Thursday, March 18, 2010

Are Statutory Compensation Rules For Inventors Scary?

In the Wall Street Journal (WSJ) Asia of March 18, 2010, Andrew Browne and Jason Dean wrote an interesting article called 'Foreign businesses sour on China'.

IP Dragon was happy to see that patent law in China was on the front page and page 17 of the WSJ Asia. The authors of the article assert that China is getting more nationalistic in its business policies, therefore discriminatory toward foreign businesses. Messrs. Browne and Dean's concerns might be justified. However, when they use China's legislation on compulsory licensing and the remuneration for inventors, they do not give good examples of a China that is favouring its domestic entities.

Messrs. Browne and Dean wrote: "Patent rules imposed Feb. 1 threaten to increase costs in China for foreign innovators in industries such as pharmaceuticals, and let authorities force foreign drug companies to license production to local companies at state-set prices."

The first half of the sentence is not about compulsory licensing, because if that scenario manifests itself, the costs of production will not increase, but the profits will decrease. The authors probably mean with the first half of the sentence the 'statutory compensation rules', with which they deal later, see below.

The second part of the sentence is about compulsory licensing. Articles 48-57 Patent Law 2008 promulgate this right of emergency of the state. When a patentee has not exploited his patent within three years or when the act of the patentee is harming competition, the State Intellectual Property Office (SIPO) can grant a compulsory license to exploit the patent. In case of a national emergency or any extraordinary state of affairs, SIPO can grant a compulsory license. The articles 73-75 Implementing Regulations 2010 give further rules for the grant of a compulsory license. China signed the Agreement on Trade-related Aspect of Intellectual Property Rights (TRIPs) and Public Health (Doha Declaration) in 2001 and the Decision on the Interpretation of Paragraph 6 of the Doha Declaration in 2003 to establish legislative and administrative frameworks to allowing compulsory licensing for export purposes, in order to help other countries that lack the capabily to manufacture medicines.

"The new patent rules providing for what is called compulsory licensing are not unique to China. But China's pharmaceuticals industry is dominated by state-owned firms, and Western lawyers worry the rules will favor them."

Indeed, compulsory licensing is not unique to China. In fact, China never granted any compulsory licensing. But, I understand messrs. Browne and Dean's concern that it might be easier for SIPO to target a foreign patentee than a patentee that is a state-owned company. But since we have no data on this, it cannot be proven.

Then directly after that the authors write: "One provision requires companies to pay Chinese employees at least 2 % of profit derived from their inventions in China unless the employees explicitly waive that right.

I have some troubles with this sentence:
  • First, this is not an example of an excess of compulsory licensing.
  • Secondly, the sentence could be read as if employees, who are not inventors, need to get 2 percent of the profit derived from inventions of the entity.
  • Thirdly, it is not a question of whether employees waive their rights or not. According to rules 76-78 Implementing Regulations of the Patent Law 2010 it is a question of whether the employers want to put in the contract with their employees that if they invent anything what their reward and remuneration will be. Only if they don't, the statutory compensation rules will kick in. Not so strange since article 16 Patent Law 2008 obligates employers to give the inventors reasonble remuneration.
  • Fourthly, both Chinese entities and foreign companies in China have to abide by this rule. Articles 74-77 Implementing Regulation of the Patent Law 2001 already gave statutory compensation rules, but those were limited to state-owned enterprises/institutions. I think it is nothing more than fair that the inventors of all entities are compensated for their inventions, innovations and designs. The statutory compensation rules are a good way to press companies to include invention rewards and remuneration into the contracts with their employees.


Mark C. said...

I had similar concerns about this article.
Inventor compensation schemes for employees are not CL (compulsory licensing) regimes. However they are common in some civil law countries, so they should not even be "shocking" to IP lawyers.

I agree with the general proposition that China has never had a CL to date - under the patent law a CL involves a SIPO-driven process that satisfies certain statutory criteria. However, there has been at least one instance where the court has declined to award damages or an injunction for patent infringement in a standardization matter, and another case where high damages were awarded in lieu of an injunction (the Wuhan flu gas desulfurization case). Moreover, there are robust possibilities for CL's under the revised law.

If the authors wanted to point out areas of concern, they could have focused on China's naked "Bolar" provision in its patent law, or the security review requirements. They could also point to government subsidies for patent filings and the effect on patent quality, the lack of deterrence for abusive patent litigation or for filing "fake" patents, high damages for difficult to invalidate utility model patents, standardization rules that could result in forced licensing, and other issues - not all of which are in the patent law or the implementing regs.

Mark Cohen

IP Dragon said...

Mark thank you for your comment.

I agree with you that there is reason for concern about the security examination of article 20 Patent Law 2008. And it is probably not conducive for innovation in China, nor an incentive for foreign direct investment. However, in this article it was about whether the amended patent law was discrimatory toward foreign firms, and I think that Chinese firms also can have problems with it. The rumour is that SIPO is estimating that 3 percent of all inventions will not be allowed to be filed for a foreign or international patent application.

About the "naked" Bolar exemption (so only the safe harbor provision) of 69.5 Patent Law 2008, I am not sure whether it is bad that there is no possibility of extending the term of patent protection. I am not sure whether the Chinese FDA has long delays. And 20 years seem long enough to get a return on the investments of innovators. And otherwise generic producers have to wait longer, which might be bad for competition. And again, in principle, the law applies in the same way to Chinese and foreign companies in China.

What do you think?