China announced sweeping punishment measures for dishonesty in patent arena

Earlier this month, China published a memorandum of cooperation for joint efforts to strengthen punishment for dishonesty in patent arena, signed by a total of 38 government bodies including the supreme court, central bank, ministry of finance, patent office etc. According to this memorandum, dozens of punishment measures will soon be targeted at “severely dishonest behavior” such as repeated patent infringements, refusal to comply with administrative decisions, obstruction of local IP offices in conducting investigations and collecting evidence etc.

The announced punishment measures are directed to a wide range of economic activities. For instance, entities engaged in those “severely dishonest behavior” would be restricted in receiving government funding/subsidy, participating in government procurement, be banned from issuing bonds, and be subject to stricter supervision under market authorities and customs. Moreover, information of “severely dishonest behavior” would be recorded in the financial credit information system and made public on a special blacklist. In short, those affected entities would be labeled as untrustworthy and would have to face various restrictions and bans in economic activities.

Interestingly, this memorandum was published just days after the Chinese and U.S. presidents had met at the G20 summit in Argentina and agreed upon a 90-day halt to their “trade war” so that the two sides could negotiate a deal to resolve, primarily, a number of U.S. complaints, including alleged deficiency in China’s IP protection system. The new punishment measures against dishonesty in patent arena are thus seen by many as China’s effort to address U.S. complaints. In fact, the introduction of the punishments was part of China’s existing plan to build a comprehensive social credit system, which plan was set out in 2014 and envisioned to be completed by 2020. Therefore, the announced punishment measures do not appear to be a mere reaction to the “trade war”. The “trade war” might nevertheless have accelerated the process.

Apparently, many of the punishment measures would affect Chinese companies/individuals more than foreign companies/individuals. For example, the Chinese companies usually have more access to and are also more dependent on government funding/subsidy and lending from local financial institutions. Restriction thereon would thus have a strong deterring effect mainly on local companies. This may be appropriate adjustment to the current Chinese system, which has been frequently criticized as favoring local companies over foreign ones.

It is worth noting that the “severely dishonest behavior” defined in the memorandum is confined within the framework of administrative patent enforcement. For example, with regard to the behavior of repeated patent infringements, only patent infringements decided by local IP offices in the course of administrative enforcement are in question, while patent infringements decided by courts in litigations are not considered. As a consequence, even if a court decided that a company repeatedly infringed a patent, the company would not have to face the punishments listed in the memorandum.

Given this disparity, the attractiveness of administrative enforcement for patent proprietors is likely to increase. The administrative enforcement system is generally faster and less expensive than civil proceedings. However, since local IP offices do not have the competence to grant damage claims, the deterrent effect of administrative enforcement is relatively low. Now, this may change due to introduction of the new punishment measures. According to the memorandum, the 38 government bodies will draw up implementation rules, operating procedures, and start to implement the joint punishment measures by end of this month.   

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