Quality is China's Biggest Patent/IP Challenge

President Obama misspoke the other evening when he claimed that the US grants the most patents in the world. In fact, it has been surpassed by China. One may well quibble with how many of those are examined - an important distinction for practical applications - but for sheer volume, there is no doubt where the emphasis now lies. This is not to say that the most valuable, useful or even practical patents are being filed in China. And, in fact, as Joff Wild, in IAM (Intellectual Asset Management)blog, points out, the next step for China is addressing issues of patent quality. He discusses the trend and its implications.

China's State Intellectual Property Office has announced that it received a record 1.2 million patent applications during calendar year 2010. This is a 25% jump on the 2009 figure. Also in 2010, over 800,000 applications were approved - most of these being for non-examined utility and design patents. That said, according to the SIPO stats page (which currently only covers January to November 2010), the number of invention patents granted in the first 11 months of last year stood at 124,184, compared to 128,489 for all of 2009. However, the number of applications had already surpassed the amount for 2009. Chinese companies now lead the way in grants and applications across all the types of patents SIPO awards. Foreign companies used to get more invention patents, but those days are long gone and look unlikely ever to return.

It is always important to point out that most SIPO grants are not based on substantive examination; as long as you fill in the forms correctly you will get your design or utility grant. But it is also important to throw in another caveat to the vast numbers as well. And that is that domestic companies in China are hugely incentivised to file patents. First of all, local governments across the country subsidise the whole application process, so making it very cheap; while second, all companies that own a certain (and relatively low) number of patents are categorised as being high-tech businesses, something that qualifies them for a significantly lower rate of corporation tax, anything up to 50% less I was told while over in China last week.

It does not take a genius to work out that a combination of a subsidised application process plus major tax savings is going to act as a pretty powerful incentive for Chinese companies to embrace the patent system. But neither does it take a genius to conclude that the quality of what is being submitted is not going to be uniformly high, to put it mildly. This is something that the Chinese authorities are becoming increasingly aware of. At a recent conference, Ma Weiye - director general of SIPO's patent department - stated: "Our companies should pay much more attention to patent quality instead of only quantity." And it was a point also made to me by Zeng Yanni, director of the office's international cooperation department, when I visited SIPO last week. "Patent quality is very important," she said. "It is one of the pillars of the patent system. Without quality, a patent is useless - it is just a number." She was absolutely right, of course.

Zeng stated that the office had been in talks with local governments to get them to tighten up their subsidy programmes. Now, for example, many will require a grant before paying out the money, whereas previously merely an application would do the job. In addition, quality controls within the office have been heightened. In addition to higher grant thresholds set out in the most recent changes to the patent law and revised examination guidelines, examiners themselves are under much greater scrutiny. "There is very heavy pressure on examiners, but we have to do it," Zeng stated. To this end, a 60 person task force is now in operation, comprising many of SIPO's most experienced examiners. Its job is to monitor the output of individual examiners, as well as teams and entire departments. This is done through random checks. If work is not found to be up to standard then sanctions are applied - "severe punishments" are imposed, is what I was told! In practice, this means potential salary reduction, not just for the individual concerned, but also for the group in which he/she works. Contrary to some reports, examiners are not rewarded each time they grant a patent.

There are now over 5,000 examiners at SIPO, Zeng stated, out of a total staff of around 9,000. New recruits are being brought in at the rate of around 250 a year. They usually come direct from university and are trained on the job. This is a challenge, Zeng conceded. However, attrition rates are relatively low - this despite the fact that competition for patent expertise in China is pretty fierce; with both industry and the growing number of patent attorney firms looking to recruit. Apparently, although pay is higher in the private sector, working for the government is a more stable career.

None of this means that SIPO has yet become a top quality issuing authority. But what it does show is that the Chinese have realised that it is not just numbers that count. Instead, it's what underpins those numbers that really matters. It will clearly take time to establish a regime of true excellence at the office and it will be incredibly hard, given the volume of applications being handled and the lack of an embedded patent culture in China. On-going training and support from foreign authorities - notably the German patent office and the EPO - is going to be very important.

But despite the difficulties, there are signs that real progress is being made. Take the IAM/Thomson Reuters benchmarking survey that was undertaken during 2009, for example. We asked respondents from both the corporate and private practice world their views on the performance of key patent offices. One of these was SIPO. A total of 22% of in-house respondents felt the office offered excellent or very good quality (compared to 71% and 55% respectively for the EPO and JPO), while 57% stated that it had improved its performance - a higher percentage than for any other office. It was a similar tale on the private practice front, with 20% assessing SIPO's work to be excellent or very good, and 56% stating that its performance had improved.

In the end, however, what will really make the difference to patent quality in China is not the practices adopted by SIPO, but the attitude of applicants. Right now, if some of the conversations I had with patent attorneys there are anything to go by, outside of the very biggest companies and those operating in some of the high-tech sectors, patents are rarely regarded as being about creating long-term value and competitive advantage; instead, they are all too often seen as a cheap and easy way to get a tax break. As a result, most applicants are not willing to pay anything more than the bare minimum to file and prosecute an application - all that matters is getting the certificate at the end of the process. Experience around the world shows us that that way lies junk.

The Chinese government has a very sophisticated view of the role patents can and should play in the development of the country's economy. But while domestic companies are beginning to engage in the patent system, there is still a long way to go before most of them do so for strategic reasons. The authorities in China can put together all the national plans and conduct all the education programmes they like, but ultimately it will be business people sitting in boardrooms from Shenzhen to Beijing, making cash-based decisions, who will dictate the quality of patents SIPO issues. Until they see the practical benefits of spending the time and money necessary to secure quality patents, they will not make the necessary investment. And right now, I am not sure that those benefits are immediately apparent to them. There has been enormous progress in China over these last 25 years in patents, but on my trip I learned there is still a long way to go.

UPDATE (26th January) : Full year figures for application and grants at SIPO during 2010 are now available. They show that during last year SIPO granted a total of 135,110 invention patents, just under 80,000 of which were to domestic entities. There were 391,177 applications.