Behind the veil: patent validity in China

Behind the veil: patent validity in China

Exclusive data on the murky area of CNIPA invalidation disputes shines new light on one of the most important – and least predictable – features of China’s patent system

Validity is king in patent disputes around the world and China is no exception to this. Yet there is little publicly available data on the China National IP Administration’s (CNIPA) practice in this area. While the patent office publishes all of its individual decisions, it does not typically publish aggregate statistics that would give a broad overview of what is happening and to whom. That means that until now, owners of Chinese patents have had to either crunch the numbers themselves or rely on rules of thumb.

To address this gap in the public understanding of China’s IP system, IAM asked Beijing-based service provider Incopat to run some of the numbers using its database of CNIPA invalidity decisions. The company has more than 95,000 validity-related documents in its library, including invalidation decisions and oral hearing notices stretching back to 1981. The cases, unless otherwise specified, span all three types of Chinese patent right: invention patents, utility models and designs. Although not necessarily a full 1:1 picture of the CNIPA’s activity history in this area, this exclusive insight provides the most comprehensive look yet at Chinese patent validity.

Such clarity is even more urgent because this critical stage in a Chinese patent dispute basically comes down to a coin flip. “We’ve been advising clients that invalidation is the most critical stage,” reports He Jing of Anjie Law Firm. Yet based on his long experience of trying cases, he estimates that around 50% of patent challenges result in a full or partial invalidation.

Some patent professionals speculate that the CNIPA’s decision not to publish statistics on the Re-examination and Invalidation Department of the Patent Office (renamed last year from the pithier Patent Re-examination Board) might be simply because there is no clear messaging about China’s goals for patent validity. “Chinese courts love to publish statistics on how many cases they close to show how proactive they are,” one Chinese lawyer observes. “But when it comes to invalidations, the CNIPA may be unable to come up with a consistent story about what the numbers show.” The data revealed here by Incopat is thus crucial for getting a better view of the validity landscape in China.

Statistics measured by number of cases can involve multiple challenges to the same patent; as this article will show, the prospect of multiple challenges is a major strategic consideration for patent owners. Some other figures – like those showing the most frequently challenged International Patent Classification (IPC) classes and patent owners – are measured based on the number of unique patents, not the total number of cases.

Beijing-based patent practitioners with long track records of CNIPA validity practice were eager to see the statistics. Despite a few surprises, overall they report that the numbers chime with their experience of arguing cases before patent office examiners. What follows are the key takeaways not just for patent owners, but for any company doing business in China.

Gradual growth

The full Incopat sample includes more than 48,000 invalidation cases, representing challenges to more than 36,000 individual patents.

Figure 1 shows the growth of validity disputes over the past 20 years. The numbers for 2019 are only partial since the date of a request is not disclosed until a decision is published and not all cases filed in 2019 had been decided at the time of writing. Still, it appears as though the annual number of disputes has quadrupled over the past two decades.

Figure 1. Invalidation requests (all types)

FIGURE 1. Invalidation requests (all types)

The picture is thus one of steady gradual growth. However, it bears little resemblance to what has happened to patent filings in China during the same period. In 2000 there were just 25,000 or so invention patent applications. By 2018 that figure had grown to a whopping 1.3 million.

Instead, invalidations tell a story similar to civil litigation statistics. Figure 2 shows that the number of validity cases tracks the number of infringement cases in civil courts fairly closely. Taken together, these metrics confirm that of the millions of Chinese patents in force, only a small fraction are ever enforced judicially. The vast supply of seemingly unexploited patent rights is one factor driving Chinese authorities’ increased focus on quality rather than quantity.

Figure 2. Number of infringement cases in Chinese civil courts

FIGURE 2. Number of infringement cases in Chinese civil courts

Most of the patents challenged at the CNIPA have been utility models or design patents, as shown in Figure 3. A key reason is that neither of these types of right, both of which carry a protection term of just 10 years, receive no substantive examination at the time of grant. Unsurprisingly, both have a higher rate of invalidation than invention patents.

Figure 3. Share of challenged patents (all time)

FIGURE 3. Share of challenged patents (all time)

But practitioners also note that utility models face a lower threshold for inventive step than invention patents. If a company files both types of right for the same invention (a strategy some lawyers recommend), the utility model could therefore be more resistant to an invalidity challenge. Once confirmed as valid, a utility model entitles its owner to the same infringement remedies as an invention patent – albeit for a shortened length of time.

Timing is everything

In the five years from 2003 to 2008, the average time from invalidation request to decision plunged from 2.5 years to just 10 months. Since then the average time to reach a decision for disputes of all types has stabilised at around five months, as shown in Figure 4.

Figure 4. Average time to decision (months)

FIGURE 4. Average time to decision (months)

While this figure includes all patent types, it is not just unexamined utility models and designs that can be ruled on quickly by the CNIPA. Law firm Chang Tsi & Partners estimates that invention patent reviews average six months, while utility models average five months and designs range from four to five.

Even complex high-tech invention patent challenges can reach a swift resolution. He recalls that last year his team received decisions in June for several wireless patent invalidations that had been requested in January. Ping Gu, an equity partner at Zhong Lun Law Firm in Beijng, maintains that in her experience, invention patent invalidations take “roughly six months”.

This tight timing means that invalidations play a key role in litigation strategy. When a civil case is filed, invalidation requests follow, the defendant usually raising a jurisdiction objection or other procedural challenge. Before the court convenes a hearing on infringement matters, the CNIPA may well have decided on validity; if the asserted claims have been knocked out, the courts will dismiss the case without prejudice. This means that even if the plaintiff can reverse the validity decision (an uncommon occurrence), it will have to restart the whole process by filing a fresh infringement suit.

The quick turnaround also means that external counsel need to be at the top of their game. “The five-month average time is something we need to be fully prepared for on both sides,” He explains. “It’s submission intensive, the oral hearing is half a day, and the Chinese patent examiners are incredibly sophisticated, so the attorney needs to perform well and really get the key points across.” Gu adds that the Chinese system is in stark contrast with that of the United States, where “you file an inter partes review and have to wait half a year”. In China, “you essentially can file ASAP and within 30 days supplement with the novelty and non-obviousness grounds – the common-knowledge evidence can be submitted at the oral hearing”.

Validity rates

Looking at the validity decisions for all three types of Chinese patent, the ‘coin flip’ rule of thumb is not far off. As Figure 5 shows, the rate of full invalidation has fluctuated between 46% and 53% over the past 10 years – currently sitting at the low end of that range.

Figure 5. Invalidation results (all patent types)

FIGURE 5. Invalidation results (all patent types)

During the same period, the percentage of cases where a patent was left fully intact ranged from 35% in 2013-2014 to last year’s decade-high mark of 42%.

In the early 2000s, and in the years prior, mixed decisions were fairly rare; more recently, they consistently account for between 10% and 15% of all results. The same trend is evident in Figure 6, which shows results for invention patent disputes only.

Figure 6. Invalidation results (inventions patents only)

FIGURE 6. Invalidation results (inventions patents only)

Full invalidation becomes markedly less common when we look at the results from invention patent cases only, while rulings of partial validity have accounted for up to 24% of results in some years. For invention patents, the coin flip chance is between a fully validated patent and a negative or mixed decision.

Top tech areas

Containers and electrical technologies were the top IPC classes of patents challenged in Incopat’s database, with major high-tech fields such as data, communications and pharmaceuticals also appearing among the top 10.

IAM asked Incopat to break down the results for two of the major classes involved in high-tech disputes (G06F and H04L), as well as the top two classes related to the life sciences (A61K and A61P), limited to the last five years. The results are shown in Figure 8.

These results look quite different from the overall aggregate data, probably in part because they draw from a much smaller sample of cases. The most notable feature is that there are a huge number of partially invalid decisions, especially in the top high-tech classes.

Dragon Wang, partner at Dunlap Bennett & Ludwig in Beijing, explains why that may be the case: “In the electronic field, it is quite difficult for the invalidity request to get all the claims if the patent owner put enough limitations into the dependent claims.”

He echoes that point, highlighting that it is challenging to fully knock out communications patents, which have a lot of features in the dependent claims: “Sometimes, you cannot get all the right prior art for the minor features.” But He cautions that the low rate of full invalidations does not mean those patents are safe. “In lots of those partially invalidated cases, there are major independent claims that may be struck down,” he argues. “That’s still pretty harsh.”

Of course, each partial invalidation must be judged against which claims of the individual patent were being asserted, or could be asserted, against a specific product. “It’s not common for the patent owner to assert all the claims, usually only an independent claim or an independent claim plus one or two dependent claims,” Wang notes.

Gu emphasises that not all mixed decisions can be chalked up as defeats for the patent owner. “It’s really hard to tell. It depends on the prior art that the challenger can find, but it’s usually hard to entirely invalidate an invention patent.” She adds that in one recent case involving a chemical process patent, her client intentionally gave up an unimportant claim while still managing to maintain the validity of key parts of the patent.

Table 1. The most frequently challenged IPC classes

Table 1. The most frequently challenged IPC classes

Figure 7. Validity results in select IPC classes, 2016-2020

FIGURE 7. Validity results in select IPC classes, 2016-2020

Major players

The list of top patent owners in Incopat’s sample – measured by the number of unique patents, rather than the total number of challenges – contains high-profile companies from several industries, as well as a couple of unexpected wild cards.

Combining the patent totals for Hon Hai Precision Industry and one of its Kunshan-based Foxconn affiliates would make the Taiwan-based contract manufacturing giant the top overall patent owner. But it also highlights the fact that other major patent owners may be missing from this list if their challenged patents are owned across several legal entities.

Two pairs of companies that have engaged in extensive validity disputes with one another – Ericsson-Huawei and Gree-Midea – also rank highly.

In the top spot, JieLi Technology is a little-known company that appears to sell a wide range of electronic products. Many of its challenged patents seem to have been utility models. According to one source, JieLi engaged in a dispute with another technology company where its founder had previously worked. That company (and an individual named Luo Shuijiang, who appears in Figure 10 as a top challenger) has reportedly challenged a significant portion of JieLi’s patent portfolio.

He believes that it is significant that many of the most challenged firms are Chinese. “It means companies like Gree and Goodbaby are fighting all these patent cases, and their experiences are going to become a stronger force in shaping patents and the law,” he observes. That could mark a change from the past, when foreign companies were the key force in patent policy debates.

The Hunan-based patent owning entity appears to be a personal vehicle for an individual inventor named Qiu Zeyou. As we turn to the list of top patent challengers, we will see that one of the most salient features of China’s invalidity system is the key role played by individuals.

UK company Dyson is the top overall patent challenger (when the numbers for its two entities on the list are combined), concentrating its efforts on Chinese design patents. Japan’s Bandai, a major toy maker, is also a frequent design challenger. Huawei is also among the top challengers owing to major disputes in the communications sphere with heavyweights Ericsson and ZTE. Meanwhile, Phillips, Panasonic and Apple are all foreign tech companies facing Chinese patent litigation or rights that otherwise threaten their business.

But China’s system makes it difficult to get a fix on the biggest challengers. According to the Patent Law, anyone unsatisfied with the quality of a patent is entitled to file an invalidation request. “Nowadays a lot of firms use a strawman to file a request for invalidation,” Wang reveals. “If they fail, they can try again a second or third time.”

Any individual – even a law firm employee – can attach their name to a validity challenge and let the lawyers handle the rest. While some individuals have made it onto the list of top filers, a name will often be used in just one case before a new one is found. Patent owners can usually make a pretty good guess of who is really behind a patent challenge, but He laments that there is no way to make the other side disclose the real party in interest.

Invalidations are tried before CNIPA patent examiners, so it is no surprise that the top firms representing patent owners are the country’s largest patent prosecution agencies. However, with validity actions playing a key role in litigation strategy, IP-focused law firms are also increasingly adding to the mix at the Patent Office.

Table 2. Most challenged patent owners

TABLE 2. Most challenged patent owners

 

Table 3. Top patent challengers

TABLE 3. Top patent challengers

 

Table 4. Top patent owner advisers

TABLE 4. Top patent owner advisers

Predictability

In aggregate, the statistics on CNIPA validity decisions are sufficiently stable to give patent owners and challengers a fairly clear idea of what to expect. But in individual cases, practitioners report that there is still a degree of unpredictability when it comes to how examiners will rule.

In a detailed invalidation strategy guide written for IAM earlier this year, David Huang of Lexfield Law Offices reported that “there is much more uncertainty on the validity side” compared with infringement trials and that “the regulations governing validity are far vaguer and more susceptible to arbitrary discretion” than the rules governing civil litigation.

A local practitioner, who asked to remain anonymous, agrees that the courts are more transparent and that there are grey areas in the validity rules in which practitioners lack guidance – although he notes that there are blind spots when it comes to litigation as well.

Expanding on his comments in the previous article, Huang maintains that Chinese courts have been very deferential to the Patent Office.

For starters, that means a low rate of invalidation reversals in the Beijing IP Court, which hears appeals from the CNIPA (13% of invalidated patents were reinstated by the Beijing court in its first two years). Huang warns that the resurrection of a patent on appeal will generally happen only when the court finds an “obvious error” in the CNIPA’s factual findings.

This “lack of input from the courts”, Huang argues, is the “number one reason for relative vagueness” at the Patent Office, also noting that while the courts have issued numerous judicial interpretations on patent infringement matters, similar documents related to validity have been stalled in draft form for years.

He agrees that “very subtle turf fights” between the Patent Office and the IP courts are an “open secret” that can create some unhealthy dynamics in the Chinese patent system.

The Chinese courts have worked for years to increase predictability by developing a pseudo-precedent system whereby courts publish guiding cases, to which later litigants can refer. The CNIPA has taken similar steps, publishing a book of its own case law last year and highlighting its top 10 invalidity cases each year.

Huang reports that his experience of using these resources to support validity arguments has been mixed, with some examiners more receptive than others. “We don’t know whether those cases are very weighty and have real guidance to examiners,” he admits, making it questionable how much they will do to increase predictability.

Among foreign companies there is some wariness about the Patent Office, which is seen as potentially more susceptible to external influence than the IP courts. This year, the CNIPA selected as one of its top 10 validity cases a decision in which a patent owned by NPE PanOptis was upheld in the face of a challenge by Huawei. The other selected cases involving foreign patentees (Nichia and Takeda Pharmaceutical) also resulted in a valid patent. Data on invalidity rates by nationality would be an interesting angle for future investigation.

Gu insists that “communication with the examining team is very important” and offers a way to mitigate some of the uncertainty. In past cases, she says that her team has been invited to the CNIPA offices to further explain their arguments – meetings that they have recently been conducting via Zoom.

In Gu’s view, the key to success is a top team and intensive research. One key difference to the United States is that in China, “you can use prior use evidence like a smartphone” to make your case, rather than strictly publications.

But overall, most of the uncertainty around validity in China is much like that in other key IP jurisdictions. “There is nothing new under the sun, and that holds true in the patent field,” Wang points out. “You can always find some combination of prior art that looks similar to the invention.”

Action plan

Validity challenges are part of almost every major patent dispute in China. An exclusive data set gathered by Incopat sheds light on this critical part of China’s IP system.

  • Invalidation requests, which are determined by the CNIPA, have increased approximately in line with patent infringement litigation in China’s bifurcated system.
  • The time to decision has decreased markedly and even disputes over complex invention patents can be resolved within five to six months.
  • Around 50% of invention patents have been deemed fully valid in recent years, with the rest at least partially invalidated.
  • Mixed decisions are common in some of the most frequently contested hightech IPC classes, and these results can be damaging to patent owners.
  • Any individual can request a validity challenge, and companies often use strawmen to knock out inconvenient patents, reducing transparency.
  • The courts show significant deference to the CNIPA’s validity decisions, making the initial hearing and resulting decision extremely important.

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