China’s Patentability Reform and Increasingly Business-friendly IP Regime

Dan Prud’homme is Professor of innovation, strategy and international business at EMLV Graduate School of Business Paris La Defense. As a part of EMLV team, he is known for his work on intellectual property, innovation, law & economics, strategy & management, business in China, and international business. In his most recent post, published on January 28, on the Oxford Business Law Blog (OBLB), Dan addressed the issue of China’s patentability reform and increasingly business-friendly IP Regime.

On 31 December 2019, China’s National Intellectual Property Administration (‘CNIPA’) officially announced the amendment of China’s Patent Examination Guidelines (hereafter ‘the Guidelines’).

The Guidelines, effective on 1 February 2020, not only offer businesses more appropriability over emerging technologies (e.g., artificial intelligence (‘AI’), ‘Internet +’ technologies, big data, and blockchain) but also add to a growing list of ways in which China’s intellectual property (‘IP’) regime is becoming world-class.

Technical features and the algorithmic features or business rule/method features examined as a whole

Even in countries conventionally assumed to have ‘strong’ IP regimes, such as the US, patenting inventions involving algorithms and business rules or methods is difficult due to restrictive legal standards requiring demonstration of a corresponding technical contribution or effect (ie, a technical solution to a technical problem). The Guidelines help clarify China’s patentability requirements for such subject matter.

In short, the Guidelines require that the technical effect of an invention should be determined through a holistic examination of the claimed invention rather than a more narrow examination of aspects of the claims. Specifically, patentability should be determined by examining how all the technical features of a claimed invention and its algorithmic features or business methods or rules interact and support one another’s functionality; these technical means should offer a solution to a technical problem, thereby producing beneficial technical effects compared to the prior art (eg, in terms of improved accuracy, quality, efficiency, or other types of performance).

The Guidelines specify that algorithms and business methods or rules not meeting this standard are not patentable, and analyze examples of corresponding unpatentable subject matter (eg, a purely mathematical model, method for providing consumer rebates, electricity consumption index for economic forecasting, and certain robot systems).

The Guidelines also analyze examples of subject matter satisfying the patentability standard (eg, a neural network, bicycle sharing method, and method for communication among blockchain nodes).

China’s business-friendly IP regime

While the Guidelines offer businesses operating in China more appropriability in key areas of emerging technology, their significance does not stop there. In fact, the reform adds to a growing list of ways in which China’s IP regime has not only become more friendly (ie, poses less risks and costs) to IP-intensive businesses relative to what it previously offered, but has also become more business-friendly than the IP regimes in prominent rich nations, such as the US. I have previously discussed this trend in articles for the Journal of World Business and Harvard Business Review.

For example, in terms of law, non-compete agreements are allowed in China but not in some US states (eg, California). In terms of IP regulations and administration, even prior to the 2019 Guidelines, certain biotechnology and software have been patentable in China but not in the US, and business methods have been easier to patent in China than in the US and Europe.

There is faster invention patent pendency in China than at the US Patent & Trademark Office and European Patent Office, and invention patent examination is said to be of higher quality in China than at some national offices in Europe. In terms of IP enforcement, there are lower attorney and court costs for IP litigation in China than the US and various other important jurisdictions, the ‘local administrative enforcement’ route in China offers potentially more efficient enforcement options than available in rich nations, there are faster IP trials in China than other major markets, and there is arguably less risk of patent trolls in China than in the US due to the design of Chinese legal institutions.

Yet other aspects of China’s evolving IP regime may surprise business executives. For example, foreigners win most of the IP infringement cases that they bring in China.

In 2018 and 2019, significant progress was made in reforming China’s controversial “forced” technology transfer policies. In the last several years, several other important changes that benefit IP-intensive businesses have been made to China’s IP regime.

US-China’s “phase one trade deal”

In addition, as this article was being finalized, the US and China signed a ‘Phase 1’ economic and trade agreement on 15 January 2020, the full text of which is available here. A helpful analysis of the IP and technology transfer chapters of the agreement is available here.

Chapter 1 of the agreement devotes eighteen pages to various IP issues and Chapter 2 devotes three pages to technology transfer issues. Many of the commitments in the agreement primarily reaffirm, in some way, changes to China’s IP regime that have already been made to domestic Chinese law or that stakeholders have already seen in draft Chinese legal measures expected to be passed into law in the relatively near future.

However, some of the language, general in places yet sometimes more specific, holds the Chinese state to newer IP-related commitments.

All of this being said, IP infringement remains a significant problem in China and the country’s IP protection regime certainly still has certain shortcomings.

Then again, the new Guidelines and other, often underappreciated, aspects of China’s IP regime nonetheless indicate that even Western businesses may be able to more feasibly safeguard returns on assets than often assumed.

Recognition of this nuance, although complicated by the US-China trade war (which, despite subsiding at present, is reportedly not yet over), is critical for smart strategizing for the Chinese market.