intends to transfer to its parent company the R & D achievements, which happens to fall into the restricted technologies listed in the Catalogue for Technologies Prohibited and Restricted from Export, then the practice with smallest risk possible, in other words, the most secure and feasible practice is for them to file a patent application while subjecting to a secrecy examination by the patent administration department under the State Council, and at the same time to apply for licensing of technology export with the competent department concerned under the State Council (the Ministry of Commerce of P.R. China) according to the relevant laws and administrative regulations.

Should the foreign companies and their R & D centers in China fail to follow the preceding procedures, they will certainly run the risk of paying the penalty for violation of the Chinese laws, though up to the present, there has been none of such cases adjudicated by the Chinese courts at various levels.

　

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