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Best Patent Practices For US Companies With Chinese R&D

Chinese and U.S. patent law have significant differences. This article will discuss some of the incentives and long-term patent-related risks facing U.S. companies with research and development centers and inventors in China.

Inventor Remuneration

Article 16 of the China Patent Law requires employers (or other entity assigned patent rights) to provide inventors with reasonable remuneration. Articles 76- 78 of the Rules of Implementing the Patent Law provide a minimum of 3000 RMB (about $440) to be paid within three months of invention patent grant and not less than 2% of profits from exploitation of the patent (or 10% of royalties if the patent is licensed). The rule does allow the employer to instead contract the amount to be paid,[1] and employers may wish to pay fixed amounts to avoid complex accounting calculations and potentially large payouts several years later once the invention is commercialized.

While China has yet to have a large payout for inventor remuneration,[2] Japan had an inventor remuneration law[3] based on employer profit from the invention. In 2001, inventor Shuji Nakamura[4] sued his prior employer Nichia for profits from his patents on his invention of blue LEDs. The Tokyo District Court initially awarded him 20 billion JPY (about $189 million) and the inventor later settled for 840 million JPY (about $8.1 million) in 2005[5].

Government Subsidies for China and Foreign Patent Filings

Many cities, provinces and even city districts offer government subsidies and rewards to Chinese applicants for Chinese and foreign patent grants. While the subsidies may be minimal for Chinese patent grants, the subsidies can be significant for foreign grants. For example, Shanghai only offers 2,500 RMB (about $370) for Chinese invention patents but up to 50,000 RMB (about $7,400) per foreign patent grant (up to five countries). Even better, the Binjiang District of Hangzhou offers 100,000 RMB (almost $15,000) per foreign granted patent.[6] In contrast, the southern province of Guangdong has mostly abolished patent subsidies.

These subsidies are available not just to Chinese applicants but also to foreign applicants, as long as the foreign applicants file in the name of their Chinese subsidiary. Accordingly, besides conventional factors when selecting an R&D site (such as transportation infrastructure and human resource availability), U.S. companies may also want to consider patent subsidy availability.

Note that some U.S. companies have intellectual property holding companies for tax purposes so the subsidies may not be as financially beneficial. However, combined with reduced corporate tax rates discussed in the next section, U.S. companies may want to reevaluate their corporate structure and the use of IP holding companies.

Reduced Corporate Tax Rates via HNTE Status

Companies with significant patent filings may qualify for “high and new technology enterprises” status, which provides a corporate income tax rate reduction of 25% to 15% and a “super deduction” for R&D expenditures.[7] Like the patent subsidies above, the Chinese subsidiary of the U.S. company must be the IP owner to qualify. Alternatively, the Chinese subsidiary can have a five-year exclusive license to the relevant IP.

We recommend discussing further with your accountant to determine eligibility as there are financial requirements besides IP (e.g., R&D expenditure as percentage of revenue).

Monitor New and Prior Employee Patent Filings

Article 12(3) of the rules state that an invention created within one year of departure from his or her prior employer, if related to his work at the prior employer, belongs to the prior employer and not the inventor or current employer, if any. Accordingly, U.S. companies may want to monitor patent filings after an employee departure and institute proceedings to reassign any patent filings to them. Conversely, when hiring new employees, U.S. companies should be careful about filing patent applications within at least the first year of employment if the employees came from another company.

Confidentiality Examination (Foreign Filing License)

Like the U.S., China requires passing a confidentiality examination (similar to a foreign filing license) before filing in foreign countries.[8] Like the U.S., it is rare for a patent application to be subject to restrictions on foreign filing. The examination can be requested when filing a Chinese patent application or by directly filing a request with the China National Intellectual Property Agency (in Chinese).

The penalty for foreign filing without passing examination is invalidity of any resulting Chinese patent. Accordingly, U.S. companies should ensure compliance with this requirement. If the proposed application is drafted in English and the applicant does not wish to translate the application, the U.S. applicant can file the application with CNIPA in English as a Patent Cooperation Treaty application, as a PCT filing inherently includes a request for confidentiality examination.[9] Note that unlike the U.S., China does not require confidentiality examination for design patent applications.

Conclusion

By being aware of differences in Chinese and U.S. patent law, U.S. companies can enjoy significant incentives and avoid long-term risks. Note, though, that this article is not exhaustive and there are other risks as well as incentives available, such as expedited medical device approval for patented technology. We invite you to discuss this further with your accountants and patent counsel.

 

 

Aaron Wininger is the director of the China intellectual property practice at Schwegman Lundberg & Woessner PA.

Xia Wu is a patent attorney at Chofn Intellectual Property Service Co. Ltd.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Article 76 of the Rules or the Implementation of the Patent Law of the People’s Republic of China.

[2] For example, in 2015, the Chinese Supreme Court affirmed a Shanghai High Court’s decision to award to an inventor 200,000 RMB (about $30,000 USD) for an invention created while employed at 3M China. Two key points of this case: 1. 3M China assigned the patent to an IP holding company, which was not the employer of the inventor. The holding company was not liable for inventor remuneration but the employer 3M China was. 2. 3M China had an employee invention policy which controlled instead of Articles 76-78, which list higher remuneration than the 3M China policy.

[3] Japanese Patent Law, Paragraph 4 of Article 35. The law was amended in 2004 to allow inventor remuneration to be set by contract.

[4] Shuji Nakamura later won a Nobel Prize in Physics in 2014 with two other scientists for inventing the blue LED.

[5] https://www.nytimes.com/2005/01/12/business/worldbusiness/japanese-company-to-pay-exemployee-81-million-for.html

[6] Note that these policies frequently change but tend to favor foreign filings, so should remain similar.

[7] GuoKeFaHuo [2016] No.32 (Circular 32).

[8] Article 20 of the Patent Law of the People’s Republic of China.

[9] Article 8 of the Rules.

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Director of China Intellectual Property Practice


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