By Meph Jia Gui｜Jiao Zhang The PRC Patent Law adopts an “authorization after preliminary examination” mechanism for utility model and design patent applications; however, it adopts an “early publication and deferred examination” mechanism for invention patent applications, i.e., after the patent administrative department of the State Council receives the application for invention patent, upon preliminary examination, it shall publish the application after eighteen full months from the date of application, and then it shall conduct a substantive examination upon the request of the applicant. After the date that the invention patent application is published, the public can read the application materials and theoretically exploit the invention, and this behavior does not technically constitute patent right infringement before the patent right is granted. In this sense, the applicant cannot be protected by the Patent Law during this period. However, during this period, the applicant may suffer from interest loss due to the earlier publicity of the technology materials; for example, competitors may occupy a greater market share by exploiting the technology to produce and sell products which would eventually be patented. If the applicant cannot get reasonable compensation during this period, he may be tempted to use the technology as a trade secret rather than apply it for an invention patent, which violates the spirit of the Patent Law of encouraging adequate publication of the invention to the public, encouraging wide exploitation of the creation, and promoting social progress. Therefore, the PRC Patent Law set a royalty mechanism for invention patents during this period, which provides that during the temporary protection period, although exploiting the invention patent does not constitute patent infringement, the entity that exploits the said patent shall pay the applicant appropriate fees.
Article 13 of the PRC Patent Law (hereinafter referred to as “Patent Law”) provides that: “After the application for an invention patent is publicized, the applicant may require the organization or individual that exploits the said patent to pay appropriate fees.”
According to this provision, only an applicant for an invention patent can be protected during the temporary period while the applicant for a utility model patent or a design patent cannot be protected. The only remedy for the applicant for an invention patent is to request the entity that exploits the said patent to pay appropriate fees. In practice, the following questions are involved in the royalty mechanism during the temporary protection period: 1. the meaning of the term “exploit” provided in Article 13 of the Patent Law, and defining what kind of exploitation which does not trigger royalty payment liabilities; 2. the temporal scope of the temporary protection；3. calculating methods of the royalties；4. which entities are entitled to claim for royalties；5. when to file a lawsuit and the statute of limitations；6. jurisdiction of the court and claims which can be made by the applicant. This article will answer these questions primarily through case analysis.
I. The meaning of the term “exploit” provided in Article 13 of the Patent Law, and defining what kind of the exploitation which does not trigger royalty payment liabilities
In a case involving Shandong Xinfa Pharmaceutical Co., Ltd., Zhejiang Hangzhou Xinfu Pharmaceutical Co., Ltd., and Shanghai Aixiti International Trading Co., Ltd., jurisdiction was disputed when invention patent royalties was sought during temporary period and invention patent infringement alleged (hereinafter referred to as “Xinfa Pharmaceutical case”) ((2008) Min Shen Zi No.81). In that case, the Supreme People’s Court (hereinafter referred to as “Supreme Court”) held that the meaning of “exploit” provided in Article 13 of the Patent Law is the same as the meaning of “exploit” provided in Article 11 of the Patent Law, i.e., the behaviors of making, using, offering to sell, selling or importing those patented products. However, we can infer that it is unnecessary to pay some types of royalties in practice through analyzing other regulations and cases. These behaviors will be analyzed in the following sections.
1. Exploitation which can be exempted from royalty payment liability
Some exploitation can be exempted from royalty payment liabilities through proving the purpose of production and operation and the legal source of the products. In the retrial case of Shenzhen Kengzi Water Supply Co., Ltd., Shenzhen Siruiman Fine Chemical Co., Ltd., and Shenzhen Kangtailan Water Treatment Equipment Co., Ltd invention patent infringement dispute (hereinafter referred to as “Kengzi Co., Ltd. case”) ((2011) Min Shen Zi No.259), the Supreme Court affirmed that the seller or the user shall not bear royalty payment liability for production, sale, and importation of the allegedly infringing products during the temporary protection period if they can provide a legal sources of these products. When determining the “legal source,” whether the relevant products were obtained through proper and legitimate commercial channels shall be considered, while it is not necessary to consider whether the seller or supplier had complied with the relevant administrative regulations when they provided those products.
In this decision, the Supreme Court confirmed that selling or using products which originate from a legal source are exempted from royalty payment liability. Although the court’s decision does not provide an explicit legal basis, the legal basis can be found in Article 70 of the Patent Law, which provides that: “Where an organization or individual, for the purposes of production and business operation, utilizes, offers to sell or sells a patent infringing product without knowing that such a product is produced and sold without licensing from the patentee, they shall not be liable for compensation provided that the legitimate source of the product can be proved.” This provision indicates that, after the patent right is granted, some exploitation may be exempted from the liability of paying compensation in certain special situations. Since the Patent Law provides a higher degree of protection for the patentee than the applicant, in similar situations, when determining the degree of protection for the applicant, the protection for the patentee provided in the laws can be referred to. Since the entities that exploit the said patents can be exempted from paying compensation through proving the purpose of production and business and the legal source of the products, they can also be exempted from paying royalties during temporary protection under similar circumstances. The Supreme Court supported this opinion in the Kengzi Co., Ltd. case. Therefore, during the temporary protection period, where the entities that exploit the said patents can prove that the exploitation is for the purpose of production and business, and that the product is obtained through legal sources, they shall be exempted from liability of paying royalties. As the legal source refers to situations where the relevant products are obtained through proper and legitimate commercial channels, the enterprise which is exploiting the patent should carefully preserve the receipts and invoices of the products it bought and other relevant materials.
In addition, according to Article 70 of the Patent Law, if the entities that exploit the said patent want to be exempted from the liability of paying compensation, they shall meet one more condition, i.e., they do not know that the product was produced and sold without permission of the patentee. Generally, the court will presume that the entities that exploit the said patent have already met this condition unless the patentee or the applicant can provide evidence to the contrary. Therefore, if the patentee or the applicant can prove that the entities that exploit the patent know that the product was produced and sold without permission of the patentee or the applicant, their exploitation of the patent cannot be exempted from liabilities.
2. Legal exploitation
If the entities that exploit the said invention patent continue the original exploitation within the original scope, they shall not bear liability of paying royalties. Paragraph 2 of Article 69 of the Patent Law provides that it shall not be deemed as an infringement upon a patent right, provided that the entity that exploits the said patent has made an identical product, used an identical process, or has made necessary preparations for making such a product or using such a process prior to the date of application, and continues to make such product or use such a process only within the original scope. This provision indicates that the continual exploitation of the existing technology within the original scope is a form of legal exploitation which does not trigger royalty payment liabilities. The “existing technology” here refers to the technology that has already been exploited by others or the technology that others have made necessary preparations for exploiting before the applicant applies for the patent. This conclusion was also supported in the case. For example, in the Li Xiankui and Shenzhen Geotechnical Engineering Co., Ltd. invention patent royalties during temporary protection period dispute ((2004) Yue Gao Fa Min San Zhong Zi No.242), the Guangdong High People’s Court held that after the application for the invention patent involved was published, since Shenzhen Geotechnical Engineering Co., Ltd. (the user) continued to use soil support structures and construction methods which had existed prior to an invention patent application for those structures and methods within the original scope, the court determined that this behavior amounted to legal exploitation. In summary, the enterprise should preserve evidence in respect of the exploitation of relevant technologies in order to avoid later restriction on their legal exploitation of those technologies when the technologies are applied for invention patents by others.
II. The temporal scope of temporary protection
Article 68 of the Patent Law provides that temporary protection is “from the publication date of application to the date when a patent right is granted.” During other periods, the owners’ rights shall be protected through other means. After a patent right is granted, the patentee can exercise the patent right to prevent others from exploiting the patent and claim for compensation. Before the publication date of the application, the applicant can protect the said technology as a trade secret. In the Xinfa Pharmaceutical case, the Supreme Court pointed out that Xinfu Pharmaceutical’s argument that the patentee can claim for compensation when anyone exploits the said patent in any means after the application date of the patent was flawed. It explained that, the patentee cannot make claims in respect of the exploitation before the publication date of the application according to the Patent Law unless that exploitation constitutes an infringement of another party’s trade secrets. Hence, as for the exploitation before the publication date of the application, the applicant cannot be protected through the temporary protection period royalty mechanism; whereas the applicant can be protected pursuant to relevant provisions in respect of prohibiting trade secrets infringements in the PRC Anti-Unfair Competition Law.
“The shareholders of a limited liability company may transfer all or a portion of their equity interests among themselves. The proposed transfer of equity interests by a shareholder to any non-shareholder party shall be subject to the consent of more than half of the other shareholders. The transferring shareholder shall notify the other shareholders in writing of the matters on the proposed equity transfer for their consent. Failure to reply by any of the other shareholders within 30 days upon receipt of the written notice shall be deemed to be consent to the proposed transfer. Where more than half of the other shareholders do not consent to the proposed transfer, such non-consenting shareholders shall purchase the equity interests to be transferred; failure to purchase the equity interests shall be deemed to be consent to the proposed transfer. With respect to any equity interests to be transferred with the consent of the shareholders, those shareholders other than the transferring party shall have the preemptive right under the same conditions. Where two or more shareholders claim to exercise their preemptive right, they shall determine the proportional ratio for purchase through consultation. Where the consultation fails, the preemptive right shall be exercised in proportion to their respective capital contribution at the time of the transfer. The provisions on equity transfer otherwise provided under the articles of association of a company shall prevail.”
III. Calculating methods of the royalties
The laws do not specify royalties due to the applicant for use during the temporary protection period are to be calculated. In practice, the court will determine the amount considering the specific situations of the case. To make that determination, the type of the invention patent, the time when the patent involved is published, the price and the quantity of the products produced through using the said technology, the importance of the technology used in the product, the patent licensing fees and the reasonable expenses of protecting the patent right, among other things, will be taken into consideration. For example, in the Li Wenqing and Liyang Liantong Environment Protection Equipment Factory (hereinafter referred to as “Liantong Factory”), invention patent royalties during temporary protection period and invention patent infringement dispute ((2007) Chang Min San Chu Zi No.75), the Jiangsu Changzhou Intermediate People’s Court affirmed that: “The court shall determine the amount of royalties for which the Liantong Factory should pay Li Wenqing by considering those factors such as the type of the patent involved, the publication time of the patent involved and the specific means that Liantong Factory exploited the patent involved, etc.” In Beijing Zhongqian Electromechanical Co., Ltd. and Beijing Qingda Science Technology Co., Ltd. invention patent royalties during temporary protection period and patent infringement dispute (hereinafter referred to as “Zhongqian Elec. case”) ((2003) Yi Zhong Min Chu Zi No.8425), the Beijing First Intermediate People’s Court (hereinafter referred to as “Beijing First Intermediate Court”) considered the quantity of the patented products produced by Qingda Co., Ltd. (the entity that exploited the said patent), the time when the products were produced, and the importance of the technology used in the products in order to determine the amount of royalties.
In the appeal case of Hengyuan (Shaoxing) Building Materials Co., Ltd. (hereinafter referred to as “Hengyuan Co., Ltd.”) and Nanjing Youningshubuluoke Building Materials Co., Ltd (hereinafter referred to as “Youning Co., Ltd.”) invention patent royalties during temporary protection period dispute (hereinafter referred to as “Hengyuang BM case”) ((2009) Zhe Zhi Zhong Zi No.30), Youning Co., Ltd. entered into a production and sales contract with Hengyuan Co., Ltd. when it was applying for the “block clods” invention patent. According to the contract, Youning Co., Ltd. designated Hengyuan Co., Ltd. to produce the patented products exclusively within a certain scope. Youning Co., Ltd. retained an exclusive right to sell the products, whereas Hengyuan Co., Ltd. was prohibited from selling or otherwise providing the products to any third party. However, Hengyuan Co., Ltd. breached the contract by selling the products to a third party. In accordance with the facts, the Zhejiang High People’s Court (hereinafter referred to as “Zhejiang High Court”) affirmed that the technology of “block clods” exploited by Hengyuan Co., Ltd. directly derived from the invention patent involved which is in the temporary protection period and the invention patent had already been granted, so the amount of royalties can be determined with the reference for the methods of calculating the compensation for patent right infringements. Therefore, if the applicant can prove that the exploited technology was directly derived from the applied invention patent, the court may determine the amount of royalties with reference for methods of calculating the compensation for patent right infringements. Additionally, if there is a contract in respect of the exploitation of the applied patent invention between the entity that exploits the said patent and the applicant, generally, the court will consider that the technology involved is directly derived from the applied invention patent.
IV. Which entities are entitled to claim for royalties
Article 13 of the Patent Law provides that an “applicant” has the right to claim royalties; yet Article 68 of the Patent Law provides that it is the “patentee” who has the right to claim royalties. However, since both the right to apply for a patent and the patent right itself can be transferred[Endnote 1], this creates a practical effect where different entities may claim for royalties of the same patent. In a situation where the applicant transfers the patent right to others after the patent right has been granted, two types of parties would theoretically be involved: an applicant and a patentee. In the Hengyuan BM case, the Zhejiang High Court affirmed that when Cheng Weiguo (the applicant) transferred the patent right to Youning Co., Ltd., he explicitly granted the right to adopt any legal acts against any infringement upon the patent right from the application date for the patent to the date when the patentee was formally changed to Youning Co., Ltd. (the present patentee). The rights transferred included, but were not restricted to the right of requesting the infringer to pay compensation regarding the patent infringing actions through contentious or non-contentious means. Hence, it was deemed that Youning Co., Ltd. had been authorized to request the infringer to pay the royalties during the temporary protection period. Therefore, Youning Co., Ltd. was the proper entity for the litigation.
A different type of scenario occurs when the applicant transfers the right to apply for a patent to others after the publication date. In that case, two similar types of parties are theoretically involved: an original applicant and a successor applicant. In the Zhongqian Elec. case, the Beijing First Intermediate Court affirmed that after Di Shengcai (the original applicant) transferred the right to apply for a patent to Zhongqian Co., Ltd. (the successor applicant), Zhongqian Co., Ltd. was therefore entitled to have the relevant rights directly derived from the right to apply for a patent and the patent right after it was granted. Meanwhile, considering that Di Shengcai had already retroactively requested Qingda Co., Ltd. to pay the royalties during temporary protection period in its own name before the date when the right to apply for a patent was transferred, Zhongqian Co., Ltd. was itself entitled to request Qingda Co., Ltd. to pay those royalties during temporary protection period.
In summary, generally, the court will affirm that the applicant has right to claim for the royalties, and if the applicant transferred the right to claim for royalties during temporary protection period to another party (in most cases, the transferee of the right to apply for a patent or the transferee of the patent right), the said transferee is the appropriate party to claim for the royalties. If the enterprise is the transferee of the right to apply for a patent or the patent right, in order to avoid unnecessary disputes in the future, it should request the transferor to transfer the right to claim for royalties during the temporary protection period together with all other rights when signing a transfer agreement.
In addition, if the invention patent has already been invalidated or canceled, the court will generally not support the claim for royalties held by the applicant as the right basis does not exist. For example, in the appeal case of Gerui Electronic (Xiamen) Co., Ltd. (hereinafter referred to as “Gerui Co., Ltd.”) and Jin Yongsu, etc. invention patent infringement dispute ((2010) Gao Min Zhong Zi No.664), since the invention patent right involved had been invalidated, there was no legal basis for the plaintiff’s claims. As a result, the court did not support the claim of requesting royalties for the patent held by Gerui Co., Ltd. (the applicant). Therefore, in the relevant cases, when entities that exploit the patent prepare to defend against the applicant, they should check whether the patent involved has been invalidated or cancelled.
V. When to file a lawsuit and the statute of limitations
The reason why the applicant can get temporary protection before the invention patent right is granted is that the patent right granted later confirms that the applicant is entitled to have the right during temporary protection period. Article 85 of the Rules for the Implementation of the PRC Patent Law provides that when two parties request the department in charge of patent management to mediate a dispute over royalties during the temporary protection period, the request must be made after the patent right is granted. Therefore, in summary, only after the patent right has been granted can the applicant claim for the royalties, except as otherwise provided by the agreement between the applicant and the entity that exploits the said patent. Paragraph 2 of Article 68 of the Patent Law provides that the statute of limitations for the patentee to claim for royalties during the temporary protection period shall be two years, commencing from the date when the patentee knows or ought to have known that his invention was being exploited by someone else. However, if the patentee knew or ought to have known this fact prior to the date when the patent right was granted, the statute of limitations shall commence from the date when the patent right was granted. Therefore, in order to avoid that the claim for royalties cannot be supported due to the expiration of the statute of limitations, the enterprise should claim for royalties within two years from the date it knows that the invention has been exploited by others.
VI. Jurisdiction of the court and the claims that can be made by the applicant
As for how to determine the jurisdiction of the dispute on invention patent royalties during the temporary protection period, in Xinfa Pharmaceutical case, the Supreme Court held that, disputes on invention patent royalties during the temporary protection period are essentially a form of infringement dispute in respect of patent right, specifically an infringement dispute involving the patentee’s right to claim for royalties during the temporary protection period. Therefore, the jurisdiction of these disputes shall be determined with reference for the jurisdiction determination principle of infringement disputes pursuant to Article 29 of the PRC Civil Procedural Law (hereinafter referred to as “Civil Procedural Law” – note that Article 29 of the old Civil Procedural Law (2007) is the same as Article 28 of the new Civil Procedural Law (2012)), which provides that a lawsuit brought on an infringement shall be under the jurisdiction of the court of the place where the infringement is committed or where the defendant has his domicile, i.e., the patentee can file a lawsuit with the court where the infringement is committed or where the domicile of the defendant is located. Hence, the applicant can determine the court where the lawsuit should be filed according to the jurisdiction determination principle of disputes on patent right infringements.
Additionally, in the Xinfa Pharmaceutical case, the Supreme Court affirmed that, in order to bring convenience for the parties in the litigation, when the patentee files a lawsuit, if the exploitation has spanned before and after the publication date of the invention patent, the patentee shall be permitted to hold claims for the royalties during temporary protection period and claims for infringement upon the patent right. Hence, the enterprise can request the entity that exploits the said patent to pay the royalties during the temporary protection period and bear the liability of infringing patent right in one case.
VII. Conclusion
If the enterprise wants to claim for invention patent royalties during the temporary protection period according to Article 13 of the Patent Law, several conditions shall be met: (1) other parties who have exploited the patent have no reasons to be exempted from the liability; (2) the exploitation happened during the temporary protection period; (3) it is the applicant or the patentee with authorization from the applicant who has the right to claim for royalties; (4) the patentee files the lawsuit after the patent right is granted, and this lawsuit is filed within the two-year statute of limitations; and (5) the lawsuit is filed with the court where the infringing action is committed or where the domicile of the defendant is located.
The enterprise should preserve and collect relevant evidence according to above laws and cases. The applicant should pay special attention to evidence in respect of the methods of calculating the royalties, such as the price, the quantity of the patented products and the importance of the technology used in the products, etc. As the entity that exploits the said patent, they should preserve relevant evidence, such as receipts and invoices of products, records of the use of the said technology, and other materials which can be used to be exempted from the liability.
It should be noted that the royalty mechanism during the temporary protection period may affect the validity of the exploitation after the patent right is granted. In the Kengzi Co., Ltd. case, the Supreme Court affirmed that in a situation where it is determined that producing, selling, and importing allegedly infringing products is not prohibited by the Patent Law, the subsequent use, offer to sell, or actual sales of the same type of allegedly infringing products by the entity that exploited the said patent shall be permitted even without the permission of the patentee. Of course, the patentee is still entitled to request the entity that exploited the said patent to pay reasonable royalties in accordance with Article 13 of the Patent Law. Consequently, where the entity that exploits the said patent has produced, sold, or imported the allegedly infringing products during the temporary protection period, the patentee cannot prohibit their subsequent exploitation in respect of the said products. As for these types of exploitation, the patentee is only entitled to have the same right as the applicant during the temporary protection period, i.e., to request the entity that exploits the said patent to pay royalties. This decision essentially expands the scope of the royalty mechanism during the temporary protection period to the period after the patent right is granted and exerts significant influence on the patentee and the entity that exploits the said patent. However, whether this case can be a guiding precedent is not clear. Enterprises should pay attention to any further cases on this topic.
(The English version of this Issue has been edited by Sean J. Pratt, a New York licensed attorney with Global Law Office’s Shanghai office.)
Mr. Meph Jia Gui is a Beijing-based partner with Global Law Office who specializes in intellectual property (IP) laws and litigation and arbitration. (E-mail: meph.gui@glo.com.cn)
Endnote 1: Article 10 of the Patent Law.
