By Dr. Ruth Taplin

The proposed change to the standards law by the Standardization Administration of China (SAC) concerning “Regulations on Administration of Formulating and Revising National Standards Involving Patents” caused a flurry of concern and responses around the world prior to the deadline for public comment of 30 November 2009. There are 21 articles which may be further be revised after public comment from global industry and they deal with Chinese National Standards involving patents.

In this column I will deal with a few of the most contested articles and provide a synopsis of the concerns of many organisations that deal with national standards and patents and those that trade with China. The latter part of this article will deal with Notice No. 618, posted on 15 November, which would implement an Indigenous Innovation Accreditation System.

In general, although SAC is trying to balance the requirements of society, which include the rights of individuals, owners of IP and institutional investors to invest in innovation by earning a reasonable fair return on their patented products with the right of all members of society to benefit from innovation and new technologies; the balance by all accounts has not been made with this proposed legislation.

Article 9, for example, is challenging the practice of worldwide organisations such as ANSI, CEN/CENELEC/ ETSI, JISC, ISO, IEC, ITU and other major standards setters by not including the basic requirements of FRAND which enables innovators to be able to obtain a return on the risks of investing in R&D. This is done through the concept of offering licenses to the essential patent claims of an internationally agreed standard based on fair, reasonable and non-discriminatory terms (FRAND).

Article 9, a national standard cannot include any patented technology unless the patent holder agrees to grant licences with royalties “considerably lower than the customary license fee” or with no royalties at all. It is argued that most patent holders making a rational choice in the face of licensing revenue being well below the normal royalty expected by the patent holder or no royalty at all, many patent holders will choose not to licence their technology which will result in a lower quality standard and a great loss as the patent holder will seek a fair return on an investment elsewhere.

Some technologies will not allow for the latter which would force the patent holder to accept a lower standard and thereby seek to make up for their losses by selling their product for a higher price outside of China which could affect adversely China’s own export business.

The Indigenous Innovation Product Accreditation Program, on the other hand, will also it is argued hamper China’s progress in advancing science and technology capabilities by limiting access to the most advanced and best products from around the world which will affect the Chinese standard of living but has serious implications for non-Chinese companies investing and operating in China. This is because Notice 618 stipulates that a Chinese product’s IP be developed and owned in China and that any trademark be originally registered in China. Within this context, quality, value and performance has a much diminished role.

As China and the international community need to robustly protect IPR together as economic ties are built, this new program does not recognise the reality of cross-border, collaborative and the global nature of R&D for innovative purposes. If local IP ownership becomes the basic requirement for market access, collaborative innovation on a global scale would suffer and would be against free and open trade as most innovative products are not developed in a single national territory. This applies to SME companies as well which increasingly rely in Europe for example on business partnering across many nations to develop an innovative product. The most important industry groups from around the world have signed a letter making such points by 10 December 2009, the deadline set by Chinese governmental departments for public comment.

The Chinese have now responded to the above-mentioned letter but appear not to have addressed the concerns of international industry. A Ministry of Foreign Affairs spokeswoman in a written statement of 14 December stated that the accreditation system of the above notice “accords with China’s indigenous innovation strategy and international rules.” She further stated that both domestic and foreign companies are treated equally and fairly under such rules. The statement did not address concerns that globally developed technology may hold IP that is difficult to discern in the case of geographic origin and that with such an indigenous based accreditation system foreign industry may be forced to transfer their IPR to China which does not constitute fair and reasonable treatment for industry outside of China. This indigenous innovation notice has tremendous implications for the fair treatment of non-Chinese global trade and innovation which is a multibillion dollar market that covers the majority of new technology products.

As China is set to become the world’s second largest economy these issues will affect IP owners, investors of all types and patent holders. How Chinese organisations and agencies continue to respond to these concerns of global industry will be worth noting.

Dr. Ruth Taplin is Director of the Centre for Japanese and East Asian Studies in London. She is the author of 14 books mainly on IP and economy, in relation to East Asia and over 200 articles. She has also edited the Journal of Interdisciplinary Economics for many years. The business partnering idea mentioned in this piece derives from her book Innovation and Business Partnering in Japan, Europe and the United States, Routledge 2007.