When Lego won its final appeal against counterfeiters Lepin in December 2020, the Chinese firm was fined 90 million CNY and its owner, Li Haipeng, handed a six-year prison sentence. The case was based on a bust of a factory in Shantou in April 2019. The Shanghai Municipal Public Security Bureau found injection moulds, packaging boxes and manuals. According to the Shanghai Higher People’s Court, Li and eight conspirators had made 300 million CNY with their knockoffs since 2015.
The Supreme People’s Court (SPC) has heralded the Lego ruling as one of the ten model IP cases for 2020. It comes alongside the successful IP infringement cases brought to Chinese courts by ABB and Siemens. But the successes of these European firms should not be seen as a sign that China is wholeheartedly embracing international norms. Rather, they should be understood as a by-product of Beijing’s long-term efforts to create Chinese firms that can compete globally in high-tech areas.
The increase in IP protection goes hand in hand with a shift in policy toward supporting Chinese firms to create valuable patents. This shift is evident in such policy documents as the Outline for Becoming an IP Powerhouse (2021-2035) and the Five-Year Plan (FYP) for IP Protection and Use (2021-2025). Both set out plans that are intended to drive the creation of high-value patents in China. As Beijing raises its sights, it is cutting loose counterfeiters like Lepin.
Shifting from quantity to quality
China currently leads the world in patent filings at the World IP Organization, with Huawei the world’s top filer for the fourth consecutive year. However, much of this has been inflated by government incentives. As Beijing now moves from focusing on quantity to quality it has said it will be phasing out direct subsidies for patent filings by 2025. Whereas the previous IP FYP set a target for the number of patent filings, the new FYP aims for a 90 percent increase in high-quality patents.
Promoting patent use is part of this. According to the FYP, trade in international patent licensing is to increase 45 percent by 2025, reaching 320 billion CNY. Under The Patent Law, which was amended in 2020, universities and research institutes have been granted more control over the patents invented by their researchers. This is a major step because on-the-job inventions are officially state property, requiring inventors to go through a complicated approval process to start a company with their ideas. These processes are now being simplified and streamlined at 110 universities under a government-supported pilot and demo project. Guidelines were issued in December 2020 to make it easier for inventors and their institutes to agree on profit sharing.
Progress will be palpable but uneven. The definition of “high-quality patents” in the FYP combines indicators like the length a patent is maintained for with more obviously political criteria, such as whether the patent has received an official award or whether it is in one of the so called “strategic emerging industries”. Judging by the numbers in the FYP, about 60 percent of current patents would not qualify as “high quality”. And other incentives are not going away immediately – there are still scores of indirect benefits that encourage companies to inflate their IP creativity. Nevertheless, Beijing’s direction of travel is clear.
With patents comes protection
Beijing is committed to giving its IP regulations teeth. Statutory damages were tripled in the amended Patent Law up to 5 million CNY, with the current record compensation (159 million CNY) handed down in February 2021 for stealing a vanillin production process. Administrative enforcement has also improved since the China National IP Administration was set up in 2018 with a stronger remit than its predecessor. A system of dedicated courts was completed in 2019 with the launch of the IP Court directly under the SPC in 2019.
More cases are brought before court. Numbers of newly filed IP cases have been increasing 25 percent per year since 2013, reaching 467,000 in 2020. Digital portals make it easier for IP owners to defend their rights. China’s highest judge pledged to improve the speed, quality and consistency of verdicts in October.
Protecting foreign firms not a priority
Getting tougher on counterfeiting suits China’s efforts to weed out low-quality producers and create an environment conducive to innovative and global Chinese brands. In the short term, foreign firms are benefitting from the more predictable and consistent IP regime that this entails.
However, in the medium term, foreign firms are at risk of losing ground in key industry sectors, where they have less access to state incentives. For instance, the FYP openly calls for self-developed IP in future tech areas such as biotechnology, artificial intelligence, and quantum communication.
Already, when it is not a clear-cut case of counterfeiting or IP theft, court rulings are less favorable to foreign firms. Especially in disputes around patent usage fees, Chinese courts tend to side with established Chinese brands, such as Huawei. The propensity of the Chinese courts to prioritize conflict resolution tends to work against foreign owners of standard essential patents, who are seen as stirring trouble and abusing their monopoly. For example, in the case between Chinese cellphone maker Oppo and Japan’s Sharp, the IPC ruled in August 2021 that it could set worldwide licensing fees.
More generally, IP policy is part of China’s ambitions to lead worldwide in key technologies. Expect incentives and regulations around patent creation, and protection and commercialization to be fine-tuned continually in coordination with China’s wider science, technology and innovation policy. The resulting mixture of international collaboration and import replacement creates a vibrant but ultimately challenging environment for foreign firms, both in China and the rest of the world.
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