What pharma pros in China need to hit enforcement curveballs

Already the world’s second largest healthcare economy, China is growing rapidly in importance as a market for innovative drugs and a hub for pharmaceuticals innovation and manufacturing. Worth $122.6 billion in 2017, the country’s pharmaceuticals market is expected to reach as much as $175 billion in value by 2022. And with an ageing population and only 6% of the country’s gross domestic product currently being spent on healthcare, such increases are likely to continue for the foreseeable future.

As such, China has a central position in the business strategies of international pharma companies, with the American Chamber of Commerce in Shanghai’s 2018 China Business Report finding life sciences to be one of the best-performing sectors among US companies in the country; 93% of respondents in the industry reported growth, while 87% described themselves as optimistic about market conditions in the country – more than in any other sector. Merck’s CEO and chairman Stefan Oschmann recently described China as “by far the most promising market” for the company.

However, life sciences companies could be forgiven for having concerns about China’s IP system. The country was seen for many years as the ‘Wild East’ of intellectual property. Low damages, a lack of expertise among the judiciary and weak enforcement measures all created significant challenges for rights holders seeking to tackle infringers; while significant patentability and filing restrictions, as well as a lack of regulatory data protection and patent-term extensions, have limited the rights available to innovators.

Such shortcomings would be particularly problematic for biopharma companies, which – due to a combination of high R&D costs and the relatively low cost with which copycat drugs can be produced – depend on effective patent protection more than companies in any other sector, while requiring an IP system to make allowances for their unique regulatory challenges.

Fortunately, China has taken steps to encourage innovation and strengthen its IP system as part of its efforts to transition from a middle-income to a high-income economy. Its first national IP strategy in 2008 established the aim of creating “a nation with an internationally top level of creating, using, protecting and managing IPRs [IP rights] by 2020” – an objective reaffirmed in the 2013 and 2017 iterations of the strategy. Efforts to improve the country’s patent regime reached a crescendo in 2017, with a raft of legislative, judicial and administrative reforms – including some of those most desired by biopharma innovators – being implemented or proposed.

Nevertheless, China remains a challenging and idiosyncratic jurisdiction for life sciences innovators, whose representatives continue to express serious concerns about the country’s IP regime. And with strong political forces pushing back against patent reform in the healthcare sector, it is not obvious what the future holds for pharmaceutical patents.

It is crucial therefore for pharma patent professionals to study the contours of China’s patent landscape, take stock of recent shifts in the terrain and understand the forces that will continue to reshape it in years to come.

Administrative enforcement and punitive damages

Over the past two years, Chinese authorities have implemented or committed to several pro-innovator reforms to the country’s patent system, aimed at boosting enforcement mechanisms and strengthening available IP rights. But many of these changes appear designed to help rights holders in other sectors and are unlikely to bring significant benefits to life sciences companies.

For example, there are plans to ramp up penalties for bad faith/wilful infringement. In December 2018, 38 government agencies – including the newly established National Intellectual Property Administration (CNIPA), the National Development and Reform Commission and the People’s Bank of China – announced severe new punishments for “serious” patent infringers under China’s controversial new social credit system. Acting in bad faith, obstructing evidence collection or repeated infringement, a memorandum of understanding said, will prompt a wide range of potential penalties including restricted access to government funding, increased supervision and travel restrictions.

This coincides with similar steps proposed in a draft patent law amendment released for public comment by the National People’s Congress at the start of this year. The draft proposes to increase punitive damages from four times to five times illegal earnings or from Rmb200,000 ($30,000) to Rmb250,000 ($37,000) if illegal earnings are below a certain threshold. It contains provisions to expand the enforcement abilities of administrative authorities, giving CNIPA and local IP offices the power to seal infringement verdicts and order the seizure of infringing products. The proposals moreover extend the statute of limitations to three years and tilt the burden of providing information necessary to determine damages in favour of plaintiffs.

This focus on punishing repeat or bad-faith infringers fails to address the enforcement issues that most concern pharma patentees, whose important disputes usually involve generic life sciences companies, which are likely to be placed into that category. Punitive damages may be useful to patent owners in some sectors, but do not play a major role in typical innovator versus generic disputes.

While damages awards can be meaningful to pharma rights holders, they are usually inadequate to remedy infringements in a sector where even a temporary loss of exclusivity can cause significant and irreparable harm. This means that getting an infringing product removed from the market in a timely fashion – or preventing it from being put on sale in the first place – is of the utmost importance to life sciences rights holders.

“If a patent-infringing pharmaceutical product is put on the market, the original drug will quickly lose market share, which is almost impossible to get back,” explains David Shen of Allen & Overy’s Shanghai office. “So you have irreparable harm if the infringement is not stopped right away. It typically takes one or two years to win an infringement case, by which point no effective remedy is available, so you cannot depend on damages.”

The emphasis on administrative patent enforcement will not be welcomed by branded biopharma companies either. Having become by far the most widely used procedures for patent enforcement in recent years, such mechanisms involve the CNIPA or local IP offices investigating infringement complaints by interviewing the alleged perpetrators, and inspecting and seizing products.

The advantage of such proceedings is that they are relatively quick and cost-effective, notes Tim Jackson, head of patent strategy and development at Rouse. However, no significant fines or damages are awarded and administrative authorities will accept only clear-cut cases. As such, the proceedings are singularly ill-suited to legally and technologically complicated patent cases, such as those that affect pharmaceuticals innovators.

Hogan Lovells’ Andrew Cobden comments: “Most lawyers would recommend that clients who own complex technologies use civil litigation. The kind of cases a pharma company is likely to be involved in would not be suited to administrative enforcement.” Shen agrees. “Lots of people are questioning the wisdom of giving the patent office more enforcement powers. Most parties in the life sciences would rather have the courts deal with enforcement actions and are worried that administrative authorities will make the wrong decisions.” As such, any development of administrative enforcement at the expense of improving judicial dispute resolution mechanisms will be to the detriment of life sciences rights holders.

Rise of specialist IP courts

Of more importance to pharma innovators is the January 2019 establishment of a new IP division of the Supreme People’s Court. Intended to function much like the US Court of Appeals for the Federal Circuit, the new division will hear appeals on patent validity and infringement decisions handed down by lower judicial and administrative authorities.

This continues a trend towards judicial specialisation in intellectual property, which saw the establishment of new specialist IP courts in Beijing, Guangzhou and Shanghai at the end of 2014 and beginning of 2015, so that disputes could be adjudicated with greater expertise, consistency and efficiency. These have proved enormously popular, with over 11,000 patent cases heard in 2015 alone.

This constitutes progress for life sciences innovators, whose disputes tend to be legally and technologically complex and whose patents are often extremely valuable. The USPTO former senior counsel for China, Mark Cohen, has described the Supreme People’s Court’s new IP division as “a much awaited, historic and potentially disruptive breakthrough in the China IP litigation system” whose creation could correct anti-foreign bias in the system by weakening the influence of local interests.

Cobden tells IAM that IP courts have already had a positive impact on pharma patent litigation: “There have been a lot of improvements to IP enforcement in the past five years. Previously, rights holders thought it might be difficult to win, but that has changed quite a lot. Pharmaceutical companies are becoming more inclined to enforce their rights… Setting up the IP courts has made a big difference. The quality of decision making has gone up, as have the amount of damages.”

Jackson agrees. “The IP system here is growing in perceived quality and reliability. The decisions are becoming more reliable and predictable and they will become even more so with the creation of the IP tribunal at the Supreme People’s Court. The judges are well trained now and know what they are doing. This will benefit pharmaceuticals companies.”

Since 2014, data on patent litigation has been more available to international observers. And what it reveals should reassure foreign rights holders. In 2016, 29 out of 64 first-instance patent infringement cases (across all industry sectors) involving a foreign party as plaintiff resulted in a win for the international party, while 24 were withdrawn and only eight were lost.

Difficulties obtaining adequate remedies

Another major problem for pharma and biotech innovators is the difficulty of getting an infringing product removed from the market quickly and the fact that it is impossible to prevent it from being launched in the first place.

There have been serious concerns among patentees about their ability to obtain preliminary injunctions in China. Last year, the Pharmaceutical Research and Manufacturers of America (PhRMA) complained that “although China’s laws and regulations provide for injunctive relief, in practice injunctions are rarely if ever granted in the context of preventing premature follow-on product market entry, due to high procedural barriers”.

Shen agrees with this analysis. “While the courts are willing to grant permanent injunctions when you win a case on the merits, preliminary injunctions are still difficult to obtain overall,” he observes. “It does occasionally happen, as in Apple v Qualcomm. But judges are very reluctant to grant injunctions when they have not yet assessed the case on its merits, especially given that they are heavily dependent on advice from technical experts.”

This problem has been acknowledged by authorities; the Judicial Committee of the Supreme People’s Court issued a new set of rules late last year regarding the grant of preliminary injunctions in IP disputes. On the face of it, these rules could make it easier for plaintiffs to succeed in removing allegedly infringing products from the marketplace prior to a judgment on the merits where that infringement could cause irreparable harm. For example, they require courts to consider evidence regarding reduction of market share. But it is unclear at this stage how courts will balance this requirement against other factors, such as the obligation to take public interest considerations into account.

Patent linkage abandoned?

Given the difficulty of obtaining preliminary injunctions, biotech and pharma innovators will have been especially disappointed that planned patent law reforms in China do not include the creation of a US-style patent linkage system, which would have given innovators the chance to litigate patent infringement allegations prior to marketing approval.

Such a system was previously proposed by the CFDA, which expressed a commitment to patent linkage in a May 2017 document and in a special opinion issued in October 2017. The National People’s Congress also stipulated the adoption of patent linkage in a 2018 draft drug administration law. It was proposed that China would create its own version of the US Orange Book, listing patents relevant to innovative drugs; that generics would be required to declare that their products do not infringe such rights before obtaining marketing approval; and that originators would have the opportunity to initiate litigation, leading to a stay of marketing approval for up to two years.

The creation of patent linkage would constitute a significant stride forwards for industry rights holders, not only marking a clear pro-patent shift by Chinese authorities but also addressing the distinctive IP issues that confront inventors in the sector. It would provide an effective way of obtaining temporary restraining orders while patent litigation plays out and before irreparable harm is done to the patentee. As such, PhRMA welcomed these proposals, saying that the establishment of an Approved Drug List akin to the Orange Book would “provide greater certainty to innovators and generic manufacturers alike regarding the patent status of approved medicines and facilitate effective patent enforcement”.

However, plans to implement patent linkage in China seem to have ground to a halt. In 2018, provisions needed to lay the foundations for linkage (eg, the introduction of “artificial infringement”) were left out of an August State Council notice on healthcare reform. Patent linkage has now been omitted from the proposed patent law amendments, while no mention of it was made in the memorandum of understanding signed by 38 government agencies.

For a 360 view of the life sciences industry in China, see the full version of this article in IAM 95, which will be published at the end of March 2019.