Eric Bo LI, Patent Attorney, Panawell & Partners

In recent years, with the rapid development of science and technology and overall heightening of national awareness of innovation and intellectual property protection in China, annual patent filings and grant has been on a dramatical rise. According to the statistics, as of the end of 2019, domestic invention patents (excluding those of Hong Kong, Macao, and Taiwan) had totaled 1.862 million, and the number of invention patents per 10,000 population reached 13.3, fulfilling the targets set in the nation’s 13^th Five-Year Plan ahead of schedule^[1].

However, the current situation in China of the conversion, exploitation and transaction of patented technologies is anything but optimistic, with lots of patents remaining dormant upon grant and the term of many terminating at the very moment of grant, with their value yet to be fully delivered, thus causing huge waste of money and time invested in the initial R&D and greatly damping the enthusiasm of patentees and scientific researchers to further invest in R&D of new patented technologies. Furthermore, the number of patent infringement disputes and lawsuits in China is continuously increasing, casting heavy burden on the limited judicial, administrative, and social resources.

To address the matter, China, by drawing upon foreign legislation and judicial practices and in response to the actual needs of the market players and innovators in the nation, has come up with the fourth Amendment to the Patent Law, which, promulgated on October 17, 2020, has incorporated three new clauses concerning the patent open licensing system in the chapter "Special License for Patent Exploitation". This marks the formal establishment of the patent open licensing system, with further enriched types and methods of patent licensing in China.

Specifically, Article 50 of the new Patent Law sets forth the procedural requirements for patentees to implement and withdraw patent open licenses, that is, where a patentee voluntarily declares in writing to the Patent Administration Department of the State Council that he is willing to license any entity or individual to exploit his patent, and specifies the methods and standards for paying for the royalties, the Patent Administration Department of the State Council shall make an announcement and implement the open license. Where an open licensing declaration is filed for a utility model or design patent, a patent right evaluation report shall be provided; if the patentee withdraws an open licensing declaration, he shall file the withdrawal in writing to be announced by the Patent Administration Department of the State Council. An announced withdrawal of an open licensing declaration will not affect the validity of the open licensing granted earlier.

And Article 51 of the new Patent Law stipulates the procedural requirements for the licensee to be granted the patent open license and the patent annuity reduction and exemption policy. That is, if any entity or individual intends to exploit an openly licensed patent, it or he shall notify in writing the patentee and will obtain the patent license after paying the royalties according to the announced payment method and standard; under an open license, the patentee will be granted a corresponding reduction or exemption of his patent annuity; and the patentee offering an open license may grant a general license after negotiating with the licensee on the royalties, but shall not license the patent exclusively.

Article 52 of the new Patent Law provides for a mechanism for resolving patent open license disputes. That is, if the parties run into dispute over the execution of an open license, they shall resolve it through negotiation; if they are unwilling to negotiate or fail in the negotiation, they may request the Patent Administration Department of the State Council to mediate, or file a lawsuit in the court.

In general, the established patent open licensing system shows full respect for the independent will of both the licensor and the licensee, and such a license is different from the compulsory patent license. Moreover, the system also more clearly regulates the rights and obligations of the licensors and the licensees, which helps to ensure safe transaction and efficient execution of patent licenses. The system, now put in place to provide an open patent licensing platform for enterprises, institutions and the general public to disseminate patent information and streamline the patent licensing procedures, will play a vital role in boosting the development and utilization of patented technologies in China in the future, in delivering the industrial value of patented technologies, and in promoting scientific and technological progress. As a result, many enterprises, institutions, and research organizations have developed their keen interest in the patent open licensing system and are eager to try utilizing it in an effort to make good use of it to seek new impetus for their future developments.

However, successful use of any legal system requires comprehensive consideration and planning of the specific methods for the purpose in advance, and reasonable designing in view of objective conditions, to maximize its strengths and avoid weaknesses for the best value of it. As for how to effectively utilize the patent open licensing system, maximize its role in promoting technological progress, and avoid the risks that may arise in the process of implementation, it is necessary to weigh upon the system from the following aspects:

First of all, the patent system is essentially a legal tool for patentees to maintain their dominant position in market competition through their technological advantages. Excluding and restricting competitors is the most direct purpose of patent rights, which is a decisive factor that a considerable number of patentees are not interested in licensing others their core patents obtained through tremendous investment and creative efforts, as the economic benefits brought by the dominant position in the market place are far more than those sought from patent licensing. As a result, the number of valuable patents actually put on the patent open licensing platform is limited. In fact, some patents that are available on platform lack the necessary competitive edge or advantage technically or commercially as they are often secondary patents that the patentees offer to tap the residual value of their low-valued intangible assets or to reduce the cost of maintaining their intellectual property portfolio. That is why patents offered for open licensing are not many in other countries that have adopted the patent open licensing system for many years^[2].

It is true that some patentees with limited funds or R&D capabilities would like to put some patented technologies with potential market value and development prospects onto the patent open licensing platform in order to realize the value of their patented technologies or to seek further development funds. But many of these patented technologies are often still in their early stage of development, with their expected future success greatly uncertain and the exploitation of them potentially risky.

Therefore, investors who are trying to find valuable patented technologies on the patent open licensing platform need to fully evaluate the technological and market value of target patents provided on the platform before arriving at a patent license, and must not make a rash decision by blindly relying solely on the disclosure made in the patent documents. What’s more, it is also necessary for them to investigate whether there are other patented technologies related to the patented technologies and whether they are replaceable by any existing technologies. As the saying goes, to find out a better patented technology, one still needs to shop around and made comparisons. Comprehensive evaluation of patent value is an indispensable part of the work to be done before concluding a patent license.

Second, as for the legal status of patents, a granted patent is of somewhat uncertain stability as is shown by the considerable number of invention patents declared invalid each year. As for the utility model and design patents, the proportion of invalidated patents is naturally even higher. While Article 50 of the new Patent Law stipulates that if an open license declaration is filed for a utility model or design patent, a patent right evaluation report should be provided, but this is not enough to completely rule out the risk of invalidation of the patent. Once a patent on which a technology that has entered the implementation stage relied on is invalidated, the loss to the licensee in terms of financial and time costs is often irreparable.

Therefore, potential patent licensees also need to examine the legal status of target patents provided on the patent open licensing platform, and, if necessary, search and analyze the related existing technologies to evaluate the stability of the patent. In addition, the patent license should spell out the clauses on liability fixation and compensation in case of invalidation of the licensed patent to avoid possible risks.

Third, while a patent is vital to the development and exploitation of a technology, whether the technology can be exploited smoothly and effectively depends on many factors in addition to the technical disclosure made in the patent documents. For example, many patentees keep some technical details as technical secrets and choose not to disclose them in the patent documents, but the technical secrets are essential for effective exploitation of the technology, or key factor for utilizing it to the best effect. Therefore, it is necessary to stipulate in the patent license agreement that the patentee shall provide relevant technical details or offer necessary personnel training when reaching a patent license.

In addition, the development of a technology often generates multiple patents, which forms a patent pool or planned spread-out of patents to protect the technology. In this case, a potential patent licensee must also search for the complete set of the licensor's patent filings relating to the technology involved in the openly licensed patent, and examine whether other related patents have also been made available on the open licensing platform. If the exploitation of an open-licensed patent still depends on the licensor's license of another patent, then the latter should be included or covered in the open-licensing agreement to ensure that there will be no patent barrier in the future exploitation of the technology.

Besides, a patented technology may also produce new innovative technical solutions in the process of exploitation under an open license, and it is also possible for these technical solutions to become new patents. Then, the ownership of the new patents will be related to the vital interests of both the patent licensor and the licensee, and a prior agreement on the matter will also help avoid future disputes.

Fourth, a patent open license is essentially a general license^[3], which, as is shown in the preceding law provisions, rules out the possibility of granting any exclusive license in connection with a patent openly licensed. Therefore, a licensee who has obtained a patent under an open license may have to face the lawful competition of the licensor or other licensees in the same field of the patented technology when exploiting the patent. In other words, the patent will be made greatly less exclusive and its market competitiveness more restricted. This is exactly what the licensee needs to note and consider. On top of this, the royalties of the open patent license should also fall within a reasonable range in view of the above-mentioned circumstances.

To conclude, the patent open licensing system will play a positive role in addressing the difficulty in conversion of patents in China at this stage, in giving full play to its important functions, such as promoting the exchange of patent information, ensuring safe patent licensing transactions and saving social resources, and in helping deliver the important goals of accelerating the construction of an innovative nation and boosting intellectual property creation, protection and utilization.

To further improve the patent open licensing system in China, practitioners in the related fields of administration, law, technology and marketing need to conduct in-depth research, and work in collaboration in the area to explore and establish a set of effective models of practice in relation to patent open licensing truly suitable for the direction along which the intellectual property system will develop in China.

References

[1] www.cnr.cn, April 23, 2020.

[2] Yanghuan ZHANG, Patent Open Licensing System from the Perspective of Liability Rules, Tsinghua Law Journal, 2019, Volume 13, Issue 5, Pages 186-208.

[3] Juan LIU, Establishing Open Licensing System to Improve Patent Explitation, China Intellectual Property News, September 28, 2018, Issue 1945, 8th edition.