Search Engines under Attack: Examining the European Union’s Right to Be Forgotten (Part I)

By Tisunge (Sunga) Mkwezalamba*

Introduction

Personal data provides a legitimate business interest to an online global market.  For instance, personal data is needed for basic functions of a website operation, such as registering, retrieving individualized preferences, or making payments.  The use of personal data also improves user experience.  By collecting and storing personal data, a website can recognize visitors and respond to their preferences.  Moreover, personal data generates revenue by offering opportunities to third parties using the personal data to increase their customer base.  Generally, this is done through direct marketing.  Data privacy rights (sometimes referred to as data protection regulation) are in place to protect personal data because individuals have no control of their data after it is collected.

The European Union (EU) affords its citizens some of the strongest data privacy rights in the world.  EU citizens enjoy privacy rights so strong that they have the option to have their data disappear from the Internet.  This disappearing power is known as the “right to be forgotten”.

This paper will argue that the EU’s interpretation of the right to be forgotten is bad policy and results in bad law that burdens search engines.  Part I introduces the pieces and functions of European Union (EU) data privacy law and some underlying policies.  This section also introduces pending data privacy legislation.  The pending data privacy legislation introduces a very broad and vague right to be forgotten, which can be interpreted through Google Spain v. González, the only case precedent interpreting the right.

Part II analyzes Google Spain v. González.[1]  In González, Mario Castejo González, a Spanish citizen, sued Google to have unfavorable personal data removed from search results pursuant to EU data privacy law.  The case began in Spanish high court, but the court referred questions to the Court of Justice of the European Union (CJEU) because it was unsure whether EU data privacy law applied to search engines that provide links to lawfully published personal data.  The CJEU held that it did, and ordered Google to remove all links to González’s unfavorable information from its search results.  In its analysis, the court defined the right to be forgotten so broadly that it now covers any personal information that an individual simply considers embarrassing.  The court also reasoned search engines, such as Google, are responsible for personal data wherever it was located on the server, regardless of how it was obtained.  As a result, this decision enlarged unforeseeable costs for search engines associated with enforcing the right to be forgotten.

Part III argues that the EU’s right to be forgotten is bad policy and bad law for four primary reasons.  First, the EU’s interpretation of the right to be forgotten does not remove access to the personal data that has been requested for removal.  Second, broadening the type of data that may be removed such as a history of bad debts is likely to lead to instability in capital markets where investments and extensions of credit are based on personal data, whether or not it is unfavorable.  In addition, removal of unfavorable personal data hurts the democratic process, which relies on such information when appointing individuals to high positions of society.  Third, as currently interpreted, the right compels large search engines to enforce the international right at their burden.  This is significant because search engines then have to create a judiciary to judge EU law where only one precedent stands and many variables exist when determining whether to remove personal data.  And lastly, the CJEU’s interpretation of the law disregards guaranteed freedoms, mainly the freedom of expression, for the right to be forgotten.

Part IV offers alternative policy and legal solutions for the EU’s interpretation of the right to be forgotten.  The first recommendation encourages online anonymity on the Internet, such as anonymous posting.  Anonymity would move information provided voluntarily outside of the EU’s definition of personal data since the definition requires that the information relate back to an individual in such a way that it identifies them.

The second recommendation discusses a draft of a right to be forgotten that would limit the right to individuals whom society and the law have a strong interest to forgive.  An example of such an individual is a minor.  This is important because a majority of requests to remove personal data is embarrassing in nature, and most individuals would prefer their past mistakes be forgiven.  However, forgiveness of past mistakes should not be afforded to every individual who is embarrassed by their past.

The concluding recommendation suggests that the EU should place the burden of determining when to afford the right to be forgotten on EU data authorities because the determination of most of the request requires a subjective test, which would lead to inconsistent application by search engines.

Part I: The European Union on Data Privacy Law

The EU provides its citizens some of the strongest data privacy and protection rights, particularly when compared with the United States.  In the EU, protection of personal data is a fundamental right to privacy provided by Article Eight of the European Convention for the Protection of Human Rights and Fundamental Freedoms.[2]  On the other hand, in the US, the specific right to privacy protection is not a fundamental right guaranteed to citizens by the Constitution.  In addition, the strength of EU data privacy law is highlighted in the policy underlying its promotion of the movement of personal data in the online global market where the collection and use of personal data generates revenue opportunities through online activities such as target advertising.  In the EU, the movement of personal data in the online global market is promoted by ensuring that processors are secure and individuals are given access to their personal data to verify, change, or erase their information.  The rationale for promoting security and access rights is based on a belief that individuals will be more willing to offer their personal data to online operators if they are confident that their privacy is secure and they are afforded access to their personal data.  In the US, in contrast, the movement of personal data in the online global market is promoted by limiting the amount of government regulation on the online market.  Thus, American laws are less voluminous than EU data privacy laws and individuals rarely have access to their personal data.  The rationale for the American style of governance is based on the belief that overregulation of markets stifles economic growth.

EU Directives on Data Privacy

In the EU, data privacy rights and the protection of personal data are governed by Directive 95/46/EC[3] and e-Privacy Directive 2002/58/EC.[4]  Collectively, they outline how an individual or entity can legally collect personal data from EU residents, the obligations that exist when using and storing the personal data, and the rights individuals have to access their personal data after it has been collected.

a. Directive 95/46/EC

In 1995, the EU enacted Directive 95/46/EC, its first directive on the protection of individuals with regard to the privacy and protection of their personal data.[5]  Directive 95/46/EC set out to follow the Organization for Economic Co-operation and Development’s (OECD) seven principles on the protection of Transborder Flows of Personal Data.  These principles ensure individuals are given notice that their personal data is being collected and for what purpose it is collected; individuals consent before their personal data is collected; data is kept secure; and subjects are given access to their personal data under certain circumstances.[6]  The underlying principle for access rights is that data subject are in the best position to determine whether their personal data is being misused.  Thus, they should be given access to make such an evaluation.

EU data privacy law applies to an individual or legal body that determines the processing of personal data, also known as the data controller.[7]  Directive 95/46/EC defines personal data as any information that relates to a natural person, known as a “data subject.”[8]  Information relates to a data subject when it can be used to identify an individual, such as an identification number, or his or her economic, cultural, or social identity.[9]

Directive 95/46/EC applies to the automated processing of personal data and other processing of personal data that form a part of a filing system.[10]  Processing of personal data is a broad term, and is essentially “any operation performed . . . upon personal data” such as collecting, storing, altering, or erasing the personal data.[11]  A filing system is the function that controls how the personal data is stored and retrieved.[12]  A controller is the operator of the filing system.  Therefore, controllers determine the purposes for processing and must uphold the certain OECD principles adopted by Directive 95/46/EC such as data security and access rights.

Article 12(b) of Directive 95/46/EC states that controllers are to provide data subject access to “erasure” or “block” access to their personal data when “it does not comply with the provisions of the Directive, particularly because of the inaccurate or incomplete nature of the data.”  The González case discussed below narrates how the CJEU recently interpreted Directive 95/46/EC access rights to have personal data blocked or deleted into a right to be forgotten.  However, the court found that the Directive compelled search engines to delete any disfavoring personal data that has been lawfully collected, regardless of whether it is incorrect or incomplete in nature.

b. E-Privacy Directive 2002/58/EC

In 2002, the EU enacted E-Privacy Directive 2002/58/EC (“E-Privacy Directive”). E-Privacy Directive was later amended by Directive 2009/136/EC.[13]  The E-Privacy Directive was enacted to address developments in technology since the enactment of Directive 95/46/EC.  The directive provides similar coverage as Directive 95/46/EC by extending the OECD principles to the field of telecommunications.  Further, the rule acknowledges developments in the means by which controllers are able to collect and process personal data through outlining the rights and obligations with regard to the use of cookies, location data, spam, and spyware.[14]

c. The future of European Union Data Privacy Law: General Data Protection Regulation

Directive 95/46/EC and the E-Privacy Directive are expected to merge under a new EU data privacy regulation in December 2017.[15]  The proposed regulation is called the General Data Protection Regulation (GDPR).[16]

In accordance with the underlying policy for the promotion of the movement of personal data in the online global market, the new set of rules gives citizens more control over their personal data and aims to simplify the regulatory environment for businesses through unification of the current data privacy regime.[17]

Though the GDPR intends to simplify the regulatory environment for businesses while providing more control to its citizens, some provisions in the draft are already drawing a lot of attention by those who argue that the data privacy and protection laws of the EU are already constraining on the online global market.[18]  Those who take a position against strengthening EU data privacy laws believe in a free market system, free from government oversight.  This position is similar to the policy underlying the U.S. data privacy regulation discussed above.

For instance, GDPR will mandate that processors hire a data protection officer.[19]  Currently, the average salary for a data protection officer is $75,899.[20]  This rule will greatly impact small business that cannot afford the additional costs during their developmental stages.  In addition, the rule disregards the communication costs for controllers who will be subject to new compulsory notification and access rights for which each data subject must have access to information that they can read.[21]  The EU recognizes 24 different languages, any of which EU citizens are to have access to documents in.[22]  Ensuring that communications regarding personal data is given in any of the 24 forms creates several additional costs to controllers.

However, the most unique addition to the GDPR, and perhaps also one of the most troublesome, is Article 17’s right to be forgotten.  This provision was included to clarify the right of erasure in Article 12(b) of Directive 95/46/EC.[23]  As was previously mentioned, Article 12(b) of Directive 95/46/EC affords EU citizens a right to erasure, interpreted in González as a right to be forgotten, regardless of whether the personal data is inaccurate or incomplete in nature.

In its clarification, Article 17 of GDPR provides a definition of the right to be forgotten that is similar to the CJEU’s interpretation in González.  In González, the court held that the right to be forgotten should be afforded to data subjects when such removal is pursuant to the principles of Directive 95/46/EC.  Similarly, Article 17 states that the right to be forgotten may be exercised in several situations, including when the personal data is no longer necessary, when the data subject withdraws consent or objects, or when processing does not comply with the principles of GDPR.

Further, GDPR’s right to be forgotten includes an obligation to the controller to inform third parties who have obtained the personal data as a result of the controller’s publication or processing, or third parties whose personal data the controller has obtained as a result of the controller’s processing mechanisms.  This language is similar to the effect of the decision in González, which held that search engines were obligated to de-link access to personal data it obtained through its processing mechanics (the storing and filing of websites containing personal data) from third parties.

An analysis of the landmark case of Google v. Mario Costeja González illustrates how the EU’s interpretation of a right to be forgotten is improper and requires large search engine operators, such as Google, to decide when to enforce EU citizen’s privacy rights.

 


*Tisunge (Sunga) Mkwezalamba. University of Illinois College of Law, J.D. candidate, Class of 2016. Data privacy focus. Many thanks to Maxwell and Hilda Mkwezalamba.

[1] Case C-131/12, Google Spain v. González, 2014 EUR-Lex CELEX-LEXIS 317 (May 13, 2014).

[2] 2000 O.J. (C 364) 1, available at http://www.europarl.europa.eu/charter/pdf/text_en.pdf.

[3] Council Directive 95/46, art. 25, 1995 (L 281) 31 (EC) [hereinafter “Directive 95/46/EC”], available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:31995L0046&from=en.

[4] Directive 2002/58, 2002 O.J. (L 201) 37, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2002:201:0037:0047:en:PDF.

[5] Id.

[6] Recommendation of the Council concerning Guidelines governing the Protection of Privacy and Transborder Flows of Personal Data (2013), OECD, http://www.oecd.org/sti/ieconomy/2013-oecd-privacy-guidelines.pdf. (Last visited Feb. 5, 2016). The seven principles are (1) Notice, (2) Purpose, (3) Consent, (4) Security, (5) Disclosure, (6) Access, and (7) Accountability. Data subjects should be given notice when their data is being collected; data should only be used for the purpose stated and not for any other purposes; data should not be disclosed without the data subject’s consent; collected data should be kept secure from any potential abuses; data subjects should be informed as to who is collecting their data; data subjects should be allowed to access their data and make corrections to any inaccurate data; data subjects should have a method available to them to hold data collectors accountable for not following the above principle. Id.

[7] Id. at art. 2(d).

[8] Id. at art. 2(a).

[9] Id.

[10] Directive 95/46/EC, supra note 3, at art. 2(c).

[11] Id. at art. 2(b).

[12] Id. at art. 2(b)(c).

[13] Directive 2002/58/EC, supra note 4.

[14] Id. See paragraph 53 discussing traffic data; paragraphs 65, 66, and 70 addressing spyware; paragraph 68 discussing spam; and paragraph 66 for cookies. See Article 2(a)(c) of Directive 95/46/EC for more information on location data.

[15] Hunton & Williams, Hunton Releases Guide to the Proposed EU General Data Protection Regulation, HUNTON PRIVACY BLOG, (May 5, 2015), https://www.huntonprivacyblog.com/2015/05/05/hunton-releases-guide-proposed-eu-general-data-protection-regulation.

[16] Proposal for a Regulation Of The European Parliament And Of The Council on the Protection of Individuals with Regard to the Processing of Personal Data and on the Free Movement of Such Data (General Data Protection Regulation), COM (2012) 11 final (Jan. 25, 2012) [hereinafter GDPR], available at. http://eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX:52012PC0011, (last visited Feb. 6, 2016).

[17] Id.

[18] Ardi Kolah, British Government Delays Progress on GDPR as EU Pressure Mounts, BRANDREPUBLIC (Jan. 10, 2015), http://guruinabottle.brandrepublic.com/2015/01/10/british-government-delays-progress-on-gdpr-as-eu-pressure-mounts; Jeremy Whitaker, The Cost of the EU Data Law, DIGITAL MARKETING MAG. (Aug. 10, 2015), http://digitalmarketingmagazine.co.uk/digital-marketing-features/the-cost-of-the-eu-data-law/2334.

[19] GDPR, supra note 16, at art. 30.

[20] Data Security Analyst Salary, SALARY.COM, http://www1.salary.com/Data-Security-Analyst-Salary.html (last visited Feb. 5, 2016).

[21] GDPR, supra note 16, at art. 12.

[22] Official Languages of the EU, EUROPEAN COMM’N, http://ec.europa.eu/languages/policy/linguistic-diversity/official-languages-eu_en.htm (last visited Feb. 5, 2016).

[23] GDPR, supra note 16 at art. 17.

Outkicking Its Coverage: How DraftKings’s Aggressive Terms of Use May Leave It Vulnerable to Class Action

By Andrew Lewis*

Over the last 20 years, fantasy sports have evolved from a niche pastime involving a group of fans informally scoring competitions by hand to a multibillion dollar industry.  The institution of daily fantasy sports (DFS) is the most recent phenomenon involving fantasy sports.  One need only look at the money spent on advertising to recognize the prevalence of DFS. During the first nine months of 2015, industry leaders DraftKings and FanDuel spent more than $205 million on more than 60 thousand advertisements.[1]  As its popularity and bottom line have swelled, so too has the number of DFS’s legal issues.

In April 2015, DraftKings faced a false advertising claim based on its dubious “100% deposit bonus,” which required players to participate in a certain number of contests before recovering the bonus.[2]  Further, critics of DFS have voiced concerns over its status as a “game of chance” rather than a per se gambling operation subject to stringent prohibitions and regulations.[3]  In early November, New York Attorney General Eric Schneiderman sent a cease and desist letter to the two DFS companies on the grounds that their operations constituted “gambling.”[4]  In response, the companies filed suit against Schneiderman and requested a temporary restraining order.[5]  In light of the New York issues, FanDuel has paused operations in the state until the resolution of the suit.[6]  DraftKings, on the other hand, will continue its operations in New York.[7]  While these issues are certainly troubling for the DFS giants, a scandal garnering the attention of federal prosecutors is perhaps the industry’s biggest threat.

In the first week of October 2015, DraftKings and FanDuel faced allegations of impropriety, akin to an insider trading scandal.  The issue was bad publicity for the DFS giants to be sure, but without an analogous securities regulation framework, the legal ramifications of the episode were unclear.  In order to understand the nature of the scandal, one must first understand how DFS works and the strategy top players use to win the contests.

DFS is a game in which participants pay an entry fee in order to compete in daily or weekly competitions.  In a given competition, participants could compete against hundreds of other individuals for the allure of a cash prize for top performers.  DFS participants choose a different fantasy team for every competition.  Each player is assigned a dollar amount based on their expected performance, and teams must stay below a certain dollar “cap.”  The object of the game is to have the players with the best statistics on your team throughout the duration of the competition.  Thus, at its heart, DFS forces participants to make economic calculations based on the expected return on investment of the athletes: choose the best players, score the most points, win the most money.  Or so it would seem.

Some argue that a more sophisticated strategy is to attempt to take the road less traveled, and choose players that relatively few other league participants choose.[8]  DFS allows players to be chosen by multiple participants, so any number of teams could look remarkably similar.  The more similar teams look, the less variance there is among those teams’ scores, and the less likely that those participants win a top prize.  While Tom Brady might be projected to have a better week than Andy Dalton, for example, in the event Dalton outperforms Brady, Dalton owners gain an advantage over a significant portion of the market.  Meanwhile, if Brady outperforms Dalton, Brady owners only gain an advantage over a miniscule portion of the market.  To this end, the best players are those that are (1) expected to perform well, (2) are relatively cheap, and (3) are unpopular.[9]  While DFS participants can use their sports expertise and economic acumen to make wise choices based on the first two variables, they are left guessing on the relative popularity of a given player.  If a participant happened to have knowledge regarding a player’s popularity, it would give him a significant advantage over his competition. Enter the scandal.

THE SCANDAL

On October 5, DraftKings and FanDuel each released statements regarding alleged impropriety in their games.  The allegations surrounded a DraftKings employee who inadvertently released DraftKings ownership statistics on a message board prior to the third week of NFL games.[10]  That information is not available until all lineups are final.  The same employee also happened to beat 229,882 other entrants in a FanDuel competition the prior week.  Critics were suspicious of the employee’s second place finish, along with his $350,000 prize—the implication being that he used his access to DraftKings ownership statistics, unavailable to the general public, to gain an advantage over FanDuel DFS participants.  Garnering attention from the media, the FBI, and disgruntled DFS players, the episode has been compared to insider trading.  On October 8, just three days after the DFS giants released their statements, the two DFS giants faced a class action complaint.

THE COMPLAINT[11]

The class action complaint filed in the Southern District of New York is comprised of seven claims, including negligence, fraud and misrepresentation, a violation of Kentucky’s Consumer Protection Act, a violation of the New York Deceptive Acts and Practices Law, false advertising, and unjust enrichment.  A significant portion of the complaint is devoted to the arbitration provision in DraftKings’s terms of use.  The provision states:

[A]ny and all disputes, claims or controversies arising out of or relating to this Agreement, the breach thereof, or any use of the Website . . . except for claims filed in a small claims court that proceed on an individual (non-class, non-representative) basis, shall be settled by binding arbitration . . . . In agreeing to arbitrate all Claims, you and DraftKings waive all rights to a trial by jury in any action or proceeding involving any Claim.[12]

If the above arbitration provision is enforced, then the Southern District of New York will dismiss the case pursuant to the agreed-to provision.  Those DFS participants seeking redress for their losses could still bring their claims on an individual basis, but given that individual losses may be modest relative to the cost of pursuing complex litigation against large corporations, DraftKings and FanDuel’s potential liability in arbitration would be much smaller than it would be in the class action context.  Thus, the DFS giants have a strong incentive to enforce their arbitration provision.

Arbitration provisions of this kind are not uncommon and are generally enforced.  In American Express Co. v. Italian Colors Rest., merchants sued American Express over alleged violations of the Sherman Act.[13]  However, the agreement between the merchants and American Express contained an arbitration provision.[14]  Similar to the provision in DraftKings’s terms of use, the American Express agreement required disputes to be resolved through arbitration and expressly prohibited class suits.  The restaurateurs argued that the cost of litigating the claims on an individual basis would have been prohibitively high relative to their potential recovery, effectively barring the merchants from seeking vindication of their rights.[15]  Because of this, the restaurateurs claimed, an exception should be made to the Federal Arbitration Act in order to preserve access to remedies.  The Supreme Court disagreed.  In the majority opinion, Justice Scalia reasoned that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”[16]  Essentially, then, arbitration provisions remain enforceable in situations where individual suits are economically unfeasible.  However, all is not lost for DFS participants—indeed, the perceived strength of the DFS terms of use may be their own undoing.

OVERREACHING TERMS OF USE

In light of the American Express decision, and the likely enforceability of the arbitration provision, the class action complaint advances a number of arguments claiming that DraftKings’s Terms of Use is not a valid, enforceable contract.  Among these is DraftKings’s right, “without prior notice,” to “revoke any or all of [the participants’] rights granted” under the terms of use and DraftKings’s ability to deny participants the ability to partake in its head-to-head contests.  Notably, one of the most aggressive provisions in DraftKings’s terms of use is absent from the complaint.  The DFS giant reserves for itself “the right to amend these Terms of Use at any time and without notice, and it is [the participants’] responsibility to review these Terms of Use for any changes.”[17]

A similar provision was at issue in Harris v. Blockbuster Inc.[18]  There, like in the DFS case, Blockbuster claimed the arbitration clause in its online terms and conditions protected the now-defunct company from class action exposure.[19]  The problem for Blockbuster, however, was that it reserved the right “at its sole discretion, [to] modify these Terms and Conditions of Use . . . with or without notice.  Such modifications will be effective immediately upon posting.”

The court sitting in the Northern District of Texas took issue with Blockbuster’s unfettered ability to “change the rules of the game,” especially given that there was no provision stating that once enacted, the changes would not apply to disputes arising prior to the amendment.[20]  Additionally, the Blockbuster court stated that it did not matter that a retroactive modification had not actually been attempted—the mere fact that the provision was in the contract rendered the entire contract, including the arbitration provision, illusory.  As mentioned above, DraftKings’s terms of use contains a nearly identical modification provision without any clause suggesting that modifications would only apply to subsequent disputes.  If the court determines that the modification clause renders the contract illusory, DraftKings will be vulnerable to class action litigation.

CONCLUSION

The case study provided by Blockbuster should have alerted drafters of the dangers of unilateral modification clauses.  Arbitration provisions offer a strong defense for companies hoping to avoid the liability associated with class action suits, but including a modification clause like the one at issue in Blockbuster could render the entire contract illusory. Indeed, DraftKings’s may have done just that.  Blockbuster informs that if a unilateral modification clause must be included, the clause must also provide that modifications would only apply to disputes subsequently arising.  Whether or not the class will succeed in its underlying suit remains to be seen, but because DraftKings may have effectively voided its own arbitration provision, there is a chance we will find out.

 


*Andrew Lewis. University of Illinois College of Law, Class of 2015. Practices commercial litigation in Chicago, IL. Many thanks to JLTP editor Iman Naim for her help and guidance with this article.

[1] Tom Kludt, DraftKings and FanDuel Ads Seem to Be Everywhere on TV Because They Are, CNNMoney (Oct. 8, 2015, 5:23 PM), http://money.cnn.com/2015/10/08/media/fanduel-draftkings-commercials/index.html.

[2] Dustin Gouker, Nothing but the Truth? DraftKings Faces New Class-Action Lawsuit for Alleged False Advertising, Legal Sports Report, (Apr. 28, 2015, 7:28 PM), http://www.legalsportsreport.com/1205/draftkings-faces-new-class-action-lawsuit-advertising.

[3] WKYC Staff, NE Ohio Attorney Files Lawsuit, Says Fanduel, Draftkings Violate Ohio Law, WKYC (Oct. 22, 2015, 12:38 AM), http://www.wkyc.com/story/news/local/ohio/2015/10/21/ attorney-fantasy-sports-websites- fanduel-draftkings-violate-ohio-law/74352890.

[4] Rachel Axon, DraftKings Staying Open in New York until Legal Decision in Court, USA Today Sports (Nov. 20, 2015, 7:39 PM), http://www.usatoday.com/story/sports/fantasy/2015/11/20/fanduel-continue-business-new-york-ligitation/76125684.

[5] Id.

[6] Id.

[7] Id.

[8] See Jonathan Berr, Is DraftKings’ Ethan Haskell Just a Shrewd “Investor”?, CBS Money Watch (Oct. 14, 2015, 5:15 AM) http://www.cbsnews.com/news/is-draftkings-ethan-haskell-just-a-shrewd-investor (explaining that “[i]n daily fantasy sports, as in the stock market, the most widely chosen assets—or, in this case, athletes—represent a less attractive investment because the rewards of the performance are shared among many holders. By contrast, the solitary owner of an undervalued asset would reap larger rewards than those who have opted for a more obvious choice.”).

[9] Seung Lee, How to Win $350,000 on FanDuel and the Mathematics of Daily Fantasy Sites, Newsweek (Oct. 8, 2015, 2:11 PM), http://www.newsweek.com/draftkings-fanduel-mathematics-daily-fantasy-sites-381129.

[10] Joe Drape & Jacqueline Williams, Scandal Erupts in Unregulated World of Fantasy Sports, N.Y. Times (Oct. 5, 2015), http://www.nytimes.com/2015/10/06/sports/fanduel-draftkings-fantasy-employees-bet-rivals.html.

[11] Complaint, Johnson v. FanDuel, Inc., No. 15-cv-7963 (S.D.N.Y. Oct. 8, 2015).

[12] Terms of Use, DraftKings, https://www.draftkings.com/help/terms (last updated Oct. 19, 2015).

[13] American Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013).

[14] Id. at 2308.

[15] See Id., (“In resisting the motion, respondents submitted a declaration from an economist who estimated that the cost of an expert analysis necessary to prove the antitrust claims would be ‘at least several hundred thousand dollars, and might exceed $1 million,’ while the maximum recovery for an individual plaintiff would be $12,850, or $38,549 when trebled.”).

[16] Id. at 2311.

[17] Terms of Use, supra note 11.

[18] Harris v. Blockbuster Inc., 622 F. Supp. 2d 396 (N.D. Tex. 2009).

[19] Id. at 397.

[20] Id. at 399.

Utility Models Revisited: The Case of Investing in China

By Runhua Wang*

I. Introduction

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.

II. Background

A. FDI and the Trend of Financial Globalization

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]

B. Concerns of the Strength of IP Regime in Developing Countries

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.

III. Understanding Utility Model

A. What is Utility Model?

“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.

B. Utility Model in China

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]

C. Standards of Non-Obviousness

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.

IV. Conclusion

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.

 


*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.

[1] See Jason Lange, Chinese Firms Pour Money into U.S. R&D in Shift to Innovation, Reuters (June 21, 2015, 9:17 AM), http://www.reuters.com/article/2015/06/21/us-usa-china-investment-insight-idUSKBN0P10KD20150621.

[2] Eva Dou, Intel Capital Invests $67 Million in Eight Chinese Startups, Wall St. J. (Sept. 17, 2015, 8:27 AM),  http://www.wsj.com/articles/intel-capital-invests-67-million-in-eight-chinese-startups-1442492847.

[3] Bob Stembridge, Chinese Utility Models – A Lesser-Known IP Strategy, Indus. Insight, July-Aug. 2010, at 9, available at http://www.iam-media.com/Magazine/Issue/42/Industry-insight/Chinese-utility-models-a-lesser-known-IP-strategy.

[4] Foreign Direct Investment – the China Story, World Bank (July 16, 2010), http://www.worldbank.org/en/news/feature/2010/07/16/foreign-direct-investment-china-story (last visited Oct. 26, 2015).

[5] Christine Greenhalgh & Mark Rogers, Innovation, IP, and Economic Growth, 258 (2010).

[6] Beata S. Javorcik, International Technology Transfer and Foreign Direct Investment, in The Evidence and Impact of Financial Globalization 311-319, (Gerard Caprio ed., 2012), available at http://www.sciencedirect.com/science/article/pii/B9780123978745000439.

[7] Carsten Fink & Keith E. Maskus, Why We Study Intellectual Property Rights and What We Have Learned, in Intellectual Property and Development: Lessons from Recent Economic Research 6 (Carsten Fink & Keith E. Maskus eds., 2005).

[8] Nagesh Kumar, Intellectual Property Rights, Technology and Economic Development: Experiences of Asian Countries, 38 Econ. & Pol. Wkly. 209, 210 (2003), available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.469.8086&rep=rep1&type=pdf.

[9] Rami M. Olwan, Intellectual Property and Development: Theory and Practice 108, 123 (2013).

[10] Greenhalgh, supra note 5, at 257.

[11] Olwan, supra note 9, at 125.

[12] Benjamin Coriat & Luigi Orsenigo, Public Health and the Pharmaceutical Industry: Issues in the Post-2005 TRIPS Agenda, in Intellectual Property Rights: Legal and Economic Challenges for Development 227 (Mario Cimoli et al. eds., 2014).

[13] Comp. Gen., Strengthening Worldwide Protection of Intellectual Property, No.132699, at 22-25 (1987), available at http://archive.gao.gov/d2t4/132699.pdf.

[14] See Keith E. Maskus, The Role of Intellectual Property Rights in Encouraging Foreign Direct Investment and Technology, supra note 7, at 48.

[15] See Id. at 54.

[16] Pager refers to this as a “damage control” policy “that seek[s] to minimize or offset the costs of having a patent system pose significant, disproportionately burdensome obstacles to local innovation.” See Sean A. Pager, Patents on a Shoestring: Making Patent Protection Work for Developing Countries, 23 Ga. St. U. L. Rev. 755, 803-04 (2006-07); see also Jerome H. Reichman, Intellectual Property in the Twenty-First Century: Will the Developing Countries Lead or Follow? 46 Hous. L. Rev. 1116, 1119 (2009). (“‘[I]f they open their domestic markets to trade, they face political and economic pressure to protect foreign IP.’” (quoting Robert L. Ostergard, Jr.)).

[17] Josh Lerner et al., Venture Capital and Private Equity: A Casebook 242 (5th ed. 2012).

[18] Uma Suthersanen, et al., Utility Models and Other Alternatives to Patents, in Innovation Without Patents: Harnessing the Creative Spirit in a Diverse World 18 (Edward Elgar ed., 2007).

[19] Id.

[20] Id.

[21] Id.

[22] See Lionel Bently & Brad Sherman, The United Kingdom’s Forgotten Utility Model: The Utility Designs Act of 1843, 3 Intell. Prop. Q. 265 (1997); see also Tabrez Ahmad & Pratic Priyadarshi Choudhury, Law of Patents Utility Model Protection: Harnessing the Backwaters of IP, 5 (2012), http://ssrn.com/abstract=1981780.

[23] See Ahmad, supra note 22 at 6.

[24] Mark D. Janis, Second-tier Patent Protection, 40 Harv. Int’l. L.J. 151, 156 (1999).

[25] Id.

[26] See id. at 158-59.

[27] See id. at 158. The duration is three years from the application date, and it is renewable for an additional three-year term.

[28] See id. at 155, 162-63.

[29] Id. at 164.

[30] Jerome H. Reichman, Legal Hybrids Between the Patent and Copyright Paradigms, 94 Colum. L. Rev. 2432, 2457 (1994).

[31] Id. at 165 n.73; see also Jerome H. Reichman, Charting the Collapse of the Patent-Copyright Dichotomy: Premises for a Restructured International Intellectual Property System, 13 Cardozo Arts & Ent. L.J. 475, 500 (1995).

[32] Ahmad, supra note 22, at 5

[33] Janis, supra note 24, at 161.

[34] Robert Hart, The European Union’s Proposed Protection for Utility Models: The Implications for Computer Programs, 3 Int’l Intell. Prop. L. & Pol’y, 50-1, 50-1 (1998).  Hart concludes that the characteristics of a second-tier regime are quickness, simple registration, less stringent requirements than for patents, low cost, and temporary protection pending the grant of a patent, and most of these characteristics have been covered by classical utility model regimes.

[35] Heather Ann Forrest, Utility Model: Widening the Economic Divide between Legacy and New EU Member States, 32 Int’l Bus. L. 216, 217 (2004).

[36] See Hart, supra note 34, at 50-1, 50-2; see also Commission Green Paper: The Protection of Utility Models in the Single Market, COM (1995), 370 final (July 18, 1995).  The Proposed Directive in the Commission of the European Community proposed that “utility model protection is better suited than patent protection to technical inventions involving a specific level of inventiveness.”

[37] Pager, supra note 16, at 803-04.

[38] Hong Liu & Jun Wei, Technology Transfer to China: The Patent System, 5 Santa Clara Computer & High Tech. L J. 363, 373 (1989).  The authors looked at an earlier draft of China’s Patent Law that says: “‘Working a patent’ means the manufacture of the invention, utility model or design, or use of the patented process.”  Gradually, it becomes general knowledge that people in China call all three kinds of inventions patents.  The current draft of the 2009 Patent Law in China still states that “inventions-creations” means inventions, utility models and designs” in Article 2.

[39] Zhuanli Fa(专利法)[Law on Patent](promulgated by the Standing Comm. Nat’l People’s Cong., Dec. 27, 2008, effective Oct. 1, 2009) P.R.C. Laws, Dec. 27, 2008, art. 2 (China).

[40] Xiaoqing Feng, The Interaction Between Enhancing the Capability for Independent Innovation and Patent Protection: A Perspective on the Third Amendment to the Patent Law of the P.R. China, 9 Pitt. J. Tech. L. & Pol’y 1, 24 (2009).

[41] Mark Shiqian Zhai, The Chinese Utility Model Patent is Destroying Innovation in China, 39 Aipla Q. J. 413, 415 (2011).

[42] Zhuanli Shencha Zhinan (专利审查指南)[The Guide of Patent Examination, “the Guide”](promulgated by SIPO., Jan. 21, 2010, effective Feb. 1, 2010) §1 ch. 2 art. 6.1 (China).

[43] Id. at art. 6.3; see also Zhuanli Fa(专利法)[Law on Patent](promulgated by the Standing Comm. Nat’l People’s Cong., Dec. 27, 2008, effective Oct. 1, 2009) P.R.C. Laws, Dec. 27, 2008, art. 2 (China).

[44] Zhuanli Fa(专利法)[Law on Patent](promulgated by the Standing Comm. Nat’l People’s Cong., Dec. 27, 2008, effective Oct. 1, 2009) P.R.C. Laws, Dec. 27, 2008, art. 42 (China).

[45] Id. at art 22.  Inventiveness is equivalent to the non-obviousness requirement of USPTO (U.S. Patent and Trademark Office) because of the difference of translation.

[46] Feng, supra note 40, at 52

[47] Liu & Wei, supra note 38, at 367; see also Zhuanli Shencha Zhinan (专利审查指南) [The Guide of Patent Examination] (promulgated by SIPO., Jan. 21, 2010, effective Feb. 1, 2010) §1 ch. 2 art. 7.4 (China).

[48] Zhuanli Fa (专利法)[Law on Patent] (promulgated by the Standing Comm. Nat’l People’s Cong., Dec. 27, 2008, effective Oct. 1, 2009) P.R.C. Laws, Dec. 27, 2008, art. 40 (China).

[49] Id. at art. 35.

[50] Id. at art. 61; see also Zhuanli Fa Shishi Xize (专利法实施细则) [The Rules for the Implementation of the Patent Law (“the Rules”)] (promulgated by St. Council, 2010) P.R.C. Laws, Jan. 22, 2010, art. 56 (China); see also, Zhuanli Shencha Zhinan (专利审查指南) [The Guide of Patent Examination] (promulgated by SIPO., Jan. 21, 2010, effective Feb. 1, 2010) § 5 ch. 5 art. 2.3 (China).

[51] Zhuanli Fa Shishi Xize (专利法实施细则) [The Rules for the Implementation of the Patent Law, “the Rules”] (promulgated by St. Council, 2010) P.R.C. Laws, art. 24, 51 (China); see also Zhuanli Shencha Zhinan (专利审查指南) [The Guide of Patent Examination] (promulgated by SIPO., Jan. 21, 2010, effective Feb. 1, 2010) §1 ch. 2 art. 7.3 (China).

[52] Zhuanli Fa Shishi Xize (专利法实施细则) [The Rules for the Implementation of the Patent Law (“the Rules”)] (promulgated by St. Council, 2010) P.R.C. Laws, Jan. 22, 2010, art. 22 (China); see also Liu & Wei, supra note 38, at 364; see also Zhuanli Shencha Zhinan (专利审查指南) [The Guide of Patent Examination, “the Guide”] (promulgated by SIPO., Jan. 21, 2010, effective Feb. 1, 2010) § 5 ch. 5 art. 2.3 (China). The novelty requirement of utility models could be softer than that of utility patents in the detail regulation of “the Guide.”

[53] Feng, supra note 40, at 55.

[54] Zhuanli Fa (专利法) [Law on Patent] (promulgated by the Standing Comm. Nat’l People’s Cong., Dec. 27, 2008, effective Oct. 1, 2009) P.R.C. Laws, Dec. 27, 2008, art. 22 (China).

[55] Feng, supra note 40, at 55.

[56] Edward W. Tracy, et al., A Practical Patent Strategy for U.S. Companies Doing Business in China, 3 Landslide 14, 15 (2010-2011).

[57] Id.

[58] Id. See also Fa, supra note 54, at art. 9.

[59] Hui Lian (廉惠), Shiyong Xinxing Bohui Anjian Shizheng Fenxi (实用新型驳回案件实证分析) [An Empirical Study of Rejected Applications of Utility Models], 8 Intell Prop. 77, 78-79 (2011).

[60] “The Guide” includes the search of both local and international prior arts in the process of preliminary examination for utility models, but excludes the process of testing non-obviousness, which is required only in the pending of an application of a utility patent.  “The Guide” shows the three types of preliminary examination for the three types of patent filing separately in Part I, and mentions less about the search for novelty in the same part.  However, even though it expresses the details of examination of novelty of utility models in Part II, “The Substantive Examination,” the Patent Law of China only requires this procedure in Article 35.  Therefore, because the test of utility is a forward step of testing novelty, which is defined in Part 2.3, Article 3 of “the Guide,” we learn that the nature of the substantive examination is to test non-obviousness of an invention.

[61] See Suthersanen, supra note 18, at 12.  Suthersanen separates the classical utility model regime from second-tier protection, like in Germany, Austria, and the proposal from the EU Commission, and the type of utility model regimes which are closest to the utility patent regime.  She calls these types “Three Dimensional Regime,” “German Regime,” and “Patent Regime.”

[62] Id. at 13.  The formalities include correct documentation, name, and address of applicant and agent.

[63] See Hart, supra note 34, at 50-52.

[64] See Janis, supra note 24, at 191.

[65] Id. at 161.  Janis shows the pattern for the PTO and judicial system to emphasize the inventive step requirement for patents since the mid-twentieth century in the U.S.

[66] Id. at 166.

[67] Ruifang Chen, The Utility Model System and Its Benefits for China—Some Deliberations Based on German and Japanese Legislation, 14 IIC: Int’l Rev. Intell. & Competition L. 493, 505 (1983).

[68] Id. at 162-63. (“In order to comply with the European Patent Convention of 1978, Germany abolished its relatively strict ‘technical step forward’ standard for inventiveness, replacing it with the less rigorous erfinderische Tdtigkeit standard . . . . The inventiveness standard for utility models . . . was adjusted to erfinderischer Schritt . . . to correspond to an even lower standard.”)

[69] Janis, supra note 24, at 168.

[70] Rudolf Krasser, Developments in Utility Model Law, 26 IIC: Int’l Rev. Intell. & Competition L. 950, 951 (1995).