I.1 Background and Questions
In 2015, China topped the world in invention patent applications, exceeding one million within a single year.Footnote 1 Its patent grants also scored a historical high of 359,000, ranking number one in the world.Footnote 2 However, its ranking of 25th in the Global Innovation Index (GII) is far from impressive.Footnote 3 In comparison, Hong Kong, China’s special administrative region (SAR), is placed at 14th in the GII 2016, while ranking 16th in patent applications with 12,212, of which only 239 are from local residents.Footnote 4 The figures show that Hong Kong’s ranking in patent applications is much lower than that in Mainland China, but its innovation status is 11 ranks higher. The reversing ranks raise interesting questions: what has made Hong Kong more “innovative” than its mainland counterpart with its incredibly low patent filing rate, particularly from local residents? What does “innovation” really mean in the context of Hong Kong and Mainland China having two distinctive patent systems within one country? Can the two regions learn from each other, given that one seems to be doing better in patenting and the other in innovation?
As a latecomer of economic and technological modernization, China has developed a sense of urgency in catching up with the Western countries. In the more than 30 years since 1984, China has built a comprehensive patent system from scratch, brought patent protection level to international standards with several patent law amendments, and formulated a series of patent and innovation plans with specific numerical targets, which have been proven to be effective in making China a world leader in patenting in less than one decade. Recently, China has realized that the “great leap forward” in boosting patent numbers and getting top scores in the world patent scoreboard will not turn China into a truly innovative country, and hence it has shifted its strategic focus from being a “big” IP country to a “strong” IP country, with a more holistic view in patent law reform, including promoting patent commercialization and trading, as well as effective patent protection. However, the question is, can China’s innovation status be moved up by merely perfecting patent system without a broader reform in other innovation indicators used in GII such as a political system, education infrastructure, and business environment that are conducive to innovation?
On the other hand, as a former British colony and presently China’s SAR, Hong Kong has been struggling to find its own identity and the right balance between dependence and independence. Such an identity-seeking mentality is demonstrated not only in the recent uproar in opposing the Central Government’s political intervention into the chief executive election and other political freedom, but also in the process of its patent law reform. After about 150 years of colonial history, Hong Kong finally had its own patent system in 1997, but it was only a “registration system,” allowing Hong Kong patents granted by other patent offices to be registered in Hong Kong. Although this “registration system” had been effective in accommodating the low patent filings in Hong Kong, the SAR government changed it to an “original grant patent” (OGP) system in June 2016 to allow SAR patent office to examine and grant patents. The rationale for this change, according to the SAR government, is to “facilitate the development of Hong Kong into a regional innovation and technology hub.”Footnote 5 The question is, however, can this grand mission be achieved through reforming the patent system? Will the new system further enhance the connection between the two different patent systems, one from common law tradition and the other civil law, within one country so that they could function together to promote innovation in each side, and in one country ultimately? Or on the contrary, will it further alienate the already estranged two sides to harm innovation of each other?
The above questions had never been comprehensively and seriously discussed inside and outside of Mainland China and Hong Kong. The reality is that many people do not even know that Hong Kong, although returned to its motherland almost 20 years ago, has maintained its own distinctive patent system that was inherited from the UK but has been operated under a registration system that does not provide substantive examination to its own patent applications. Even fewer people know that the majority of applications for Hong Kong patents had been substantively examined by the SIPO, and such practice will be continued under the new OGP system, only under the different name of “outsourcing.” It is thus imperative to fill the gap by having a comprehensive academic and practical investigation into this unique arrangement of “one country, two patent systems.” This study is also timely in the midst of vast confusion and uproar surrounding Hong Kong’s role and identity within China, an authoritarian state with amazing speed in economic growth while striving to transform itself from an imitation-oriented nation to an innovation-oriented nation. Is Hong Kong willing to, or can it, play a role in this transformation? Or is its OGP designed to make the SAR more independent or alienated from this transformation process? Furthermore, can Hong Kong become a “regional innovation and technological hub” without the participation of the Mainland’s patent system and technological innovation?
This introduction intends to address some, if not all, of the above questions by first taking the readers through the historical development of patent systems in Mainland China and Hong Kong respectively, and then by empirically examining how patents and innovation interacted in China and Hong Kong, and lastly focusing particularly on future interplay of the two distinctive patent systems in Mainland and Hong Kong under the unique political arrangement of “one country, two systems” (OCTs). This introduction also identifies and links the essential points of each subsequent chapter in this book. It is hoped that, through reading this book, the audiences will have a better understanding that, although hailed as a genius design of China’s chief architect for economic reform, Mr. Deng Xiaoping, the OCTS could be very complicated and difficult in implementation, not only politically but also legally, and that the complication could have either a negative or positive impact on innovation in both Mainland China and Hong Kong, depending on how the two sides respond and interact with each other.
I.2 The Two Systems in One Country: Origin and Development
Before tackling the more challenging issue of patents and innovation in China and its SAR, it would be helpful to have a historical survey of the origin and development of the two patent systems. Since a whole chapter of this book, Chapter 7, has been devoted to the development of Hong Kong’s patent system, but no chapter is on that of the mainland, this section will fill the vacuum by giving a relatively detailed account of the historical development of the patent system in Mainland China.
I.2.1 The Origin, Development and Reform of PRC Patent System
Prior to 1903, there had been no legal regulation of intellectual property rights (IPRs) in imperial China. The 1903 US and China trade treaty provided limited patent protection only to US citizens in China,Footnote 6 which were made available beginning in 1912 and yielded less than 700 patents in the subsequent 30 years.Footnote 7 The Nationalist government, with a vision to modernize China’s IP system after taking power in 1928, issued a provisional patent measure in 1932Footnote 8 and enacted a patent law in 1949 which was abolished immediately by the Chinese Communist Party when it established the People’s Republic of China (PRC) in the same year.Footnote 9
The PRC did not enact a formal patent law until 1984. During the 30-year gap, the government issued a few regulations governing patent matters. For instance, a Provisional Regulations on the Protection of the Invention Right and the Patent Right was issued in 1950, adopting the former Soviet Union’s two-track system, under which either the state owned the patents while inventors received modest rewards, or inventors owned patents from five to 15 years. In 1963, the PRC government adopted the Regulations to Encourage Inventions and the Regulations to Encourage Improvements in Technology, which changed the former two-track system to a one-track system under which only the state enjoyed exclusive patent ownership.Footnote 10
The first PRC Patent Law was enacted in 1984, a few years after the end of Cultural Revolution. It was drafted based on extensive study of western patent laws, but the following aspects were criticized by the West as nonconforming to international standards: inter alia, the 15-year patent protection term for regular invention patents (five years for utility model patents and design patents); the lack of protection for chemical and pharmaceutical products and process patents; and the state designated patent agents handling all patent applications. Therefore, in 1992, a “Memorandum of Understanding on the Protection of Intellectual Property” (MOU) was signed by the United States and China requiring the latter to raise its IP protection standards. Pursuant to the MOU, China amended its Patent Law in 1992 to (1) expand protection to include pharmaceutical products, food and beverages, flavorings and substances obtained via a chemical process; (2) extend the protection term for invention patents from 15 years to 20 years, for utility models and designs from five to 10 years; (3) narrow the grounds under which a compulsory license may be granted; and (4) specify the burden of proof in litigation relating to method patents and adding a provision for domestic priority.
The second amendment to the PRC Patent Law came in 2000 when China was trying to gain entry into the WTO. Major changes were made in accordance with the minimum requirements of the Trade-Related Intellectual Property Rights (TRIPS) Agreement, which include: ownership of “service invention” can be decided by agreement; the “offer for sale” of a pirated product can be deemed as an act of infringement for inventions and utility models; judicial review of decisions in re-examination and invalidation processes is allowed; preliminary injunctions and property preservation are permitted; more conditions are imposed on using compulsory licensing; and damages can be calculated by multiplying the royalties of licenses.Footnote 11
To implement national IP strategies formulated by the government in the 2006–2008 period, which aimed at promoting China’s indigenous innovation,Footnote 12 PRC Patent Law was amended for the third time in 2008 and the following changes were adopted: (1) replacing the mixed test to an absolute novelty test for all patent examinations;Footnote 13 (2) imposing higher standards for granting patents to industrial designs;Footnote 14 (3) requiring a security check for filing foreign patents for the inventions completed in China; (4) adding a requirement to disclose the genetic resources used for an invention in patent applications; (5) adopting an exception similar to the US Bolar exception to patent infringement, that is, using a patented invention without authorization for marketing approval; (6) allowing parallel importation; and (7) increasing the statutory damage up to one million RMB.
In 2013, the State Intellectual Property Office (SIPO) drafted the Fourth Patent Law Amendment with an objective of further strengthening the enforcement of patent rights in China.Footnote 15 The draft amendment includes the following proposed changes: giving the patent administrative agencies a semi-judicial power to handle the patent disputes; holding ISPs jointly liable for patent infringement over the Internet; imposing legal obligation on local patent bureaus to promote patents’ marketization; allowing the inventors of a state-funded project to negotiate a right to use the invention; and increasing punitive damage awards to five million RMB.Footnote 16
All of the above patent law reforms are aimed at promoting indigenous innovation by strengthening patent protection. Whether this goal has been achieved is a question to be further explored in Section I.3 of this chapter and subsequent chapters of this book.
I.2.2 The Origin, Development and Reform of Hong Kong’s Patent System
Under the British ruling from 1843 to 1997, Hong Kong did not have an independent patent system, although it had a Registration of Patent Ordinance (Cap 42) (1932, amended 1977) allowing UK or European patents to be registered in Hong Kong. Those patents were not Hong Kong patents and were not enforceable in Hong Kong courts.Footnote 17
The Sino-British Joint Declaration concerning Hong Kong’s handover to China, which was signed in 1984, allows Hong Kong to maintain its own legal system under the unique political arrangement of “one country, two systems.”Footnote 18 Hence, after 1997, Hong Kong has established its own independent patent system under the Patent Ordinance (Cap 514) that is totally separated from the patent system in Mainland China. This new patent system covers two types of patents: short-term patents with an eight-year duration that are subject to only formality examination; and standard patents with a 20-year duration that are subject to substantive examination. The standard patents are examined and granted by one of the three designated patent offices: China’s SIPO, UK Intellectual Property Office (UKIPO) and European Patent Office (EPO), and then registered in Hong Kong. The registered patent is a Hong Kong patent that is enforceable in Hong Kong courts.Footnote 19
The registration model was adopted largely because Hong Kong did not have sufficient resources and expertise in conducting patent examination at the time. Although the system has been functioning very well since its inception, the SAR government initiated the patent law reform in 2011, recommending the establishment of an original grant patent (OGP) system that allows Hong Kong patents to be granted by Hong Kong’s Intellectual Property Department (HKIPD). After four years of public consultation and deliberation, the Patent (Amendment) Bill 2015 was passed by Hong Kong Legislative Council (LegCo) on June 2, 2016.
The new OGP system is to coexist with the registration system, which means that, while some standard patent applications are locally examined and granted, some can still be examined and granted by the three designated patent offices. This is deemed necessary because Hong Kong lacks manpower and expertise in conducting patent examination. In fact, even for those patents examined and granted locally, the examination will be outsourced to other patent offices such as the SIPO. In addition, the HKIPD signed a cooperative agreement with the SIPO in December 2013, under which the SIPO will provide technical assistance to IPD in patent examination and manpower training.Footnote 20
The short-term patent system has also been reformed to solve the low-threshold and easy-to-get problem that had led to the abuse of the system. Under the new system, substantive examination of short-term patents are required in cases where (1) an enforcement action is commenced; and (2) the patent holder is concerned about the validity of his patent. It is also required that the person threatening to sue for infringement of a short-term patent shall furnish all particularities to the alleged infringer.Footnote 21
The purpose of introducing the OGP system is to help develop Hong Kong into a “regional innovation and technology hub.”Footnote 22 However, very little, if any, theoretical justification and empirical evidence has been provided to explain why there is a link between the OGP system and innovation, and how the adoption of the OGP system can help Hong Kong become more innovative. The discussion below and in Chapters 6, 7, 8 and 9 in this book intend to fill this gap.
I.3 The Role of Patents in Innovation: Two Systems Compared
As mentioned above, in 2015, China topped the world in both patent applications and grants, while it scores fairly low (25th) in the Global Innovation Index (GII). On the other hand, in the same year, Hong Kong ranked fairly low in patents (16th and 15th in applications and grants respectively), but its innovation status ranked 14th, which is 11 ranks higher than China.Footnote 23 These data seem to suggest that patents are not very relevant, or at least not too crucial, to innovation. On the other hand, as a comparison, the US ranked high in both patents and innovation in 2015 (2nd for both patent applications and grants, and 4th for innovation),Footnote 24 and has been consistently leading in both patents and innovation for several centuries, which indicates a strong correlation between the two. These data raised the following questions: what is the true relationship between patents and innovation? What are other factors behind or in addition to patents that affect innovation in a given jurisdiction? What lesson, if any, can China and Hong Kong learn from the US in making patents a genuine tool for promoting innovation?
I.3.1 From a “Big” to a “Strong” IP Country
Before answering the above questions, we first examine the implications and possible causes for the disparity in China’s patent scores and its innovation status, as well as the recent policy changes in government’s patent strategies.
From 2006, the Chinese government has adopted a series of initiatives in an attempt to transform China into an innovation-oriented country. In the first few years, the government’s main strategy and top priority was to boost patent numbers, making China a “big” IP country. To achieve this goal, the government set specific numerical targets for patent filings and grants, e.g. ranking China in the top five in the world in invention patents and SCI papers,Footnote 25 increasing the numbers of overseas patent filings,Footnote 26 ranking China in the top two in annual patent number for inventions granted to domestic inventors, bringing the total patent applications to two million in 2015, and increasing the number of invention patents owned per 10,000 habitants from four in 2013 to 14 in 2020.Footnote 27 Guided by these targets, China has experienced an exponential growth, or a “great leap forward,” in patent filling and granting, and has been leading the world in patents for six consecutive years since 2010.Footnote 28 However, as the number one patent country, China ranks only 25th in GII in 2016. How to explain the discrepancy? What other factors in addition to patents have dragged China down in innovation?
I.3.1.1 Quality of Patents and Government Subsides
To answer the above questions, we may use the US as a reference point, as it has been leading in both patents and innovation scoreboard. Although the US had been surpassed by China in the total numbers of patent applications and grants in recent years, it still leads in other categories such as the number of patentees per 10,000 people, foreign patents, PCT filings, the number of top 100 global innovators, and patents in high tech fields, which are normally considered to be indicators of high patent quality and genuine innovation. For example, in 2012, out of 10,000 people, 35.6 American, but only 2.4 Chinese, own patents;Footnote 29 American filed 98,617 patents abroad, while Chinese filed only 13,258;Footnote 30 the US is the biggest PCT user (57,121) while China comes in 3rd (29,837);Footnote 31 in 2016, among top 100 global innovators, there are 49 US companies, but only one Chinese company (Huawei);Footnote 32 and vast majority of US patents are filed in high and emerging technological fields such as medical, computer and digital communication, in which Chinese patents have a very small share.Footnote 33 A study found that China’s PCT applications achieve only 34 percent of the quality level of international PCT applications, and that “China’s expansion of international filings was achieved to the detriment of quality.”Footnote 34
One of the factors causing the inflation of low-quality patents in China is the explosion of utility model patents, which are granted to trivial inventions without going through substantive examination.Footnote 35 Prud’homme found in Chapter 1 of this book that the over-filing of utility model patents were caused by the easy-to-get procedure, low cost and government subsidies:
China’s patent subsidies have encouraged behaviour that maximizes patent quantity at the cost of quality, namely: repeated patent applications; splitting inventions into smaller inventions just to boost the number of applications; filings for products that are already published or otherwise disclosed (in some cases for a significant amount of time) and thus are not patentable; and filing applications only to get an application number in order to claim subsidies but not even paying official patent fees.Footnote 36
In addition, the explosion of utility model patents might have also been caused by the “dual filing”Footnote 37 strategy allowing the inventions to be protected earlier by utility model patent, and then by invention patent when it is granted later. Prud’homme argued that, although many studies show utility models can be used as an “accessible instrument of appropriability” in innovation, particularly incremental innovation in developing countries,Footnote 38 “the proliferation of low-quality utility models can hamper innovation.”Footnote 39
Chinese government has recently come to realize the harmful effects of the proliferation of the low-quality patents and has adopted measures to tighten the use of subsidies in utility model applications.Footnote 40 Notably, the State Council issued an Action Plan for Further Implementation of the National Intellectual Property Strategy (2014–2020) (hereafter, “Action Plan”) in December 2014, shifting the focus of building a “big” IP country to building a “strong” (or “powerful”) IP country.Footnote 41 The Action Plan declares that the state “will place more focus on IP quality and benefits, optimize industrial layout, guide industrial innovation and accelerate the quality/efficiency enhancement and upgrading of industries.”Footnote 42 It is hoped that the trend of proliferating the patent numbers can be halted by these initiatives, and the numbers of patents will represent true status of China’s innovation.
I.3.1.2 Capacity in Patent Commercialization
Another possible factor affecting China’s innovation status is its weak capacity in IP commercialization. Innovation means how many patented inventions are commercialized into useful products, not how many inventions are patented.Footnote 43 In this respect, the US has been the world model. To promote technology transfer and commercialization, the US congress passed Bayh-Dole Act in 1980, allowing federally funded research institutions to retain patent rights and to commercialize the inventions through exclusive licensing. In 1986, the Federal Technology Transfer Act was passed to make technology transfer a responsibility of federal laboratory scientists and engineers, and a part of their performance evaluation. Before the Bayh-Dole Act, the commercialization rate in the US was fewer than 5 percent,Footnote 44 and only about 1,000 licenses were granted by American universities in the period of 1974–1984. After the Bayh-Dole Act, 10,510 licenses were granted in the period of 1989–1990, indicating that more patents being commercialized after universities using federal funds were given patent ownership.Footnote 45 In comparison, patent commercialization rate in China has always been fairly low. A Rule of law Blue Paper published by China Academy of Social Science in March 2017 disclosed that only 2 percent of patents had been licensed during the period of 2012-2014.Footnote 46 A 2015 statistic reveals that only 2.1 percent, 1.5 percent and 1.7 percent of university patents were licensed, transferred or resulted in marketable products, respectively.Footnote 47 The low rate of patent commercialization in China indicates a need for a Bayh-Dole style legislation since most research in Chinese universities is state-funded and their patents are owned by the state.Footnote 48 In 2006, a provision drawing on the Bayh-Dole Act had been included in the draft of Patent Law Amendment, but it unfortunately disappeared from the passed 2008 Amendment.Footnote 49 In the 2013 Patent Law amendment draft, “promoting and encouraging” IP commercialization is imposed as a responsibility on patent administrative authorities;Footnote 50 however, no specific scheme has been formulated to enforce this responsibility. On the other hand, the above study focuses mainly on IP patent licensing, rather than other types of commercialization such as self-implementation, which is predominantly adopted by Chinese enterprises. According to a report by SIPO, the rate of IP “industrialization,” that is, transferring patents into marketable products, has reached about 40 percent, which is comparable with the US, Europe, and Japan.Footnote 51
I.3.1.3 Scope of Patentable Subject Matter
Statistics show that majority of Chinese patents have not been filed in the strategic and world competitive technology areas such as medical, digital communication, optics, semiconductor, engine, and audio and video technologies.Footnote 52 China is particularly weak in medical and digital technology.Footnote 53 Besides the fact that China is a latecomer to economic modernization, the problems of patent law itself, that is, the restricted patent scope and incompatibility between patent criteria and innovation characteristics, may have also contributed to low filing in those areas. Unlike the US, which allows virtually “anything under the sun that is made by man” to be patentable,Footnote 54 Chinese patent law excludes the following subject matter from patent protection: computer program and business methods as such,Footnote 55 transgenic animals and plants, methods of diagnosis and treatment of human diseases, inventions against public interest and social morality. This is exactly the subject matter allowed to be patentable in the US and the technological areas in which the US has become a world leader. The denial of these areas from patent protection may stifle the innovation of the technologies in these fields because inventors will not invent, and investors will not invest, in the areas that are not protected by patents.Footnote 56 As I argued earlier, and I believe that the argument still hold true, “whereas that US patent system has become too aggressive and has created so-called ‘the tragedy of anti-commons’ and the impediment of public access to medicine, the patent system in China is comparatively still young and has hardly reached its full potential.”Footnote 57 One of the potentials is to consider allowing the excluded subject matter to be patentable. Unfortunately, this seems to be the most ignored issue in all of China’s patent law amendments. As a consequence, China has been lagging behind in the area of computer hardware and software, pharmaceuticals and medical treatment methods and equipment, and biotechnologies, among others. Without breakthrough technologies in the strategic high-tech areas, China will not be considered as an innovative country no matter how many patents are filed.
I.3.1.4 Compatibility between Patentability Criteria and Technology Characteristics
Another problem with Chinese patent law is the compatibility between patentability criteria and innovation needs of specific industries. Although this is a universal problem without a universal solution, it is particularly acute in China due to its more rigid construction of the law and the inflexibility of the patent prosecution and litigation system. Chapters 2, 3 and 4 of this book are the effort of multiple years of research devoted just to finding the cause and solution to this problem. Specifically, Gao in Chapter 2 discovered that, being the world’s top manufacturer of solar panels and wind turbines, China actually lacks some core technologies and therefore bottlenecks the sustainable development of its green-tech industry.Footnote 58 Gao proposes to stimulate green-tech innovation through the “greening” of the Chinese patent law, that is, “to offer better incentives to green technological change by preventing the patenting of the environmentally harmful inventions and giving the environmentally beneficial inventions priority over others.”Footnote 59 In Chapter 3, Chen found that traditional Chinese medicine (TCM) has not been well accepted and protected in the Western world, which is not beneficial to TCM innovation.Footnote 60 He proposes to introduce an industry-tailored patent policy to make the patent practice more compatible with TCM invention, such as adopting product-by-process claims and the doctrine of equivalence to remedy the problem in identifying and constructing TCM patent claims; allowing secret TCM formulae to be patentable without requiring a full disclosure.Footnote 61 In Chapter 4, Yu argues that, Chinese patent law offers broad discretion to be applied to the characteristics of Chinese telecommunications industry (CTI), however, these discretions have been overlooked by the rule-makers, patent examiners and judges in formulating CTI-related rules, examining CTI-related patent applications and deciding CTI-related patent disputes, to the extent that innovation of CTI has been seriously affected.Footnote 62 Yu proposes to enhance patent prosecution and litigation procedure to allow a greater discretion for examiners and judges to interpret the concepts such as prior art and persons skilled in the art, and allow such judicial interpretations to bind future decisions.Footnote 63
I.3.1.5 Patent Prosecution and Litigation System
Indeed, China’s patent prosecution and litigation system are in want of further reform to foster technological innovation. China’s patent prosecution system is fairly rigid in procedure but relaxed in substantive standards. For example, on one hand, China does not have inventor-friendly patent prosecution processes such as US’ one-year grace period and provisional patent application providing inventors more chances of filing patents and additional time to further develop their inventions, determine the marketability, acquire necessary funding, and seek licensing and manufacturing opportunities.Footnote 64 On the other hand, the high number of patents granted might mean relaxed and speedy examination, which renders many immature and low-quality patents. As to patent litigation, China has made great strides in reforming its court system, particularly in creating three specialized IP courts, which has resulted in a remarkable growth in patent litigations in recent years, e.g. 13,000 cases reported in 2015, witnessing a 22 percent increase from a year before.Footnote 65 Research shows that foreign companies filed 10 percent of the patent lawsuits in China and won 70 percent of the actions.Footnote 66 China is now being perceived as “a reasonable and fair place to resolve patent disputes”Footnote 67 and has increasingly become a preferred venue for foreign patent holders due to the low court costs and fast return of verdict.Footnote 68 For example, in November 2016, a Canadian company, WiLAN Inc., sued Tokyo-based Sony Mobile Communications in Nanjing, signaling a trend of foreigners using China as a new venue for IP litigations.Footnote 69 However, is this a healthy development for China’s innovation? In other words, does filing more patent litigations have an effect of promoting technological innovation? To some extent, the answer might be “yes,” because more patent litigations, particularly those brought by foreign plaintiffs, may force Chinese companies to stop copying and to start innovating.Footnote 70 More patent litigations may also mean higher awareness of rights protection among Chinese citizens, and more confidence of foreign litigants in the Chinese judicial system. However, the explosion of patent litigations may also stifle those genuine incremental innovations, particularly when the lawsuits were brought by patent trolls or patent assertion entities (PAE) who profit mainly from asserting patents. The situation might be worsened by the inexperience of the specialized IP courts that function as the first instance courts on all IP matters, rather than an appellate court specializing in patent lawsuits like those in the US, the UK and Japan.Footnote 71 With 13,000 patent cases a year,Footnote 72 it is hard to be optimistic about the quality of the court judgments,Footnote 73 particularly when there is no specialized appellate patent court exercising quality control.
The Chinese government is aware of the importance of the enforcement of patent rights to national innovation, and it has tried to find different solutions. For example, the fourth patent law draft amendment increases the statutory damage to RMB 5 million, and gives administrative agencies semi-judicial power in handling patent infringement disputes and in deciding damages.Footnote 74 On November 29, 2016, the SIPO published “Opinions on Tightening Patent Protection,” which calls for a holistic improvement of the patent enforcement system including building online trading platforms to curb patent infringement and counterfeits, and improving the rules in the mediation and arbitration of patent disputes.Footnote 75 In practice, courts have also adopted other civil law principles to deal with the growing patent disputes involving foreign patent trolls. For example, the case Huawei v. IDCFootnote 76 discussed by Lee in Chapter 5 of this book demonstrates that Chinese courts have adopted a flexible approach in handling patent disputes by applying civil law principles such as good faith that suit China’s own innovation needs. Specifically, the court in Huawei held that the patent troll (or PAE) company, InterDigital Communications Corp. (IDC), is bound by the good faith principle under the Chinese General Principle of Civil Law and Chinese Contract Law to provide a FRAND (fair, reasonable and non-discriminatory) rate for Huawei to license IDC’s SEPs (standard-essential patents).Footnote 77 Lee concludes that, “In the long run, good faith doctrine may become an important part of China’s innovation policy that fits its own needs because the application of this doctrine will reflect local business practices, norms, or even moral standards.”Footnote 78
I.3.2 From Re-registration to OGP System: More Innovation in Hong Kong?
As mentioned above, Hong Kong’s landscape for patents and innovation is opposite to that of Mainland China in the sense that Hong Kong ranks relatively low in patents but fairly high in innovation. Hong Kong ranked 15th, 15th and 16th in 2008, 2012 and 2015, respectively, for patent applications, but ranked 12th, 8th and 14th in the same years in the GII, which are very impressive considering Mainland China ranked only 37th, 34th and 25th in GII in those years. These rankings may not be consistent with the popular perception about Hong Kong, an international financial center and a city dominated by service and real estate sectors without much technological innovation. The question arises then: What does “innovation” mean in the context of Hong Kong? What has made Hong Kong more “innovative” than the mainland? Or in other words, what is Hong Kong’s major strength that Mainland China lacks? Is that strength sufficient to make Hong Kong an “innovation hub”? In the discourse of patents and innovation, what, if anything, can Hong Kong learn from its mainland counterpart?
In its 2016 exercise, GII used, the following factors to assess innovation: (1) political situations; (2) education; (3) ICT access; (4) business environment; (5) knowledge intensive employment; (6) patents; and (7) trademarks and copyright industries.Footnote 79 It is obvious that the GII’s criteria of “innovation” stretches beyond “technology” to encompass political, social, economical and cultural aspects of a society. It is in this sense that Hong Kong has been rated more “innovative” than its mainland counterpart. According to Wan, who provides an overview of Hong Kong’s economic development in Chapter 6 of this book, Hong Kong has a strong IP system, an independent judiciary, effective law enforcement, a clean government, high business integrity and ethical standards, a well-established financial system and capital market, an advanced technology and information system, and excellent research universities and institutions.Footnote 80 However, when assessing “innovation” in relation to patents, the focus is normally on technological advancement. In this respect, Hong Kong has not been faring very well. In fact, a commentator remarks that in Hong Kong “so few companies here foster innovation or technology-oriented. Hong Kong’s economy remains reliant on its traditional pillar industries of retail, property, financial services and shipping.”Footnote 81 Taking biotech as an example, a study conducted 15 years ago shows that Hong Kong was lagging behind not only Western countries but also its neighbors such as Singapore, Taiwan, Mainland China and India, even though biotech was identified by the HKSAR government as a significant industry.Footnote 82 The situation with the biotech has remained unchanged today. Digital technology and e-commerce have also been significantly dwarfed by the remarkable development in Mainland China, despite the SAR government formulated the Digital 21 Strategies as early as 1998 and last updated in 2013, which called for establishing a world-class information and communication technology (ICT) infrastructure.Footnote 83
Hong Kong’s disappointing performance in technological innovation is reflected its very low patent applications from local residents. For example, in 2015, out of 12,212 patent applications, only 239 were from local residents.Footnote 84 In addition, patent litigation is also very rare. Only a handful of patent cases has been litigated in Hong Kong since 1996.Footnote 85 “This demonstrated a sad reality in Hong Kong, that is, patent system has not been well developed largely due to the underuse and misconception of the system.”Footnote 86 Misconceptions of the system include the situation that the short-term patent is used as a tactical measure, or “troll,” to fend off any business competition. For example, in SNE v. Hsin Chong case, SNE registered the patent after the claimed method had already been disclosed to the public, merely for the purpose of preventing other parties from using its method after discovering that its contract with the defendant might be terminated.Footnote 87 The low patent filings and litigation may be also attributable to the lack of education about patent protection in Hong Kong. As SNE v. Hsin case demonstrated, the SNE patent was invalidated due to its own “prior art,” that is, its disclosure of the patented method to other parties prior to the date of filing.Footnote 88
What has stifled innovation in Hong Kong despite of all its favorable conditions? In Chapter 6, Wan attributes it to government’s “positive non-interventionism” policy, which prevents the government from subsidizing research in the private sector; Hong Kong’s investment culture of “high return from a short-term investment with limited risk”; and the weak tie between research institutions and industries.Footnote 89 A commentator observed that the failure to attract intellectual talents to Hong Kong is another major factor, because “it takes more than infrastructure, data connections and a favorable business climate to attract a critical mass of entrepreneurial and intellectual talent”, Footnote 90 and suggested the following strategies to solve the problem: fostering a vibrant venture capital community by using Hong Kong’s role as a global financial center; encouraging multinational corporations to set up research centers in the city; supporting universities in their research with potential commercial applications; and improving SAR’s primary and secondary education system.Footnote 91
In addition to economic, social and educational factors, the patent system has also been considered as a factor blocking Hong Kong in its path of becoming an innovation hub. From Shay’s comprehensive account of Hong Kong’s patent system in Chapter 7 of this book, we can see that the SAR government considers the old re-registration system a “second-grade” patent system which “does not facilitate Hong Kong in promoting innovation or developing itself into a premier intellectual property-trading hub,” and that adopting an original grant patent (OGP) system would change this situation.Footnote 92 In fact, the idea of establishing an OGP system in Hong Kong had been proposed 15 years ago by scholars and practitioners,Footnote 93 and the arguments for having it then is similar to those presented today, that is, to promote technological innovation and turn Hong Kong into a “regional innovation and technology hub.”Footnote 94 The rationale is that a local original grant patent system may boost confidence of inventor and investor in Hong Kong and attract them to file patents locally. Theoretically speaking, a full-fledged OGP system is more suitable for a region that has high technological capability and a strong demand for patent protection. The call made 15 years ago for an OGP system was based on the perspective that Hong Kong might acquire such a capability and become an innovation hub in Asia. However, after 15 years of development, this perspective has proven to be a mission impossible, and Hong Kong has still yet to acquire such a capability because many technology and manufacturing companies have moved away from Hong Kong. Without a strong technological and manufacturing base, there would be no invention worthy of patent protection, how can the OGP system incentivize inventors to invent and apply patents in Hong Kong? Will the OGP system brings more problems than solutions to Hong Kong’s patent system as it has to bear its own costs in patent examination related matters such as training patent examiners?
The last two chapters of this book, Chapters 8 and 9 may offer some answers to the above questions. Although the OGP system has already been adopted in June 2016 (effective date pending), the discussion of its pros and cons may still shed some light to the discourse of patent and innovation, and to the successful implementation of the new system. In Chapter 8, Mclean and Yue identified and discussed five advantages and 11 disadvantages for establishing an OGP system in Hong Kong. In summary, it is speculated that the OGP system would promote technological innovation, job opportunities, efficiency of patent prosecution, and cooperation with the mainland. On the other hand, the new system may fall short of the expectation of attracting R&D and patent filings, as there are many disincentivizing factors such as insufficient demand, priority concerns, lack of technical expertise and the quality of the patent granted and cost to the applicants and to the public.Footnote 95
Chapter 9 of this book compares Hong Kong and Singapore in building their OGP systems (called “positive grant patent,” system in Singapore).Footnote 96 Yu argues that, although Singapore’s new system has strengthened its credential as an IP hub, created more job opportunities for IP professionals, and extended its impact to ASEAN countries, the success has not been translated into the increase in the patent numbers, particularly from local residents.Footnote 97 He argues that, by substantially outsourcing patent examination to the SIPO, Hong Kong may not be able “to reap the benefits from such local capability,”Footnote 98 and that “while Singapore’s new patent search and examination (S&E) capability has won it some plaudits, it is too early to assess its full impact on the country’s overall IP ecosystem in terms of new job creation, additional numbers of patents, more patent filings by local entities, or other indicators of increased innovative activity.”Footnote 99
I.4 The Role of Patents in Innovation within the OCTS Framework
I.4.1 The History and Perspective of Patent Cooperation under the OCTS
The legal systems of Mainland China and Hong Kong had been developing in parallel, without much connection and interaction until 1997, when China resumed its sovereignty over Hong Kong. After 1997, China and Hong Kong continued to maintain two separate legal systems under the OCTS framework.Footnote 100 While China’s legal system has been influenced mainly by continental European civil law tradition with some socialist flavor, Hong Kong’s legal system has maintained the British common law tradition.
However, it is particularly important to place Hong Kong within the context of China because, in addition to the fact the Hong Kong is a part of China, the two sides have been closely connected or integrated economically and technologically. Many innovation ideas conceived in Hong Kong’s universities and research institutes are being developed and manufactured in China, and there are countless joint research projects being carried out across the border. Discussing the reform of Hong Kong’s patent system without bringing it into a bigger picture of the Mainland is like studying the ecosystem of a tree without placing it in the forest.
In fact, the link between the two patent systems has been stronger than many people would have imagined. As mentioned, prior to 1997 and starting in 1986 when the Sino-British Joint Declaration was formulated, Hong Kong’s patent system had already been brought into the political arrangement of OCTS in the sense that Hong Kong Patent Steering Committee had chosen the patent system that allows China’s SIPO to examine Hong Kong’s patent applications. In fact, in the past, among the three designated patent offices, the SIPO examined more than half of Hong Kong patents annually,Footnote 101 and patent professionals in Hong Kong and Mainland China have developed very strong working relationships. For example, they share the IP databases,Footnote 102 and have regular training sessions for IP professionals based on the cooperative agreement entered between the SIPO and HKIPD.Footnote 103
As to future collaboration of the two sides, in addition to SIPO’s continuation of patent examination, though called “outsourcing” now under the new OGP system, and personnel training for HKIPD, parallel filing of invention patents and utility models in the Mainland and Hong Kong was also suggested.
I.4.2 Patents and Innovation within the Context of OTCS
The statistics of the World Intellectual Property Organization (WIPO) show that among the 10 patent offices receiving the most patent applications in 2015,Footnote 104 only two countries rank in the top 10 of the GII, US (4th) and Germany (10th); the other eight are either low or very low in the GII ranking.Footnote 105 It is clear that patents are more about “invention” rather than “innovation,”Footnote 106 because patents filed and granted for certain inventions only represent how many new ideas have been discovered and generated at the early stage of innovation, rather than how many of them have been developed into commercial products.
The academic circle has also been divided on the role of patents in innovation.Footnote 107 Some believe that patenting is a driver or an engine of innovation, as it provides incentive to invent, invest in, and develop new technologies.Footnote 108 Others believe that patents are largely irrelevant and are sometime even obstacles to innovation because of its monopolistic nature.Footnote 109 Between these two opposite views, some argue that the role of patents in innovation is industry-specific and varies by context. For example, while patent has been viewed as an insignificant incentive in innovation of some industries, such as software, it is considered indispensable in R&D in industries such as medical and IT hardware, and particularly biotechnology and pharmaceuticals.Footnote 110
In the context of Mainland China and Hong Kong, as mentioned above, the rankings of patents and innovation for the two regions are completely opposite – with the mainland leading in patents but lagging in innovation, and Hong Kong leading the mainland in innovation but being dwarfed by the mainland in patentsFootnote 111 – both of which show relatively weak link between patents and innovation. This result should serve as a reminder to both Hong Kong and Mainland China that “patents are important for innovation because they are crucial for further commercialization in some technology sectors, but they are not the sole indicator of innovation.”Footnote 112 Therefore, over-emphasizing the role of patent system, either in promoting patent numbers, improving patent quality, or reforming patent system without taking into account of a holistic reform in political, social, economical, technological and educational systems will not lead to true innovation. It is also unrealistic to hope that a nominal change of a patent system without underlying technological base, innovation demand and professional resources to support the new system will turn a city into an innovation hub. As Cornish and Llewelyn observed, “it is very difficult to measure or assess the effect (if any) that a patent system is producing,” although they recognize that “there is no clear evidence that corporations are not influenced in their research and development decisions by their chances of securing and taking advantage of patent protection.”Footnote 113
Through comparing Mainland China and Hong Kong, we can see more clearly that the former lacks what the latter has, that is, political and economic freedom as well as independent judiciary that guarantees effective enforcement of IP rights. To be a true innovative country, Mainland China must start to reform its political and economic systems, although this is too broad an issue to be explored in this book. Mainland China’s weakness in IP commercialization indicates the need to strengthen the confidence of venture capitalists in a long-term investment in an uncertain political and economic environment. On the other hand, Hong Kong, despite the favorable political and economic environment, has been doing badly in technological innovation, as is indicated by the extremely low patent filings from local residents. What Hong Kong lacks is exactly what Mainland China has: that is, a robust technological capacity and a comprehensive government innovation strategy with significant funding support. However, it is not feasible for Hong Kong to compete with Mainland China or any other technologically advanced nations in technological innovation and it is also not advisable to do so, because of its “high return on a short-term investment with limited risk” investment culture, its path-dependence on finance, service and real estate sectors, and its lack of a technologic and manufacturing base, which cannot be changed overnight.
Hong Kong’s best route for future development might be finding its own niche and trying to be more integrated into the mainland’s framework of patents and innovation, rather than moving away from it. In fact, it is mutually beneficial for both Hong Kong and Mainland China to be more integrated economically and technologically because their respective strengths and weaknesses could be complimentary. For example, although both sides have a large pool of high-tech talent and impressive research institutions, neither has been able to translate these advantages into commercial success due to the lack of funding – from private venture capitalists in the mainland, and from government in Hong Kong – as well as other factors such as the lack of sophisticated financial system and professional trading services in the mainland, and the lack of manufacturing basis in Hong Kong. When two sides collaborate, one could provide the other with what is needed most. In reality, all kinds of collaborations between the two sides have already been happening.Footnote 114 Who reviews or grants Hong Kong patents should be the least concern at the moment, particularly when the old system had been working efficiently, there is no urgent need and necessary resources to install a new system, and it is more beneficial for Hong Kong to be integrated into China’s technological development in the grand scheme of the Belt and Road Initiative.Footnote 115
The political design of OCTs, after 20 years of practice, should draw Hong Kong and its mainland closer and make the two sides more integrated without tarnishing their own distinctiveness. Specifically as to patent systems, there should be more collaboration with an aim to promote innovation on both sides, particularly when the world trend is toward more patent integration.Footnote 116 It is encouraging to see that the HKSAR government has made IP service and trading as its strategic focus, has kept the registration system in parallel with the OGP system, and has established close collaboration with the SIPO on patent-related matters in spite of the adoption of the OGP system.
