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Intellectual Property Rights in China: Learning Through Two Case Studies

HKUST Full-Time MBA, Class of 2017 Kazuhiro Matsumoto

Table of Contents

Section 1: Introduction: Patent Applications in China ............................................. 2

Section 2: Intellectual Property Rights in China ........................................................ 3

Section 3: Case Study 1 – Schneider vs. Chint ........................................................... 5

Section 4: Case Study 2 – Apple vs. Proview ............................................................ 6

Section 5: Conclusion ............................................................................................... 8

Acknowledgements .................................................................................................. 9

References ................................................................................................................ 9

Executive Summary The Chinese government has strengthened intellectual property rights in the wake of

economic growth and the increase of investments in R&D in China. Because of this, it is more likely for domestic companies to file lawsuits against foreign companies. Therefore, it is imperative for foreign companies to understand intellectual property rights in China. For this purpose, we have considered their essence through two case studies. As a result, we have come to the conclusion that it is important to take advantage of utility model patents and design patents for quick actions, as well as invention patents, and to do sufficient research about clearance and due diligence before entering China as a new market. Moreover, in the case of patents, the scope of inventiveness will be weighed more heavily than the scope of novelty in the future, because of amendments to Chinese patent law in 2009.

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Section 1: Introduction: Patent Applications in China

As the economy grows in China, the number of patent applications in China has been increasing. In 2011, China surpassed the US to become the world’s leading filer, as shown in Fig. 1. In 2014, the number of patent applications in China was more than 920,000. The number shown in Fig. 1 includes only invention patents. If utility model patents are also taken into account, it turns out that the number of patent applications in China is incomparably large, as shown in Fig. 2: in 2014, the number of both combined was almost 1.8 million, which three times larger than that of the US1. The reason for this is that the Chinese government has encouraged Chinese entities to file patents by providing financial incentives. In addition, foreign companies have filed patents more often to hedge against the risks of infringement by Chinese entities [1].

The surge in patent applications in China mainly results from the increase of applications from domestic firms. In 2012, almost 80% of China’s patents were awarded to domestic applicants. In contrast, fewer than 50% of US patents were awarded to US applicants [2]. Such a high ratio of domestic applicants in China has arisen from a national strategy in China. According to the country’s National Patent Development Strategy (2011-2020), China has set a goal of having 2 million patent applications in 2020 [3].

Internationally as well as domestically, Chinese companies’ patents are prominent. Figure 3 shows the top 10 companies of international patent applications filed under the Patent Cooperation Treaty (PCT) in 2014 [4]. Chinese telecom giant Huawei took the first position by overtaking Panasonic. It was followed by Qualcomm, US-based chipmaker, and by ZTE, the Chinese competitor to Huawei. These top three companies have similar patent portfolios. They mainly consist of digital communications, computer technology, and telecommunications [5].

Notably, Chinese companies have invested in R&D more and more. Huawei increased R&D spending by more than 25%, bringing it up to $4.7 billion in 2012, and ZTE spent $1.4 billion on R&D in 2012. China spends almost $300 billion, which is second only to the US. It is estimated that the R&D spending in China will overtake that of the US by 2023 [2].

Therefore, along with an increase in R&D expenditure, the number of domestic patent applications in China and the number of international patent applications by Chinese companies will increase in the future. Thus, it becomes more important to understand intellectual property rights in China in order to compete with Chinese companies. Without knowing them, foreign companies might begin to incur huge losses. For this purpose, this paper focuses on them and considers two intellectual property case studies in order to help understand the essence of intellectual property rights in China.

1 Note that the US does not have utility model patents, only invention patents. For comparison, data in China and the US are shown together in the same graph. As for the notions of invention patents and utility model patents, refer to Section 2.

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Section 2: Intellectual Property Rights in China

Since 1979, intellectual property rights in China have been protected. They consist of three areas: patents, trademarks, and copyrights. In this paper, we focus on trademarks and patents. As for trademarks, in 1983, the Chinese government promulgated the "Rules for the Implementation of the Trademark Law.” Through several amendments, in 2002 the Chinese government again revised it and renamed it the "Regulations for the Implementation of the Trademark Law."

As for patents, in 1984, Chinese patent system became modernized under Deng Xiaoping’s Economic Reform Policy [6]. The first patent law of the People’s Republic of China, which set the foundation for China’s patent system, was promulgated in 1984 and came into force in 1985. The

Figure 1 Number of invention patent applications: China, EU, JP and US.

Source: WIPO statistics database. Last updated: December 2015

Source: [4] and therein

Figure 3 International patent applications filed under the Patent Cooperation Treaty

Figure 2 Number of applications including invention patents and utility model patents: China, JP and US.

Source: WIPO statistics database. Last updated: December 2015

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first patent law was European [7]. In 1992, the Chinese and American governments reached an agreement called the “Memorandum of Understanding Between the Government of the People’s Republic of China and the Government of the United States of America on the Protection of Intellectual Property,” which required China to amend its patent law. Afterwards, through three amendments to the law, China acceded to join the World Trade Organization (WTO) in 2001, which means China’s patent office has a partnership under the Patent Cooperation Treaty (PCT).

The patent system in China is a first-to-file system which holds that the patent right is given to the first person to file a patent application for protection of that invention, regardless of the date of the actual invention. The patent law contains three areas: invention patents, utility model patents, and design patents. Invention patents are granted for new technical solutions or improvements to a product or a process; utility model patents are granted for new technical solutions proposed for the shape and structure of a product, or a combination thereof, which are fit for practical use; and design patents are granted for a new design of the shape, pattern, or the combination thereof, or the combination of the color with the shape and patterns, which are rich in aesthetic appeal and are fit for industrial application [8].

As some countries do not have utility model patents, we will briefly explain them. Table 1 shows the differences between patent systems among major patent offices. The US and the UK do not have short-term patents corresponding to utility model patents in China. It is also notable that mainland China and Hong Kong have independent patent offices, leading to different patent systems. In terms of the period of protection and substantive examination, it is recognized that utility model patents (short-term patents) are simpler ones, though only Korea has a substantive examination. In fact, most of the utility model patents in China consist of a few pages. Normally, it takes only a few months after the filing date for utility model patents to be granted [18].

For both invention patents and utility model patents, the requirements for the right to be granted are novelty, inventiveness, and practical applicability [9]. Novelty means that the same

Table 1 Differences between patent systems among major patent offices

Source: [19]

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invention or utility model has not been publicized in China or abroad before the date of filing2. Inventiveness means that, in terms of technology before the date of filing, the invention has prominent substantive features and represents notable progress, and that the utility model has substantive features and represents progress. Practical applicability means that the invention or utility model can be made or used industrially, and can produce effective results.

For design patents, the requirement for the right to be granted is novelty. Any patentable design must not be identical or similar to any designs which, before the date of filing, have been publicized in China or abroad.

Recently, e-commerce business has been developing. Therefore, software-related patents will be more important in the future. However, as software itself is insubstantial, it is controversial to grant a patent to a software application. Under Chinese patent law, software itself cannot be patented, but it is possible to patent it if the software is combined with a computer as a tangible substance, or it is a part of process to provide a technical solution to a problem in an industrial field [20]. On the other hand, in the US, software can be patentable because US patent law does not exclude software or business model methods [21]. When we file a patent application in several countries under the PCT, we must be careful to write a patent specification for the invention. Otherwise, even if it is a great invention, it will not be patented.

Section 3: Case Study 1 – Schneider vs. Chint

In 2006, the Chinese company Chint Co. Ltd filed a patent infringement action against the Chinese subsidiary of Schneider Electric of France that Schneider was infringing upon a utility model patent (ZL97248479.5) granted to Chint in 1999 [10-11]. Schneider refuted that they did not infringe because they held a patent, but eventually the case was decided against them, and Schneider paid Chint RMB 157.5 million (USD 23 million).

This utility model patent of Chint was related to electric circuit breaker technology. In its defense, Schneider argued that it had used this technology for more than 15 years in numerous countries. In addition, Schneider claimed, to the Wenzhou Intermediate People’s Court, where the legality of this action was in dispute, that the alleged infringing circuit breakers were designed and produced by implementing an earlier Chinese patent held by Schneider. The Court concluded that the prior art submitted by Schneider was insufficient to invalidate the utility model patent of Chint because the earlier patent of Schneider did not describe some of the features present in the alleged infringing products, which were disclosed in the utility model patent of Chint. Therefore, the Court rejected Schneider’s plea, reasoning that the earlier patent did not disclose enough to deny the Chint patent. Subsequently, in September 2007, the Wenzou Court issued an injunction against Schneider, and awarded RMB 334.8 million (USD 49.2 million) in damages to Chint. Schneider objected to the decision and appealed to the Zhejiang Province High Court, but before the appeal was concluded, in April 2009, Schneider and Chint announced a global

2 The amendment to Chinese patent law in 2009 changed the notion of novelty. Under the amended law, an absolute novelty standard is adopted, where the public use or sales outside of China can reject novelty.

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settlement with a condition of Schneider paying Chint RMB 157.5 million (USD 23 million).

One of the reasons why Schneider lost the case was that the case was held under Chinese patent law before the amendment. The patent law before the amendment in 2009 did not recognize prior use or sales outside of China as proper prior art. The Chinese government amended the patent law to adopt the absolute novelty standard, in which the prior use or sales outside of China are to be taken into account as proper prior art. This amendment took effect in October 2009. However, Schneider could not enjoy this update to patent law during the dispute. If the amended law had been applied to this case, the action from Chint would have been rejected under the fact that Schneider had had public use outside of China as prior art. This amendment in 2009 will be meaningful in the future for foreign companies.

A lesson in this case study is that foreign companies should not ignore utility model patents as a low-cost and quick method to build a patent portfolio in China. Although utility model patents as well as design patents give a shorter duration protection than invention patents do, these patents are not substantively examined, and are issued within a year from filing. Thus, when these patent rights are granted, the patentee can take infringers to court. In a sense, these utility model patents and design patents enable patentees to take quick action from both viewpoints, offense and defense. Under the amended Chinese patent law of 2009, an applicant can simultaneously file both an invention patent and a utility model patent for the same invention. A strategy is to file both at first and to wait for the invention patent to be granted after the utility model patent is granted. As soon as the invention patent is granted, the utility model patent is replaced with it, resulting in a 20-year protection for the invention3.

Section 4: Case Study 2 – Apple vs. Proview

In 2012, Apple Inc paid USD 60 million to “唯冠科技:Proview Technology (Shenzhen) Co., Ltd.

(Shenzhen Proview),” in order to settle the dispute over the trademarks registered by Shenzhen Proview in China [12-14].

This dispute goes back to 2010, when Apple sued Shenzhen Proview because Apple had already purchased the trademarks registered by Shenzhen Proview. This case is a little complicated. In order to understand the details of the case, we have to know that Shenzhen Proview and ”唯冠電子: Proview Electronics Co., Ltd. (Taiwan Proview)” are sister companies,

which are owned by a listed company in Hong Kong, “唯冠国際:Proview International Holdings

Limited.”

In 2006, Apple realized that Taiwan Proview had registered the trademark of “IPAD” in several countries, including China, in 2000 while it was planning to launch the tablet terminal “iPad.” At that point, Apple bought the global rights to use the name of “IPAD” from Taiwan Proview for $55,000 (£35,000) under the guise of a UK-based company named IP Application

3 The dual filing strategy works because the utility model patent is used not only as a supplementary protection during the pending of invention patent application, but as an alternative protection if the invention patent application is rejected [18]. In other words, the utility model patent is still effective after the rejection.

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Development, the abbreviation of which is IPAD4 [15]. However, Apple noticed later that in China, not Taiwan Preview but Shenzhen Proview owned the trademarks of IPAD (No. 1590557) and iPAD (No. 1682310), which were both registered in 2001 for a desktop terminal with touch-screen display called the Internet Personal Access Device, or IPAD (See Figure 4) [13-14]. It appealed that its agreement with Taiwan Proview included the rights in mainland China, as well. Thus, it sued Shenzhen Proview in 2010, claiming the ownership of the trademarks, but Shenzhen Proview refuted that it had the ownership, and Apple’s assignment agreement with Taiwan Proview had had nothing to do with Shenzhen Proview. Eventually, the appeal from Apple was rejected in the Shenzhen Intermediate Court.

Apple raised an objection and appealed to the High Court of Guangdong Province [16]. Eventually, the High Court of Guangdong Province announced in July 2012 that both companies had reached a settlement agreement on June 25, and Apple paid the money.

Although USD 60 million is a substantial amount of money, it was worth paying, considering that China was a booming market and Apple could afford to pay, given that it had more than $100 billion in cash and investments. The iPad case hampered sales of iPads made by Apple, because before the agreement, Shenzhen Proview applied to Chinese customs to block shipments of the iPads in and out of China. Thus, the settlement must have been great news for Apple.

We can learn from this case that the first-to-file principle is important in terms of trademark registrations in China. Although some people say that Shenzhen Proview is a trademark squatter, we cannot always say so, because Shenzhen Proview had already started to use the “IPAD” mark

4 In 2010, IP Application Development sold the rights to Apple for £10.

Figure 4 Trademarks registered by Shenzhen Proview. Left: IPAD (No. 1590557) and Right: iPAD (No. 1682310).

Source: Cited from [14].

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in 1988, and it registered the trademark in China in 2001 before Apple developed the iPad (it is said in 2002) [17]. Thus, it seems convincing that Shenzhen Proview was entitled to claim against Apple. This case was the result of Apple’s mistake. Apple made the big mistake of not making a sufficient clearance investigation in China. Mainland China was the most important market for Apple. Nevertheless, it did not investigate Chinese trademarks fully enough, but just focused on Taiwan Proview. This case tells us that when entering a new market, clearance and due diligence research is indispensable.

Section 5: Conclusion

With the support of the Chinese government, targeting 2 million patent applications in 2020, the number of patent applications in China has been increasing. In order to protect domestic technologies in China, the Chinese government has developed intellectual property laws. While the development of laws brings benefits to crack down on copycats, there is a downside for foreign companies that they are likely sued by domestic companies. In this paper, we have reviewed Chinese intellectual property rights, which use a first-to-file system, and considered their essence through two case studies: Schneider’s case and Apple’s case.

In the former case, Schneider was sued by Chint because one of Schneider’s products infringed upon a utility model patent granted to Chint. The point was that Schneider had already used the product outside of China and registered an invention patent in China, which did not describe some features present in the allegedly infringed product, but the utility model patent of Chint did. While foreign companies tend to consider that utility model patents are not as useful as invention patents, this case shows that utility model patents are effective in China. In addition, on those days before the amendment of Chinese patent law in 2009, Schneider could not use this fact as prior art to invalidate the utility patent of Chint. Considering the consequences of this, the speed with which a patent can be granted and the scope of novelty for invention should be important for foreign companies to consider in making patent portfolios. In the future, the scope of inventiveness instead of the scope of novelty will be paid attention to because of the amendment to Chinese patent law in 2009.

In the latter case, Apple lost a lawsuit against Shenzhen Proview that alleged infringement of the iPad trademarks. Apple purchased the global rights to use the name of trademark “IPAD” from Taiwan Proview in 2006. However, Apple could not use the name in mainland China, which was one of the most important markets for Apple, because not Taiwan Proview but Shenzhen Proview owned the trademarks of IPAD and iPAD, and a court announced that the assignment agreement of Apple with Taiwan Proview was not effective in mainland China. Apple eventually made a settlement agreement with Shenzhen Proview, and was able to use the name of iPad and continue to sell iPads in China. The lesson from this case study is to remember that China adopts the first-to-file principle in trademarks as well, and to make sufficient clearance and due diligence research when entering China as a new market.

Following economic growth and the increase of investments in R&D in China, it is more likely for domestic companies to file lawsuits against foreign companies. In order to deal with this situation, foreign companies will require more expeditious actions. For this purpose, it is

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important to take advantage of utility model patents and design patents, as well as invention patents, while making a research of competitors.

Acknowledgements

The author would like to express his sincere thanks to Dr. Theodore Clark for valuable comments on intellectual property laws.

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[13] “Apple Pays Proview $60m to Resolve IPad Trademark Dispute,” Bloomberg, July 2012.

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