Legal Issues Relating to Multinational Companies' Application for Patent for Their R&D Achievements Made in China 

With the ever accelerating process of global economic integration, multinational companies' investments in China become more and more common mainly in the form of their solely invested companies or joint ventures, to make it possible for them to localise their R&D using of the local human resources. The resulting technological results from the efforts along the line are mostly patentable. However, under the Chinese law there are restrictions on application for patent for local inventions and the patent assignment. This is especially the case with patented technologies in hi-tech fields. This article will be scrutinising the provisions and the general practice in China in relation to multinational companies' application for patent for their R&D achievements made in China for your reference. 

Provisions Relating to Application for Patent for Technological Achievements and Assignment of Patents  

Provisions on Chinese Entities' application for patents in foreign countries 

Article 20 of the Patent Law: Where any Chinese entity or individual intends to file an application in a foreign country for a patent for its or his domestic invention-creation, it or he shall file first an application for patent with the patent administrative organ under the State Council and, shall appoint a patent agency designated by the said organ to act as its or his agent. In this regard, the prescriptions of Article 4 of this law shall apply.

 Any Chinese entity or individual may file an international application for patent for its or his invention-creation, according to the international treaties concerned to which China is a party. The applicant for the international application shall abide by the provisions of the preceding paragraph. 

This provision may be understood this way. If one intends to apply for a foreign patent for a technological achievement made in China, he should first file an application for a Chinese patent. Even if an application is filed for foreign patent through the PCT channel, it should be first filed for a Chinese patent, and the PCT application is filed afterward with the priority based on the Chinese patent application, or if a PCT application is directly filed, China should be specially designated in the application. 

Comments: the principle underlying this provision is in fact also a consistent practice in all countries, and would give no cause for much criticism. A foreign company's R&D establishment in China, if it is a "Chinese entity or person" in the meaning of the Chinese Patent Law, is also subject to this regulation. Directed to any non-compliance with this provision, only Article 64 of the Patent Law¹ has set forth the relevant punitive provision within the system of the Patent Law. However, the precondition for the this provision to apply is that the application "divulges a State secret". Normally, it is rare for the precondition to be satisfied. Besides, the restriction under Article 20 of the Patent Law may now be circumvented by making use of other provisions of the Patent Law. Following is an analysis along the line. 

Right to Apply for Patent 

Article 8 of the Patent Law relates to the issue of attribution of the right to apply for patent. For the purpose of the present discussion, let's first clarify the related concepts: 

The right to apply for patent means the right one qualified to be an inventor on the basis of an R&D result enjoys the right to file an application for patent. 

The patent application right means that an application has been filed for an R&D achievement and a patent application number and the date of priority has been secured. This is a state of completion of the application. The applicant's application is likely to be granted the patent right, and so has an expected value. The right lasts from the date of filing and the date of patent grant. 

The patent right refers to the right officially approved and protected under the law. 

Article 8 of the Patent Law: For an invention-creation jointly made by two or more entities or individuals, or made by an entity or individual in execution of a commission for another entity or individual, the right to apply for a patent belongs, unless otherwise agreed upon, to the entity or individual which made, or to the entities or individuals which jointly made, the invention-creation. After the application is approved, the entity or individual that applied for it shall be the patentee. 

The principle of this provision is that the right to apply for patent is based on the principle that "with an agreement, the agreement prevails, without, the statute prevails". The principle of the said statute is that one who makes an achievement is entitled to apply for patent unless otherwise agreed between the interested parties. 

While these principles and provisions originate from the Patent Law, a special law, similar provisions can also be found in the Contract Law, a general law as shown below: 

Article 339 of the Contract Law: For any invention or creation achieved through the commissioned development, the right to apply for patent belongs to the researcher-developer, unless otherwise agreed between the interested parties. If the researcher-developer obtains the patent right, the commissioning party may exploit the patent free of charge.

 If the researcher-developer assign its right to apply for patent, the commissioning party has the right of first refusal of such assignment on equal conditions. 

Article 340 of the Contract Law: For any invention-creation achieved through the cooperative development, the right to apply for patent belongs jointly to all parties to the cooperative development, unless otherwise agreed between the interested parties. If one of the parties assign its joint right to apply for patent, any other party has the right of first refusal of such assignment on equal conditions. If a party to a cooperative development waives its joint right to apply for patent, any one party to the cooperative development may alone, or all the other parties, may jointly file the application. If the patent right is obtained by the applicant(s), the party that has waived its right may exploit the patent free of charge. If one party to a cooperative development does not agree to apply for patent, the other party or parties shall not do so. 

Although it has been in force since 1 October 1999, the Contract Law has integrated the law provisions on contracts of the former Economic Contract Law of the People's Republic of China, the Law of the People's Republic of China on Economic Contract Involving Foreign Interest and the Technology Contract Law of the People's Republic of China. Academically, the Contract Law is taken as the "consolidated contract law". The above two provisions originate from the former Technology Contract Law of the People's Republic of China as of 1987. The Contract Law has just roughly copied them. The original provision goes as follows: 

Article 32 of the Technology Contract Law of the People's Republic of China: The principles of ownership and sharing of technological results arising from the performance of a technology contract are as follows; 

(1) The right to apply for patent for an invention-creation which results from commissioned development shall, unless otherwise stipulated by the contract, lie with the party which undertook the research and development. If the party which undertook the research and development obtains patent right, the commissioning party may exploit the patent free of charge. 

If the party which undertook the research and development assigns its right to apply for patent for its invention-creation, the commissioning party may have the right of first refusal of such assignment. 

(2) The right to apply for patent for an invention-creation which results from co-operative development shall, unless otherwise stipulated by the contract, lie jointly with the parties to the joint development. If one party assigns its joint right to apply for patent, the other party or parties may have the right of first refusal of such assignment. If one party to co-operative development waives the jointly held right to apply for patent, any one party to the cooperative development may alone, or all the other parties, may jointly file the application. Once a patent right is granted, the party which waived its right to apply for patent may exploit the patent free of charge. If one party to a co-operative development does not agree to apply for patent, another party or the other parties shall not do so. 

(3) The rights to use and assign non-patented technological achievements made in commissioned or co-operative development, and the detailed method of distribution of benefits shall be stipulated by the parties in the contract. If the contract contains no stipulation of the kind, all parties shall have the right to use or assign the technological achievements. The party commissioned to undertake the research and development may not, however, assign the results of the research and development to a third party prior to handing those results over to the commissioning party. 

Comments: The Patent Law is a special law and the Contract Law a general law, but they are exactly the same in the provisions on the ownership of technological achievements. Under the two laws, it is quite possible for the establishment of a foreign business in China to allow its technological achievement to be owned by a multinational company (its mother company) by virtue of contractual agreement. Thus, the right to apply for patent is secured under Article 8 of the Patent Law, which circumvents the restriction under Article 20 of the Patent Law. Obviously, the outcome is by no means what the legislators wanted, but a technical deficiency in legislation. It is foreseen that provisions along the line will be changed, when the Patent Law is to be amended for the third time. In the Guide to the Research Project on Revision of the Patent Law and its Implementing Regulations for the Third Time, issued by the State Intellectual Property Office (SIPO) at www.sipo.gov.cn is stated that "in reality, there are applicants, especially foreign applicants, make use of it to circumvent the relevant provisions of the Patent Law", which conversely shows that the "so-called" circumvention" is not contrary to the relevant law provisions in China, otherwise it is unnecessary to put the matter on the agenda of the patent law revision. 

Outbound Assignment of Patent Application Right and Patent Right 

Article 10 of the Patent Law: The right to apply for patent and the patent right may be assigned.

Any assignment, by a Chinese entity or individual, of the right to apply for patent, or of the patent right, to a foreigner must be approved by the competent department concerned of the State Council. 

Where the right to apply for patent or the patent right is assigned, the parties must conclude a written contract, and shall register it with the patent administrative organ under the State Council. The patent administrative organ shall announce the registration. The assignment will come into force upon the date of registration. 

Comments: This Article relates to outbound assignment of the patent application right and the patent right, showing that outbound assignment of the patent application right and the patent right is subject to the governmental control, with the approving agency being the Ministry of Commerce (the former Ministry of Foreign Trade and Economic Cooperation). The precondition for it to apply is that a patent has been granted or applied for a technological achievement. An interested party may, under Article 8 of the Patent Law, avoid the assignment issue and free itself from the restriction under Article 10 of the Patent Law by virtue of contractual agreement on the ownership of the technological achievement formulated before the achievement was made, say before the development thereof. 

Conflicting Law Provisions: Other Restrictive Requirements in the Provisions of the Regulations of the People's Republic of China on Technology Import and Export Administration 

It seems not sufficiently appropriate to simply believe that the provisions of the Patent Law and Contract Law have accorded the legal protection for lawful assignment of R&D achievements made in China. 

The Regulations of the People's Republic of China on Technology Import and Export Administration going into force on 1 January 2002 have set forth relevant provisions on technology export. Under the Regulations, there are three kinds of control on technology exportation: prohibitive, restrictive and free. 

The prohibitive and restrict provisions are as the following: 

Article 31 Any technology that falls under any of the provisions of Articles 16 or 17 of the Foreign Trade Law is prohibited or restricted from exportation. The competent foreign trade department under the State Council shall, in conjunction with other relevant departments under the State Council, formulate, change and publish catalogues of the technologies which are prohibited or restricted from exportation. 

Article 32 Technology prohibited from exportation shall not be exported. 

Article 33 Technology restricted from exportation shall be subject to license administration; and shall not be exported without a license.

Article 34 To export any technology restricted from exportation, an application shall be filed with the competent foreign trade department under the State Council. 

The free-export provisions are as follows: 

Article 39 Freely exportable technology shall be subject to the contract registration administration.

A contract for exporting a technology takes effect from the time when the contract is established according to law, the registration thereof not being the condition for the contract to be effective. 

Article 40 When a freely exportable technology is to be exported, registration shall be made with the competent foreign trade department under the State Council, with the following documents submitted: 

(1) an application for registration of the technology export contract;

(2) a copy of the technology export contract; and

(2) any regulatory document certifying the legal status of the contracting parties. 

The means for the control under the above provisions are as follows: publishing catalogues of the technologies which are prohibited or restricted from exportation, with no technology prohibited from exportation being allowed for exportation; subjecting a technology restricted from exportation to the license administration; and subjecting the freely exportable technologies to the contracts registration administration.

 It is worth noting that Articles 46-52 in the Chapter Four Legal Liability have very stringently provided for the legal consequences to be borne for any violation of them. Let's look at Articles 46-47: 

Article 46 Where a technology prohibited or restricted from importation and exportation is imported or exported without license shall be prosecuted for criminal liability according to the provisions for the crimes of smuggling, illegal business operation, or divulging national secrets or the other crimes under the Criminal Law. Where such import or export is not so serious as to be prosecuted for criminal liability, penalty shall be imposed according to the circumstances pursuant to the relevant provisions of the Customs Law, or the competent foreign trade department under the State Council issues a warning against it, confiscates the illegal income and/or imposes a fine one to five times the illegal income. The competent foreign trade department under the State Council may revoke the foreign trade business license.

 Article 47 Any act of importing or exporting technology restricted from importation or exportation by exceeding the scope of business licensed shall be prosecuted for criminal liability according to the provisions for the crime of illegal business operation, or other crimes under the Criminal Law. Where the act of importing or exporting is not so serious as to be prosecuted for criminal liability, penalty shall be imposed according to the circumstances pursuant to the relevant provisions of the Customs Law, or the competent foreign trade department under the State Council issues a warning against it, confiscates illegal income and/or imposes a fine one to three times the illegal income. The competent foreign trade department under the State Council may suspend, and even revoke, the foreign trade business license. 

Comments: As the above provisions show, control on technology exportation in China is in conflict with the Patent Law; hence needs coordination and amplification. Besides, the Regulations on Technology Import and Export Administration set forth criminal and customs provisions, and such crimes as those of smuggling, illegal business operation, divulging the State secrets. For that matter, how to protect the technological achievements made by foreign businesses in China and how to stay away from legal risks are issues worth our in-depth study and close attention. 

Conclusion 

As the present situation shows, the Patent Law is legislatively at a higher level than the Regulations on Technology Import and Export Administration, which are administrative regulations; hence, for this writer, it is legitimate for foreign businesses to treat the technological achievement made in China pursuant to Article 8 of the Patent Law. However, it has to be noted that the punitive provisions of the Regulations on Technology Import and Export Administration contains criminal and customs provisions, and the Criminal Law and the Customs Law are legislatively not lower than the Patent Law. Further, the Criminal Law is also a basic law. Analysis of their law principles, a subject matter outside this article, is left for other scholars to pursue. 

Since the issue of application for patent for technological achievements made by foreign businesses in China are related to the national interests, it will surely draw great attention from the legislators when the Patent Law is to be revised for the third time. However, the issue involves many government agencies, and the views are so much divided or different that it is unlikely for a consensus to be reached too soon. Meanwhile, law revision takes considerable time. As is officially expected, the new Patent Law would not be promulgated before 2008, to be the soonest. 

It should be noted that Article 20 of the Patent Law as of 1992 provides that Where any Chinese entity or individual intends to file an application in a foreign country for a patent for invention-creation made in the country, it or he shall first file an application for patent with the Patent Office, and, with the approval of the competent department concerned under the State Council, shall appoint a patent agency designated by the State Council to act as its or his agent. The competent agency under the State Council then referred to the Ministry of Science and Technology. Under the Patent Law as of 2000, it is explicated that the competent department is the Ministry of Commerce. This change is an indication that China is inclined to exercise control through the technology export administration, thus incorporating the issue of application for patent for technological achievements made by foreign businesses in China into the uniform technology export administration. Doing things this way also seems to require the harmonisation the Patent Law and other relevant laws. 

1.Article 64 of the Patent Law: Where any person, in violation of the provisions of Article 20 of this Law, files in a foreign country an application for a patent that divulges an important State secret, he shall be subject to disciplinary sanction by the entity to which he belongs or by the competent authority concerned at the higher level. If the circumstances are serious, he shall be prosecuted for his criminal liability according to law.