Compulsory License in China

The SIPO’s new rules on compulsory licensing of patents may affect those who own patents or want to use others’ patents.

China State Intellectual Property Office (SIPO) has issued detailed rules on measures for compulsory licensing of patents, which came into effect on May 1 2012. These rules cover the procedure for granting compulsory license, for determining royalty rate, and for terminating compulsory license.

The SIPO will make decision on these matters in accordance with the rules. They may affect those who own patents and those who want to use others’ patents in China, as well as the least developed countries that want to import generic medicine from China in accordance with the WTO rules. This article outlines how the SIPO processes the petition for granting compulsory license of patents in China, and also analyzes the possible impact of these rules.

The grounds for granting compulsory license
The rules reiterate five conditions, under one of which any qualified would-be licensees may file a petition with the SIPO for granting compulsory license of a patent in question. These five conditions have been enumerated in Chinese Patent Act (2008).

1. Not exploit patents sufficiently.
Any parties that have the ability to implement the patent are entitled to file a petition for granting compulsory license of a patent where the patent holder has not exploited its patent at all or not exploit its patent sufficiently within 3 years from the patent granting date and within 4 years from the patent filing date without any legitimate reason.

2. Dependent patents.
Where a patented invention is an important technical advancement over an earlier granted patent and has prominent economic significance and the exploitation of the patent depends on implementation of the earlier granted patent, the patent holder can request compulsory licensing of the earlier patent. If a compulsory license is granted, the holder of the earlier patent is entitled to request compulsory licensing of the other patent.

3. Monopoly.
Where the enforcement of a patent is held as a monopoly practice, to eliminate or reduce the negative effect on competition caused by the monopoly practice, any parties that are capable to implement the patent are entitled to file a petition for granting compulsory license of the patent.

4. State emergency.
In the case of an emergency or other extreme urgency of the state, or for the purposes of public interest, a competent department under the State Council may request the SIPO to grant a compulsory license for implementing a patent to a designated qualified party.

5. Public health.
For the purpose of public health, any parties that are capable to implement the patent are entitled to file a petition for granting a compulsory license for manufacturing and exporting a patented medicine to a least developed country in accordance with international treaties that China has joined. Although the rules do not indicate a specific treaty, obviously Doha declaration in 2001 provided the possibility that the supplying country may issue a compulsory license to manufacture and export a generic copy of a patented medicine to a least developed country.

Anyone who wants to file a petition for granting compulsory license of patents must satisfy one of these five conditions.


The procedure to apply a compulsory license in China
To petition for granting a compulsory license, the would-be licensee must file a petition in Chinese affiliated with required documents or evidences. If all the formality requirements are fulfilled, the SIPO accepts the petition. Then the SIPO forwards a copy of the petition to the patent holder in question. The patent holder has a chance to comment on the petition within 15 days. The SIPO will review the reasoning, information and relevant evidences submitted by the petitioner, and review the opinion of the patent holder. If necessary, the SIPO may dispatch two staffs to have an onsite check.

If one party requests a hearing procedure, the SIPO should organize and conduct an oral hearing. In hearing proceeding, petitioner and patent holder and other relevant parties may defend themselves and cross-examine the evidences. Unless it involves state secrets, business secrets or personal privacy, hearing proceeding should be open to the public.

After examining all the relevant information, the SIPO delivers a preliminary decision to both parties for comments. After considering these comments, it will make the final decision of to grant or not grant compulsory license. Each party who is not satisfied with a decision is entitled to a petition for administrative reconsideration or to appeal with a court.

The rules also include the procedure to determine royalty rate of a compulsory license, and the procedure to terminate a compulsory license, which are similar to the procedure to grant compulsory license highlighted above.


The impact of the rules on granting compulsory license
The amended Patent Act (2008) defines five situations in which a compulsory license of patent can be granted. The SIPO rules only elaborated the implementation of the provisions in Patent Act on compulsory license. So it did not create any new obligations for patentees to license.

Following these rules, any qualified parties both Chinese and foreigners are entitled to file a petition to request the SIPO to grant compulsory license of patents. It may facilitate the application of compulsory license in China for would-be licensees.

It seems that these rules are carefully devised to be in accordance with the obligations established in Article 31 of Trips Agreement and Article 5 of Paris Convention. Since the scope of compulsory licensing is only limited to five special situations, the rules should not raise concerns on wildly expropriation of patent rights. But these measures could be used for strategy purpose against competitors who own patents. Some firms may file a petition for a compulsory license in order to put pressure on the patent holder to conclude into a patent licensing agreement, which otherwise could not be achieved.

The first situation, in which a patentee has not exploited its patent as stated earlier in this article, may promote the implementation of patents and reduce patent hold-up, therefore avoiding waste of resource. This could also be helpful against patent trolls.

The second one is dealing with the access to dependent patents, namely an improved patent that cannot be exploited without infringing another patent. Compulsory license could solve the deadlock when the patent holders cannot agree on cross-licensing.

The third situation, in which the practice of a patent has been held as monopoly practice, aims to avoid abuse of patent monopoly. Compulsory license in this situation requires a would-be licensee to provide a valid decision by the competition law enforcement body, which has confirmed the patent holder conducted monopoly practice in terms of the patent in question. However, to acquire such a decision may take very long so that it might not be very helpful for would-be licensees.

The fourth situation involves state emergency. Since the state emergency could rarely happen, the impact of this provision on patentees should be minimal.

The fifth situation involves providing generic medicine for the least developed countries that cannot manufacture necessary medicine by themselves. According to the rules, granting compulsory license, manufacturing and exporting patented medicine in this situation are strictly regulated to be in accordance with WTO rules.