China to Cancel Patent Subsidies, and Emphasise Quality Over Quantity

As highlighted in a report recently published by the US Patent and Trademark Office (USPTO), entitled Trademarks and Patents in China: The Impact of Non-Market Factors on Filing Trends and IP Systems, the high rate of Chinese patent and trademark filings in recent years is widely believed to have been influenced by government subsidies and other ‘non-market factors’.  Since at least 2011, some Chinese applicants appear to have been taking advantage of the Australian innovation patent system to maximise the subsidies they are able to claim for foreign patent grants.  In 2020, Chinese residents were by far the largest users of the system, filing more innovation patent applications than all other nationalities combined.

But could it be that the days of government subsidies, and an associated massive growth in patent applications originating in China, are drawing to a close?

On 27 January 2021, the China National Intellectual Property Administration (CNIPA) announced, in a notification entitled ‘Notice of the CNIPA on Further Strictly Regulating Patent Application Behaviour’ (in Chinese) (‘Notice’), that many lucrative subsidies must end by the middle of this year, with all others to be phased out by 2025.  (A brief report of the Notice can be found on the China IP Law Update blog, while a Google translation of the Chinese original is quite comprehensible.)

The Notice states that the overriding objective of the new regulations on patent application behaviour is:

In order to thoroughly study and implement Xi Jinping’s thoughts on socialism with Chinese characteristics in the new era; to earnestly implement the decisions and deployments of the Party Central Committee and the State Council; and to earnestly promote China’s transformation from a major importer of intellectual property rights to a major country of IP creation, and from the pursuit of quantity to the improvement of quality.

An End to Subsidies

Under the heading of ‘strengthening collaborative governance’ the Notice directs that:

1. before the end of June 2021, all levels of funding for patent application stages should be completely cancelled, and that no local government shall provide financial support for patent applications in any form;
2. subsidies for patent grants may continue for the present, but must end by 2025;
3. in any event, however, the total amount of funding that continues to be available must not exceed 50% of the official fees paid for obtaining patent rights, and cannot cover service fees such as agency (e.g. attorney) fees, or patent/application maintenance fees (e.g. annuities).

By the second half of this year, therefore, subsidies will no longer be available to fund the application process (including filing and examination costs), and the subsidies that may remain available upon securing granted patent rights will be significantly less than the actual cost of obtaining a patent.  This should substantially eliminate any incentive for Chinese applicants to file applications for reasons other than a genuine desire to obtain enforceable rights.

The Notice also indicates an intention to crack down on abuses of the patent system that may be employed to obtain unjustified subsidies or to inflate patent filing numbers, including:

1. the deliberate independent submission of closely related applications;
2. the submission of patent applications that are obviously inconsistent with the applicant’s research and development capabilities;
3. ‘abnormal’ resale of patent applications; and
4. the submission of applications for technical solutions that implement simple functions with complex structures, that merely combine or stack conventional or simple features, and ‘other behaviours that are obviously not in line with the common sense of technological improvement’.

Emphasis on Patent Quality

The Notice also mandates a refocussing on quality over quantity.  Among other things, it requires authorities to develop and use more ‘scientific’ performance indicators, and expressly forbids practices that may tend to emphasise and reward filing numbers rather than the merit of applications filed.  Such forbidden practices include:

1. using the number of patent applications as the main basis for departmental work evaluation;
2. setting binding targets for the number of patent applications;
3. apportioning filing targets to localities, enterprises, agencies, etc through administrative orders or administrative guidance; and
4. comparing numbers of patent applications, including applications filed through the Patent Cooperation Treaty (PCT), with each other.

Failure of a local authority to comply with these directives may result in the withdrawal of various forms of financial backing, preferential policies, and rights to apply for and participate in national development projects.

Regarding quality, the Notice observes that the Chinese State Intellectual Property Office regularly publishes reports on the quality and distribution of patent applications in various localities.  A notification and ‘name and shame’ policy will be applied to local authorities that oversee a decline in patent application quality for two or three consecutive quarters.  If the decline continues for a full year, penalties similar to those noted above will be imposed on the offending authorities.

There is much more in the Notice that seems also to be directed to improving patent quality and stamping out abuse, corruption, and ‘gaming’ of the system.  It is interesting that the very existence of these directives, complete with punishments for failures to comply, constitute an acknowledgement that these abuses have been occurring, and will no longer be tolerated.

Conclusion – What Impact to Expect on Australian Filings?

It will be interesting to observe the effects of these new policies on patent filings in Australia by Chinese applicants over the coming year. 

I anticipate that we may see a final rush on innovation patents by Chinese applicants prior to the end of June 2021.  It is ironic that an end to the subsidies that have created abuse of the innovation patent system will come just a couple of months before it will cease to be available for new filings on 26 August 2021.

It is less clear what impact the withdrawal of subsidies may have on standard patent filings by Chinese applicants.  Over the past two years, applications from China have nearly doubled, from 1,243 in 2018 to 2,360 in 2020.  Most indications are that a majority of these are ‘genuine’, with over a quarter of Chinese-originating applications in 2020 being filed by one of the two well-known companies OPPO and Huawei.  Chinese applicants only narrowly failed to eclipse Australians as the second largest users of the Australian standard patent system in 2020, and only modest growth would be necessary for Chinese to surpass local filers in 2021.  I am currently inclined to think that this remains likely.

Nonetheless, if recent behaviour has been driven by subsidies, it is possible that we might see a slowing of growth, or even a decline, in numbers of new Chinese-originating filings by the second half of the year.  You can be sure that I will be monitoring the situation closely!

Tags: China, Innovation policy, Patent filing