18 | Patent World Issue # 191 | April 2007 www.ipworld.com

AUTHORS

J. Benjamin Bai (left) is a partner at Jones Day in

Houston and Shanghai. With an emphasis on

patents, Dr. Benjamin Bai’s practice spans all areas

of intellectual property law with clients ranging

from emerging growth businesses to Global 500

companies. In addition to his US patent practice,

he is devoting a substantial amount of time to

China-related IP issues.

Anthony M. Insogna (right) is a partner at Jones

Day in San Diego. Anthony focuses his intellectual

property practice on the pharmaceutical and

biotechnology industries. He has extensive

experience with patent issues in medicinal chemistry,

peptides, antibody engineering, target driven drug

discovery, formulation development, medical

devices, and other life science disciplines.

The views expressed in this article are the views of the attorney

and not necessarily the views of Jones Day.

As more and more US pharmaceuticaland chemical companies are movingor outsourcing their manufacturing

and R&D overseas, particularly to India andChina, a myriad of intellectual property (“IP”)issues arise. While there are certaincommonalities between US and foreign IPlaws, the differences are significant andnumerous. The unwary will be trapped.Indeed, certain US IP laws are not onlydistinct but are incongruous with most of theworld. Thus, mistakes commonly occur whenUS or multinational companies simply applyUS practices without modifications to theiroverseas patent filings.

Global IP strategies

Generally speaking, IP rights, particularlypatents and trademarks, are territorial. Simplyput, a US patent cannot be enforced in China,and vice versa. There can be no patentinfringement in China if one only seeks patentprotection in the US, Europe, Canada andJapan for their most significant invention.Many US and multinational companies havemade, or are still making, the mistake of notfiling patent and trademark applications inChina because they believe that China does notenforce IP rights. However, the fact is,developing countries, like China, are rapidlytaking measures to improve their IPenforcement systems. They realize that arobust IP system is ultimately beneficial totheir national economy and globalcompetitiveness. Therefore, where to obtain IPprotection requires forward-looking visions.

To adequately protect the fruits of R&D, it isessential to file patent applications overseas. Itis, however, costly to file and maintain patents

globally. Thus, for most companies orinventions, it is not cost effective to file andmaintain patents in every country in the world.A balance should be struck between patentfilings and their associated costs. Such balanceis generally driven by business strategies. Inother words, patent protection should bealigned with specified business objectives. As ageneral rule, patent filings should cover all themajor markets. For important inventions, abroad net of overseas filings should be made incountries where there are potential licensingopportunities or where there aremanufacturing capabilities. For less importantinventions, US, Canadian, Japanese andEuropean filings might be sufficient. China andIndia are not only becoming increasinglyimportant, but Chinese and Indian companiesare capitalizing on failures to file for patentprotection in their countries.

IP ownership

Most US practitioners take it for grantedthat transfer of IP assets between a parentcompany and its subsidiary can be donefreely, subject to some tax consequences.However, in developing countries, such asChina, administrative approval may berequired for such transfer to be legally valid.

For example, in China, ABC, Inc., aDelaware company with its headquarters inNew York, is considered as a foreign entity.On the other hand, ABC (China), Inc., awholly foreign-owned enterprise of ABC,Inc.’s with its headquarters in Beijing, isconsidered as a Chinese entity. Anytechnology transfer, such as assignment ofpatents, between a foreign entity (e.g., ABC,Inc.) and a Chinese entity (i.e., ABC (China),

J. Benjamin Bai and Anthony M. Insogna of Jones Day

warn US firms not to overlook China and India in their

global IP strategies

IN SUMMARY

– Many US and multinational companies are

not filing patent and trademark applications

in developing markets such as China as they

believe China does not enforce IP rights.

However, China is stepping up its IP

enforcement systems and, along with other

increasingly important markets such as

India, is capitalizing on failures to file for

patent protection in their country

– Using China as an example, this article

explores selected issues that highlight the

differences between US and foreign IP

practices

K CHINA

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K IP rights in developing countriesHandle with careHandle with care

www.ipworld.com April 2007 | Patent World Issue # 191 | 19

CHINA K

Inc.) is subject to China’s Regulations onAdministration of Technology Import andExport, effective January 1, 2002 (“theRegulations”), which govern the import andexport of technologies into and out of China,as well as technology transfers between aChinese legal entity and foreign legal entity.

The Regulations classify technologies intothree broad categories:• Prohibited technologies: technologies

that cannot be imported into or exportedout of China;

• Restricted technologies: technologies theimport and export of which must beapproved by the relevant governmentalauthority in advance, and the relevanttechnology transfer agreement must besubmitted to the relevant governmentalauthority; and

• Permitted technologies: technologiesthat can be imported into or exported out of China without prior governmentalapproval, but the parties need to register the technology transferagreement with the relevantgovernmental authority.

Under Article 52 of the Chinese contract law,a contract is void if it fails to comply withrelevant administrative regulations. Aseemingly innocuous intra-company patentassignment between a US parent companyand a Chinese subsidiary involving restrictedtechnologies may be ineffective as a matter oflaw for failure to obtain prior administrativeapproval. With respect to permittedtechnologies, though the failure to register atechnology transfer agreement does not affectthe effectiveness of the agreement, failing todo so may have other adverse consequences,such as the inability of a Chinese licensee tomake royalty payments in foreign currencies.

Where to file firstUnder Chinese patent law, inventions madein China must be first filed with the ChinesePatent Office before any foreign filing. Thereis no statutory definition of “invention madein China.” It clearly covers inventionswholly made in China, i.e., where all theinventors are resident in China at the time ofthe invention. It arguably encompassesinventions partially made in China, i.e.,where at least one inventor is resident inChina at the time of the invention.

This file-first-in-China requirementconflicts with longstanding “normal”practices of US and multinational companiesof filing patent applications first with the USPatent and Trademark Office. While there isno statutory requirement that inventionsmade in the US be filed in the US first, USpatent law does require that a foreign filinglicense be obtained prior to foreign filing.

Therefore, to comply with both Chinese andUS laws, a US company should consider filingpatent applications for inventions made inChina with the Chinese Patent Office as PCTapplications in English. Before such filings, USand multinational companies should considerwhich entity is the appropriate assignee andshould consider seeking a foreign filing licensefrom the US Patent and Trademark Office.

Currently, Chinese patent law does notprescribe any penalty for failing to complywith the file-first-in-China rule. Thus,foreign companies are not complying withthis law. It is conceivable that in theforeseeable future Chinese courts mayinvalidate the corresponding Chinese patentif the patentee failed to file in China first.

Inventor remunerationUnder US laws, an employer can obligateemployees to assign their inventions madewithin the scope of employment to theemployer with no additional compensation.However, many foreign countries, by statute,require that an employer pay reasonableremuneration for the transfer, exploitation, orlicense of an employee’s invention, forexample Japan, Germany, China, and Taiwan.

Under Article 35 of the Japanese patent law,employee inventors are entitled to “reasonableremuneration” from their employers fortransfers of patent rights, either by assignmentor exclusive license. Until 2004, little attentionwas given to Article 35 – inventors in Japansimply accepted modest fixed or variablepayments on terms set unilaterally by theiremployers, or received nothing at all. OnJanuary 30, 2004, a Tokyo district courtordered Nichia Corporation to payapproximately $180 million to an inventor ofthe blue light emitting diode he invented whileemployed there. It was reported that theparties eventually reached settlement a yearlater for about $5.4 million.

China has a similar provision in its patentlaw which requires reasonable remuneration

to inventors. With respect to “reasonableremuneration”, Chapter 6, Rules 74 to 77, ofthe Implementation Regulations of ChinesePatent Law provides some compensationguidelines. The guidelines are mandatory forstate-run (i.e., government-owned)enterprises; but private businesses mayadopt the standard voluntarily. According tothe guidelines, inventors are compensated ateach of the following three stages:(1) Issuance of Patent: Within three months

after the patent is issued, the employershould pay the inventors at least about$250 for each invention patent, or about$60 for each utility model patent;

(2) Exploitation of Patented Invention:During the term of the patent and for everyyear the patented invention is practiced bythe employer, the employer should pay theinventor(s) at least 2% of the after-taxprofits generated by the invention. Thecompensation can be made by a lump sumpayment or paid annually; and

(3) Licensing of the Patent: The employershould pay the inventor(s) at least 10% ofthe after-tax profits generated bylicensing the patent.

While private companies in China are notsubject to such compensation guidelines, UScompanies should consider adopting suchcompensation schemes or develop reasonableremuneration standards for inventors inChina. In addition, US companies shouldconsider taking the following steps:• Work closely with employees to agree

upon a remuneration standard.• Make the final remuneration standard

available to employees.• Give an employee inventor an opportunity

to speak when determining remuneration.• To prepare for a possible dispute at a later

date, preserve documents evidencing thesteps taken to ensure that the overallprocess was reasonable, including havinginventors to acknowledge in writing thereasonableness of the remuneration.

ConclusionAs illustrated above, foreign IP laws differsignificantly from certain US practices.Therefore, best practices in the US maynot best practices overseas; and sometimesUS practices do not even comply withforeign laws. K

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