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Monday, March 16, 2009

China & Compulsory Licenses for "Unworked" Patents
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Last month, Ronald Cass, the former dean of the Boston University School of Law, penned an op-ed in the Wall Street Journal about China's ongoing patent reform efforts.  (For a useful summary of all the changes in the Third Amendment to China's patent law, see this report by the attorneys at the Jones Day law firm.)  The op-ed focused upon on one particular change, namely the authorization of compulsory licensing for non-use of a patented technology.  The idea is that if a patentee does not practice its patented invention, then the state should be able to ensure that someone else will.  I thought I'd take the time to provide some background about such provisions (which I will call, interchangeably, "non-use provisions" or "worked requirements") and why China's amendment is potentially dangerous.

This concept that patent rights will be taken away if the patent is not practiced is anathema in the United States, where there is no requirement that the patent be "worked."  That's been well recognized for a long time.  The Supreme Court so held in a century-old decision, Continental Paper Bag v. Eastern Paper Bag, 210 U.S. 405, 409 (1908), that explained that no such requirement has existed under U.S. law since 1836.  Concerns about any unfairness from letting a patented technology lay fallow are accommodated somewhat in the United States by providing the authority for a court to deny an injunction to a patentee who does not practice its invention.  EBay v. MercExchange, 547 U.S. 388 (2006).

Such requirements that a patentee "work" its technology have a more significant pedigree outside the United States.  The Paris Convention of 1887 provided for compulsory licenses "on the ground of failure to work or insufficient working before the expiration of a period of four years from the date of filing of the patent application or three years from the date of the grant of the patent, whichever period expires last; it shall be refused if the patentee justifies his inaction by legitimate reasons."  Paris Convention for the Protection of Industrial Property, art. 5(A)(4).

Prior to TRIPS in 1994, many countries, including Australia, Canada, and France, for instance, provided for the authority of the state to license non-worked patents with provisions that track the Paris Convention.  See Gianna Julian-Arnold, International Compulsory Licensing:  The Rationales and the Reality, 33 IDEA 349, 372 (1993).  (Canada no longer appears to have such a provision, although Australia does.)

TRIPS, though, imposes additional limitations on compulsory licensing.  Article 30 states that members may craft exceptions to patent rights only to the extent that those exceptions do not "unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties. Article 31 imposes a number of very specific limitations on the grant of a compulsory license including that negotiations generally be held regarding "reasonable commercial" terms for a license; should such negotiations fail, the patentee is entitled to be "paid adequate remuneration."

These limitations from TRIPS act as a check on the use of compulsory licenses, which brings us to China's amended provision.  An unofficial translation prepared by a Spanish NGO reads in relevant part as follows:

Article 49:  "In any of the following cases, the Patent Administrative Department under the State Council may, upon the request of the entity or individual which is capable to exploit, grant a compulsory license to exploit the patent for invention or utility model:

     "(1) where the patentee, after the third anniversary of the grant of the patent right and fourth anniversary of the filing date of patent application, has not exploited the patent or has not sufficiently exploited the patent without any justified reason;

     "(2) Where it is determined through the judicial or administrative procedure that the patentee's exercise of the patent right thereof is an act of eliminating or restricting competition, thus there's a necessity to grant a compulsory license to the applicant."

Thus, the law purports to adopt a relatively unfettered application of the Paris Convention, ignoring China's obligations under TRIPS including the establishment of appropriate compensation.  It is also potentially much farther reaching than compulsory licenses limited to drugs for combating epidemics and the like.  Moreover the language itself is inscrutably vague.  As Ronald Cass pointed out, "sufficiently exploited" and "justified reason" are terms that are inherently ambiguous.

Even if China's new law is applied in a manner that comports with China's treaty obligations, it is still very troubling.  Non-use provisions are protectionist because they allow a nation to appropriate patent rights -- which in China will generally be possessed by foreigners -- for the benefit of domestic industry.  China's government has an unusually close relationship, of course, with its domestic industry.  Accordingly, providing for the power to aid that industry, at the expense of foreigners, is alarming.

There seem to be two reasons why non-use provisions don't cause much of a stir elsewhere.  First, other governments are more detached from their domestic industries.  Second, such governments likely set the bar quite high before a compulsory license is awarded.  By way of example, see sections 133-140 of Australia's Patents Act of 1990, which impose complicated limitations on the compulsory license for non-use.  I couldn't find much written about these non-use provisions, at least as they involve developed countries.  It could just be that the provisions are never actually invoked in practice.

It is too soon to tell how China will implement its new compulsory licensing authority.  China's amended patent law goes into effect on October 1, 2009.  China is currently drafting its regulations that implement the new law, but I have not been able to come upon an English translation.  One hopes that concerns about the breadth of the law are mooted by limitations imposed by the regulations.  If not, the entire premise of patent protection -- exclusive rights -- risks being cast away:  Those who invest in technology in order to stay a step ahead of the competition everywhere else in the world will find instead in China that they are a step behind state-authorized copycats who enter the market first.

posted by Sidney Rosenzweig @ 11:35 AM | China , IP

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