Practical Pieces & Perspectives

Dedication: *Runhua Wang. University of Illinois College of Law, J.S.D Candidate, Class of 2016. Special thanks to my parents. Many thanks also to Professor Paul Heald and Professor Jay P. Kesan (University of Illinois College of Law), and JLTP editor Iman Naim (Class of 2016) for their instruction and help.

To encourage innovation, Chinese investors increasingly invest in U.S. technology researchers.[1]  Meanwhile, U.S. investors also invest in the technology market in China. Recently, Intel Capital invested $67 million in eight Chinese startups, and Dell Inc. pledged $125 billion in investments in Chinese businesses, including technological component purchases and manufacturing expenses.[2]  When entering a market in a developing country, investors in high-technology industries must consider IP protection, especially patent protection, so they should understand what a utility model is and how that patent system can be efficiently used in the developing countries that have a utility model patent regime.[3]

This article focuses on explaining the utility model regime in China and helps investors in developed countries, especially U.S. investors whose home country does not have a parallel regime, to avoid relative legal risks in the Chinese market, so they can adjust to and survive in that market. This article includes three sections.  In this section, I will introduce the utility model patent system and compare the Chinese utility model regime to other utility model regimes, as well as general utility patent regimes, to help investors from developed countries understand the inherent characteristics in the Chinese utility model regime.  In the second section, I will analyze the efficiency of utility model regimes from economic and technological perspectives and explain why the U.S. does not have a utility model patent system.  Based on the comparative analysis of the Chinese and other utility model regimes, I will make recommendations in the last section as to how investors can avoid relative legal risks and maximize their benefits in the Chinese market through this particular regime.

Foreign Direct Investment (FDI) in China is transforming from solely manufacturing FDI to FDI in technology development.[4]  It is not difficult to recognize that, under the trend of financial globalization, the bright line between traditional FDI and international portfolio investment, which focuses more on capital mobility rather than on technology transfer,[5] diminishes.

FDI is important for technology transfers and spillovers.[6]  Most developing countries rely on inward FDI to effect technical change and structural transformation,[7] which could increase economic growth.[8]  Moreover, FDI may also directly facilitate the growth of a country’s economy in many other ways, such as creating new jobs, improving access to new and advanced technologies, increasing productivity, and strengthening management strategies.[9]

Besides the benefits of FDI to receiving economies, the benefits to originating economies are also important in international trade and financial transactions, because levels of FDI are driven by factors in originating economies.[10]  The technology transfers and spillovers through FDI trigger concerns regarding IP protection, another factor driving the levels of FDI;[11] so, scholars and international institutions usually suggest that developing countries strengthen their IP protection to attract FDI.[12]  For example, one of the main obligations of the World Intellectual Property Organization (WIPO) is to assist developing countries in preparing IP laws and in promoting the overall protection of IP rights.[13]

Statistics of several developing countries show an uneven distribution of FDI among developing countries and among their industrial regions, but not among their IP laws.[14]  However, even though strong IP protection alone is not sufficient to attract foreign firms to invest in a country, some scholars, including Maskus, believe that a weak IP system would deter foreign firms from investing in a developing economy.[15]

Can this theory of the relationship between FDI and the strength of the IP regime in a developing country be used by developing countries to attract U.S. capital investors and technology investors if those countries strengthen their IP protections?  WIPO and the TRIPS Agreement do not require IP regimes in developing countries to be as strong as those in developed countries to avoid a “development dilemma.”[16]  Because there are no rigid restrictions on the strength of developing countries’ IP regimes, how should U.S investors evaluate the strength of an IP regime in a developing country?  Under the trend of financial globalization, what concerns would U.S. investors have regarding the patent regime and the technology market in China?

In practice, statistics show that the venture capital market could be over-developed so as to become uneven in developed countries, including the U.S, thus decreasing the incentives of investors to invest in the domestic financial market.[17]  Hence, regardless of the concerns regarding the costs of production or labor, it seems to be inevitable that there will be more U.S. investors involved in the financial and technology markets in developing countries, especially in China.

“Utility model” is a generic term that refers to the subject matter falling between patent law and sui generis design law.[18]  However, there is no global consensus on the term’s meaning due to fundamentally different concepts from one country to another, such as “innovation patent” in Australia, “utility certificate” in France, “short term patent” in Belgium, and “utility innovation” in Malaysia.[19]  Thus, it is necessary to review the nature of these systems through the characteristics of some typically designed utility model regimes.

Some of these systems define utility models as intangible subject matter like technical concepts; other systems relate their definition of utility models to three-dimensional forms; still others consider utility models tantamount to utility patents without examination and for a shorter duration (usually seven to ten years).[20]  Classical utility models are usually recognized by these characteristics: cheap, quick, and easily accessible protection for inventions or innovations, many of which cannot gain protection under the utility patent regime.[21]

The earliest classical utility model regime appears to be the United Kingdom’s Utility Designs Act of 1843.[22]  It protected designs for the shape or configuration of useful articles of manufacture, which were literally remote from utility patent protection.[23]  However, because of its narrow protection only for external appearance or “form,” not for function or principle, many commentators argued to extend its scope to functional equivalents of the embodiments that the drawing illustrates.[24]  In 1919, the act was reduced to insignificance by a series of judicial and legislative actions.[25]

Germany, comparatively, introduced a utility model regime, Gebraucbsmuster, firmly and essentially remaining a creature of design protection in 1891, a prototype of classical utility model regime.[26]  It features lower standards of inventiveness, no pre-grant examination, limited subject matters only for movable articles having three dimensions, and a very short term of protection.[27]

Progressively, the utility model regime in Germany departed from the classical utility model originating in design protection concepts to a modern second-tier patent regime as a complement to its utility patent regime.[28]  In 1990, Germany enacted reforms to abolish the requirements of a three-dimensional configuration and to permit protection of electronic circuit designs, chemical substances, foodstuffs, drugs and immovables.[29]  Thus, this regime is no longer only a close cousin of design protection,[30] but has transformed into a longer and stronger regime, providing patent-like protections of small inventions generally for a relatively short period of time.[31]  The qualified protected inventions are less strictly tied to three-dimensional, functional shapes of tools or everyday implements.

Another vital characteristic of a utility model regime in many countries is the lack of substantive examination to register.[32]  The registration process hence is often significantly simpler and faster than that in a patent regime in testing for non-obviousness,[33] and it expands a temporary protection for pending applications of patents.[34]

Similar to patents but with lower standards of non-obviousness, utility models require novelty,[35] even if the level of the novelty standard could vary in different countries’ utility model regimes.  The Commission of the European Community (“The Commission”) suggests that restricting novelty to the territory of a particular Member State might run counter to the objective of a single market.[36]

Therefore, based on their common characteristics, utility models are fairly defined by Pager as subpatentable innovations combined with early disclosure of patent applications and narrow interpretation of claims to allow local firms to invent around foreign innovations.[37]  This series of rules for favoring surrounding inventions is excluded from the restriction of TRIPS Article 31 for dependency patents to favor developing countries.

In the law of China, utility model is defined as a type a “patent.”[38] It should be practical and have new technical solutions relating to the shape, the structure, or a combination thereof of a product.[39]  Beside the P.R.C. Patent Law (“Patent Law”), the patent regime also administers utility models through other regulations: the Rules for the Implementation of the Patent Law (“the Rules”) and the Guide of Patent Examination (“the Guide”).  Until the amendment of the “Patent Law” in 2009, utility models had not been clarified, and they were only specified by these two regulations at a lower level of authority.[40]  Functionally, these two regulations provide or emphasize the details to clearly explain the terms in “Patent Law.”

The contents of the patent laws show that utility models in China acquire a second-tier patent protection.[41]  The Guide requires that the subject matter of utility models be attached to products.[42]  Measures can only be protected under utility patents.[43] Moreover, utility patents are protected for twenty years after the filing date; utility models are protected for ten years after the filing date.[44]  In addition, the qualifications of both types of rights demand novelty, inventiveness, and utility,[45] but the standards to grant rights differ between them.[46]

The State Intellectual Property Office of the P.R.C. (SIPO) conducts a preliminary examination to determine conformity with proper procedures and qualifications for the requirements of utility and novelty.[47]  When a utility model application passes this preliminary examination, it should be published and issued on the same day.[48]  Only utility patents require a substantive examination as a condition to issue.[49]  However, for enforcement, courts or administrative authorities can ask for a patent examination report as evidence in a dispute concerning utility model infringement.  The report is made by SIPO after searching, analyzing, and judging the technology from the request of the patentee or an interest-related party.[50]

Moreover, the Rules require that the scale of protection and the remedies or punishments, such as injunctive relief, be basically similar between utility patents and utility models.  The requirement of a patent examination report for utility model disputes is the only distinctive term to regulate how utility patents and utility models get protected through litigation.  The rules of compulsory licenses and the rules of the six month grace period for utility patents and utility models are not differentiated.[51]  In addition, both of them must satisfy the same standards of novelty, which requires a “prior art” search, and have practical applicability to meet the standards of utility.[52]

The requirement of prior art for both utility patent and utility model is an important notion to judge their novelty and creation.[53]  The prior art in “Patent Law” refers to any technologies known to the public in the country or abroad before the date of filing.[54]  It should be a statement in which the knowledge and information concerned are disclosed to the public, and the technicians in the field can obtain the knowledge and information from public domains through normal channels.[55]  Thus, it includes both the local prior arts and the existing arts in any other countries.[56]

Filing both a utility model and a utility patent for an identical invention on the same day is permitted.[57]  However, only one patent right shall be granted, so an applicant shall be granted a utility patent only if the applicant agrees to abandon the previously obtained utility model that has not ended.[58]

From 2006 to 2010 in China, there were merely around 21.5 percent utility model applicants who were rejected in the preliminary examination for lacking utility, but more than 97 percent of these failed applications were individual applicants rather than “work for hire.”[59]  Hence, investors who are interested in investing in Chinese startups or established firms rather than individuals need to understand that the fundamental difference between registration of utility model and registration of a utility patent is substantive examination, the core of which in China is the standards of non-obviousness.[60]

Some European utility model regimes have no requirements of non-obviousness.  These regimes are similar to classical utility regimes and usually are called three-dimensional regimes, such as the regimes in Italy, Denmark, Finland, Greece, Portugal, and Spain,[61] and they only examine for formalities.[62]  Because of their standards of local novelty that only prohibit using local prior arts, the three-dimensional form requirement could be abolished.[63]  Some scholars, such as Janis, believe that a second-tier patent system could be a gap-filler to utility patent regimes.[64]

The U.S. has a trend of increasing the strictness of patent requirements through the standards of non-obviousness.[65]  Australia applies the same standards for obviousness to both utility patents and utility models.[66]  Comparatively, while Germany has amended its utility model regime several times, its procedure, which has a soft obviousness standard rather than requiring substantive examination, has not been changed,[67] and Germany has experienced a softening of the non-obviousness standard for patents to be less strict.[68]  Therefore, the soft obviousness standard makes the utility model regime primarily different from a utility patent regime with a shorter term.[69]  In the European Union, apart from the European Patent Convention, other conventions, such as the Strasbourg Convention on the Unification of Certain Points of Substantive Law and Patents for Inventions, left the standards of registration of utility models unclear,[70] so member countries can flexibly design and adjust a proper system for their local economy.

Utility model regimes provide exclusive rights to inventions or innovations, similar to utility patent regimes.  Compared to utility patents, utility models usually provide a shorter duration of protection.  Utility models are cheap, quick, and easy for inventors to gain exclusive protection for their inventions.  Hence, more technologies and inventions can qualify for protection under a utility model regime than for protection under a utility patent regime.  However, examination under a utility model regime is much less strict than that under a utility patent regime.  Utility model claims do not have to meet the same non-obviousness standards as utility patents.  Therefore, it is difficult to simply conclude the utility model regime in China is weak or strong.  In the forthcoming part, I will explain the efficiency of utility models in addressing the concerns of FDI investors from developed countries, particularly U.S. investors, whose home country does not have a parallel system.