Utility model patent strategy in China

Utility model patents are not a special type of patent in China, since numerous countries provide utility model patent protection for certain technologies. However, the utility model patent in China has attracted much attention and raised considerable concern based on its use in practice.

In 2017 more than 1.6 million utility model patent applications were filed in China and in excess of 99% of those were filed by Chinese applicants. There were more than 3.5 million utility model patents in force in 2017. According to a non-official data source, approximately 7,800 out of 12,000 first-instance patent infringement litigation cases established before courts all over China in 2016 were based on utility model patents. This demonstrates that utility model patents are actively working.

Rules and features

Patentable subject matter

There is limited patentable subject matter for utility model patents. Only a product with a physical shape and structure is eligible for protection under a utility model patent. A product without a physical shape or structure (eg, a chemical compound) cannot be a utility model patent.

Prosecution procedure

Utility model patents are different from invention patents in that they have a preliminary examination procedure rather than a substantial examination procedure. However, the preliminary examination procedure – which is not merely a formality check – will go through all substantial examinations regarding claims and specifications, as well as drawings (including clarity, enablement and support issues) and written description requirements. Since October 2013, at the discretion of the examiner, a preliminary examination may also conduct a prior art search and examination regarding the novelty at issue, which may explain the recent decrease in the grant rate of utility model patents from approximately 95% to approximately 80%. For the majority of utility model patent applications, there is no prior art search or related examinations during prosecution, meaning that there is no opportunity to amend claims against prior art raised by the examiner. It is highly advisable to conduct a deep prior art search during the drafting stage to make the utility model patent more stable.

The prosecution period for utility model patents from date of filing to date of grant has varied from one-and-a-half years (in the early years) to several months (more recently). Currently, a utility model patent application may be issued around six to 10 months from the filing date.

Factors and inventiveness standards

For technical improvement, the type of patent most suitable for protection is always key for in-house patent counsel, who will consider the following questions when deciding whether a utility model application should be filed:

• Is the subject matter eligible for a utility model patent?
• What is the lifetime of the product in the marketplace – a few years or more than 10 years (since the patent term for utility model patents is only 10 years)?
• Can the product be copied quickly and easily – necessitating quick protection with a utility model patent?

Another frequent and important factor for consideration of a utility model patent is the inventiveness level of the improvement. Where the inventiveness level is not very high, a utility model patent will be a good choice through which to seek protection since the inventiveness standard for utility model patents is lower than that for inventions. Based on Article 22 of the Patent Law, an invention must possess prominent substantive features and indicate remarkable advancements to have ‘inventiveness’, while a utility model patent will be considered to have inventiveness if it possesses substantive features and indicates advancements. It is difficult to pinpoint the line between what is ‘prominent’ and what is ‘remarkable’. Based on the examination guidelines, in practice the line reflects two main conditions:

• the fields of prior art for evaluating the inventiveness of a utility model patent should be identical or similar; and
• the volume of prior art (eg, reference documents) required for evaluating the inventiveness of a utility model patent should be limited to two pieces of evidence (with more than two pieces of evidence in only the most exceptional situations).

In accordance with this practice, an improvement to a certain inventiveness level may prove particularly interesting if it is filed as an invention application. The application may not survive the substantive examination procedure; however, if it is filed as a utility model patent application, the application will be granted procedurally (with no examination regarding inventiveness and only possible examination on novelty) and might not be invalidated after issue due to a different standard of inventiveness.

Dual application filing strategy

Since the subject matter of a utility model patent can also be filed as an invention patent application, a dual application filing strategy is frequently used by applicants. This means that the same technology (eg, the same claims and specifications) could be filed with two applications: one as an invention, the other as a utility model patent. Usually, the utility model patent application is granted within a year (approximately eight months) so as to obtain early protection. When the invention application is ready to be issued, the examiner will check whether a claim regarding the invention application has identical scope with a claim regarding the issued utility model patent from the same applicant. If this is the case, the examiner will request that the applicant select between the utility model patent and the invention application. The applicant will usually abandon the utility model patent and take the invention patent for protection to have a longer patent term.

For quicker and longer protection, and to avoid a double patenting problem, the two applications should be filed on the same date, cross referencing each other in accordance with the examination guidelines requirements. In this regard, dual applications cannot be filed with a Patent Cooperation Treaty (PCT) application, since there is no document available with which to cross reference PCT application documents.

Enforcement of a utility model patent

A utility model patent is enforceable directly following its grant. In general, there is no significant difference in enforcing a utility model patent from an invention patent. However, there are some minor differences, such as issues regarding stays in procedure and damages.

To lodge a lawsuit with a utility model patent, the court will usually require the patentee to submit a patentability evaluation report issued by the National Intellectual Property Administration. This is not a condition to establish the lawsuit, but it will be an important reference in deciding a stay request of the defendant based on patent invalidation grounds. Utility model patents are at a disadvantage compared to inventions and the general rule for utility model patents is to grant the stay request. Other factors including the conclusion of the patentability evaluation report, results of previous invalidation requests against the utility model patent and the grounds and evidence in the present invalidation request, will also be considered for the court to reach a comprehensive judgment.

In deciding damages when infringement is found, there are four methods according to Article 65 of the Patent Law. The first three methods include:

• the lost profits of the patentee;
• the profit of the infringer as a result of the infringement;
• reasonable times of previous licence fees, if any, where the three methods will be calculated based on evidence; and
• lack of difference between the invention patent and utility model patent.

In the fourth method – known as ‘statutory damages’ – the court will decide on an amount of damages ranging between Rmb10,000 and Rmb1 million based on several factors (including the type of patent). Only in this statutory damages method will the utility model patent be in a weak position compared to an invention patent.

Thus, utility model patents can be enforced immediately after grant in a way similar to an invention patent and can also obtain enough damages, if necessary, to provide evidence for the calculation of damages.

Challenges

Risk of being sued is high

For practising entities in China, there is a high risk of being sued by the patentees of utility model patents. The risk is derived from several aspects, among which the first is the huge amount of utility patents. By the end of 2017, there were more than 3.5 million valid utility model patents – a significant amount of which were owned by non-practising entities, including individuals. Individual patentees do not usually practice their patents and the main or only way to benefit from the patent may be from a licence or damages. An individual patentee may be interested if there is a chance to sue a company, especially a large company. Unlike for competitors (which are practising entities), it is quite difficult for a company to set up a counter-measure strategy for a patent infringement challenge against an individual patentee.

Among the significant number of utility model patents, a high percentage are unstable and low quality. However, there are still many utility model patents which are stable, strong and more difficult to challenge than invention patents, due to the different standard regarding the inventiveness requirement.

China’s patent litigation system favourable to patentee

China’s patent litigation system is very favourable to the patentee side, when considering cost and risk on the one hand and possible gains on the other. The cost for patent litigation is relatively low compared to the United States, the United Kingdom and Germany, and sometimes the actual cost to the individual patentee side can be very low. The cost usually contains two main elements:

• court fees, calculated based on damages claimed by the plaintiff; and
• attorney fees.

A strategy used by individual patentees to reduce costs and risk regarding costs following a loss is to file the lawsuit with an injunction claim and no damages claim. This will keep the court fee at the minimum level (Rmb500 or approximately $70). If infringement is found or likely to be found during the court hearing, the plaintiff may add a damages claim by the end of the hearing or start a new lawsuit at a later date for higher damages. The attorney fee may vary between $20,000 and $50,000 for an ordinary case. However, an individual patentee may prefer to hire a lawyer with contingent service. The risk is also very low for the patentee plaintiff, even if the plaintiff loses the lawsuit – the risk at large will be the expense for the plaintiff. Therefore, it may be less expensive and even pose less risk for an individual patentee to sue a practising entity. However, on the other hand, if the patentee plaintiff wins a case against a practising entity (especially a large company), the patentee could obtain a large award. Even though the damages level remains low in China, the injunction remains strong – with a grant rate of approximately 98% when the court finds infringement. Thus, the patentee may receive satisfactory compensation by using injunction as leverage.

Lack of mechanism to limit abuse of patent rights

A mechanism to limit abuse of patent rights is lacking. There is no negative effect except its own expense against the patentee if the patentee sues without reasonable care and loses the case. The only exception is that the patentee clearly sues in bad faith. However, based on court precedents – which are very few – it is very difficult to prove bad faith in the patentee, and ordinary carelessness does not meet the ‘bad faith’ standard. Thus, a patentee may sue in bad faith, but it will be difficult for the innocent defendant to prove it. In a recent case, a patentee filed an infringement charge against a party with five utility model patents. With hard work, the five patents were successfully removed. However, the patentee lodged 130 utility model patent infringement cases against the party. Considering the cost, even if all the cases are won, the party will have to seek a settlement with the patentee.

Utility model patent strategies

Since utility model patents can be obtained in a less expensive and more timely manner and are enforceable immediately after issue – even though there is much criticism of their low quality and of so-called ‘junk patents’ – they remain popular in China. Unfortunately, in the past year less than 1% of utility model patent applications were filed by foreign applicants – the utility model system has been overlooked for a long time by foreign applicants. In this regard, the right reaction is to use the utility model patent system rather than merely observing or complaining.

In a hypothetical case, Company A invented and patented a new product and the patent application (in particular, the specification) focused on a main inventive point named Feature A1 (common practice in patent drafting). The actual product contains the structure of Feature A1, but all other structures are not be mentioned in the patent. Company B, a competitor, discovered the product on the market when it was launched and filed a utility model application. The application describes and claims a Structure B1 for the product, which was not mentioned in Company A’s patent. Here comes the problem – Company B issued a warning to Company A. Company A was frustrated because its earlier filed patent did not disclose Structure B1, and it is difficult to subsequently collect proof of the date and structures of the earlier product if evidence has not been preserved (eg, prior use evidence or prior public disclosure by sale).

The first part of the strategy for using the utility model system is to establish a defensive strategy, which includes:

• defensive publication of the patent application and online disclosure with evidence preservation, among other things;
• collection of evidence, preferably with notarisation for prior use and prior sale of the main products, if any;
• watching the patent filing situation of the main competitors;
• a freedom-to-operate search on main or key products before marketing; and
• patent invalidation preparation and invalidation requests against risky patents found before marketing new products.

The second part of the strategy for using the utility model patent system is to establish an offensive strategy, including:

• filing the utility model patent applications proactively to build a patent pool with reduced expense;
• sending a warning letter with more than one utility model patent; or
• taking infringement action (especially through administrative procedures by filing a complaint of patent infringement before the local IP office) with many utility model patents against a competitor.

In this respect, if one utility model patent is found to be valid and infringed, even if all other patents are removed or have failed, in a business sense the patentee will win the battle against the competitor. In practice, it is advisable to draft a first claim with a broad scope (perhaps even broader than ‘reasonable scope’), which may be weak in inventiveness but clearly possesses novelty. Following which, dependent claims should be drafted with gradually narrower scope so as to have strong patentability. Since a first claim is novel, the application will be issued and the patent with a broad first claim will be valid and enforceable. This will create a significant risk for competitors in the design of their new products.