NFTC, a US trade association, asks USTR to sanction China for issuing and enforcing “junk patents” (2014 submission)

A February 7, 2014 Special 301 submission from the National Foreign Trade Council (NFTC) asks USTR to bring trade sanctions against China for granting and enforcing “junk patents.” The NFTC also wants patent enforcement to be strickly a private civil remedy (Contrast to the USTR demands that countries implement linkage between drug registration and patents), and complains about China rules that would require employers to more fairly compensation the Chinese inventors they employ.

1625 K STREET, NW, WASHINGTON, DC 20006-1604
February 7, 2014
The Honorable Michael Froman
United States Trade Representative
Executive Office of the President
600 17th Street NW
Washington, DC 20508

RE: 2014 Special 301 Review: Identification of Countries Under Section 182 of the Trade
Act of 1974: Request for Public Comment and Announcement of Public Hearing
(Docket number USTR-2013-0040)

. . .

Fourth Amendment to the Chinese Patent Law/”Junk Patents”: China’s patent system includes the issuance of IP assets, including utility models and design rights, without examination of the substance. Unlike other rights like invention patents, the quality of unexamined assets is unknown, regularly resulting in the granting of “junk patents.” The vast majority of these unexamined rights are held by Chinese domestic companies and individuals. Since no substantive review of unexamined assets is required prior to their assertion, they represent a significant business risk to innovation-driven American (and Chinese) companies.

China issued a draft Fourth Amendment to its Patent Law in August 2012. In the draft amendment, there is a significant focus on administrative enforcement of unexamined rights. As such, one of the effects of the draft Fourth Amendment will be to allow primarily Chinese domestic entities or individuals to assert their “junk patents” more effectively, and to disrupt foreign-owned patents and the activities of their owners or licensees.

Rather than further extend the problem of unexamined “junk” patents, China’s patent system should be reformed so as to prevent the granting of utility models and design patents without effective substantive review. To be more effective, China’s patent system should further allow for recourse to civil litigation for patent infringement to the exclusion of any administrative enforcement remedies, which are often political, unprofessional or commercial and discriminatory in nature. Doing this would help rights holders who can actually demonstrate the innovative nature of their patent or other rights to address, inter alia, the problem of junk patents before competent (and less political) adjudicators and courts. Finally, China’s patent system should be reformed so as to ensure that infringement litigation that is based on unexamined rights cannot proceed until the validity of the utility model and design involved is finally determined through the Patent Reexamination Board’s examination and judicial review.
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NFTC is also one of several US trade associations (including IPO and US-China Business Council) criticizing China rules requiring employers to pay reasonable remuneration to Chinese inventor employees, including a share of the returns from patents when they are the inventor. (More context here).

Chinese Service Inventions: China has been developing a new regulation on “service inventions” that are created during an inventor’s employment. The draft regulation, if passed, will negatively affect the ability of U.S. companies to make commercial choices about how to exploit IP assets derived from Chinese inventions and will increase legal and financial risks. For example, under Article 19.2, the Regulations could take away an employer’s ability to contract around SIPO’s default rules and replace the current autonomy that an employer has with extremely onerous regulations. . . . .Moreover, the draft regulation also applies to technical secrets, which will greatly disadvantage the technical secret owner, should there be any disputes between the inventor and the technical secret owner.

A few other trade associations are raising the China “Service Inventions” issue in their 2014 Special 301 submissions. This is from the U.S. based Intellectual Property Owners (IPO) Association:

China’s State Intellectual Property Office has been developing a new administrative Regulation intended to increase employer payments for “service inventions” that are created during an inventor’s employment, apparently in the belief it will increase innovation. The draft Regulation, if passed, will negatively affect the ability of companies to determine how best to incentivize innovation by its own employees and will increase legal and financial risks of conducting R&D in China. For example, under the second paragraph of Article 19, any agreement or policy reasonably implemented by an employer regarding inventor remuneration could be subject to repeated challenge as somehow “limiting” an inventor’s rights and could be retroactively supplanted by SIPO’s onerous default rules.