Take Two — China’s Proposed Regulations For Patent-Involving National Standards21/12/2009 by Intellectual Property Watch Leave a CommentShare this Story:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Google+ (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window)IP-Watch is a non-profit independent news service, and subscribing to our service helps support our goals of bringing more transparency to global IP and innovation policies. To access all of our content, please subscribe now. You also have the opportunity to offer additional support to your subscription, or to donate.The views expressed in this column are solely those of the authors and are not associated with Intellectual Property Watch. IP-Watch expressly disclaims and refuses any responsibility or liability for the content, style or form of any posts made to this forum, which remain solely the responsibility of their authors.By George T. Willingmyre, P.E.In 2004, the Standards Administration of China (SAC) issued a draft patent policy proposal. This proposal received much criticism from entities throughout the world and was not implemented. On 2 November, 2009, SAC issued Proposed Regulations for the Administration of the Formulation and Revision of Patent-Involving National Standards (SAC patent policy proposal) ((http://www.sac.gov.cn/templet/default/ShowArticle.jsp?id=5298)) and requested public comments. ((The 2004 draft and the 2009 SAC patent policy proposal appear to be strikingly similar.)) Numerous papers from governments, companies, and private interest groups worldwide were submitted. Many echoed a common point of view: the SAC proposal undervalues the contribution and potential role of intellectual property rights holders in standard setting activities and threatens to inhibit the contribution of innovative solutions and technologies for use in national standards.Granted, all patent policies of standards developing organisations strive to achieve a balance among the valid interests of multiple stakeholders in the standards process. Article 1 of the SAC patent policy proposal clearly states this desired goal:Article 1 With a view to properly handling the patent issues involved in national standards, standardizing the formulation and revision of national standards, encouraging independent innovations, promoting the rational adoption of new technologies in national standards, protecting the rights and interests of social public, patentees and related right holders and ensuring the effective implementation of national standards, these regulations (“Regulations”) are hereby formulated…Unfortunately, the SAC patent policy proposal fails to strike this desired balance and undervalues the intellectual property included in a standard. As a result, if implemented as worded, it will discourage the contribution of innovative technologies for use in national standards and the participation of related patent rights holders. The SAC patent policy proposal as currently worded is out of synch with the patent policies of international standards setting organisations and will negatively impact standards setting and innovation within China.For example, Article 9 within Chapter III Statement on Licensing of Patent Rights contains a description of a patentee’s irrevocable written statement on patent licensing. This statement is collected when a patent is required to implement a national standard:(1) The patentee agrees to license, on a reasonable and nondiscriminatory basis, any organization and person to implement the patent when implementing the national standard at a price significantly lower than the normal royalties; The phrase “at a price significantly lower than the normal royalties” is not found in patent policies of any other standards developing organisation with which the author is familiar. In comparison, the licensing intention this sentence describes (with the subject phrase removed, i.e., leaving solely the requirement to agree to offer licenses on a reasonable and non-discriminatory basis) is commonly and widely used in patent policies of standards setting organisations such as the common patent policy of the ISO/IEC/ITU:2.2 the patent holder is willing to negotiate licenses with other parties on a non-discriminatory basis on reasonable terms and conditions. Such negotiations are left to the parties concerned and are performed outside ITU-T/ITU-R/ISO/IEC. ((ISO/IEC/ITU common patent policy http://isotc.iso.org/livelink/livelink/fetch/2000/2122/3770791/Common_Policy.htm))and the IETF:b) under a license that contains reasonable and non discriminatory terms and conditions, including a reasonable royalty or other payment, ((Intellectual Property Rights in IETF Technology Request for Comments: 3979 http://www.ietf.org/rfc/rfc3979.txt))and of ANSI:(i) under reasonable terms and conditions that are demonstrably free of any unfair discrimination. ((ANSI patent policy – Inclusion of Patents in American National Standards http://publicaa.ansi.org/sites/apdl/Reference%20Documents%20Regarding%20ANSI%20Patent%20Policy/ANSI%20Patent%20Policy%20-%20Revised%202008.pdf))and of ETSI:6.1 When an ESSENTIAL IPR relating to a particular STANDARD or TECHNICAL SPECIFICATION is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licenses on fair, reasonable and non-discriminatory terms and conditions under such IPR to at least the following extent. ((ETSI Intellectual Property Rights Policy http://www.etsi.org/WebSite/document/Legal/ETSI_IPR-Policy.pdf))Owners of Intellectual property both inside and outside China will be discouraged from participating in national standards activities in China by this clause requiring owners to offer licences at “significantly lower than the normal royalties” for valuable technologies that are often developed in high risk R&D programs at great expense. They will see this clause as a restriction to monetise and receive a fair and reasonable return on such investments. Including this phrase in the Article 9 sentence will have the unintended consequence of impeding the development and/or adoption of the most technically viable standards based on patents that are not contributed to the process. Inevitably, such policies will lead to the adoption of standards that are more costly to implement or less effective in performance or both.Likewise, articles within Chapter IV Special Requirements for Involvement of Patent in Compulsory National Standards raise troubling compulsory licensing issues when patents are needed to practice mandatory standards:Article 12 In principle, a compulsory national standard shall not involve patent. Article 13 For a compulsory national standard that indeed needs to involve a patent, the patentee shall grant license free of charge or the national administration department of standardization shall request the related departments to consult with the patentee about disposal of the patent. If the related departments fail to agree with the patentee on the disposal of patent, the approval for release of the national standard will be temporary withheld or a compulsory license will be granted according to law.Article 14 Before patent-involving compulsory national standard is approved for release; the national administration department of standardization shall disclose the full text of the standard and the known patent information to public for a 30-day period.The principles in Article 12 that a compulsory national standard shall be patent free, and in Article 13 that any patents in compulsory standards are to be available royalty free, are without precedent for compulsory standards as a generic category. For example the ANSI policy states:3.1 ANSI patent policy – Inclusion of Patents in American National Standards. There is no objection in principle to drafting an American National Standard (ANS) in terms that include the use of an essential patent claim (one whose use would be required for compliance with that standard) if it is considered that technical reasons justify this approach. ((ANSI Patent policy http://publicaa.ansi.org/sites/apdl/Documents/Standards%20Activities/American%20National%20Standards/Procedures,%20Guides,%20and%20Forms/ANSI%20Patent%20Policy%20-%20Revised%202008.pdf))In the United States, Office of Management and Budget (OMB) Circular A-119 establishes policies on federal use and development of voluntary consensus standards and on conformity assessment activities. Voluntary consensus standards can become mandatory technical regulations through administrative proceedings. With respect to intellectual property the Circular states:For purposes of this policy … these standards include provisions requiring that owners of relevant intellectual property have agreed to make that intellectual property available on a non-discriminatory, royalty-free or reasonable royalty basis to all interested parties. ((CIRCULAR NO. A-119 Revised http://www.whitehouse.gov/omb/rewrite/circulars/a119/a119.html))Patented technologies are frequently key to minimising overall life cycle costs of implementation and maximising performance of interoperability standards, thereby providing significant benefits to consumers and users of the standards worldwide.The compulsory licensing anticipated in Article 13 is problematic. Compulsory licensing should be used rarely and in limited extraordinary circumstances. Compulsory licensing must be undertaken within the global rules and context of the World Trade Organization’s Trade-Related Aspects of Intellectual Property Rights (WTO/TRIPS) Agreement. Likewise within China, SAC should contemplate joint regulatory promulgation and coordination with the State Intellectual Property Rights Office, possibly the State Administration for Industry & Commerce or the Antimonopoly Commission and the National Copyright Administration.Nowhere in the SAC patent policy proposal is the necessary level of legal and procedural detail clearly articulated with guidelines and definitions limiting the applicability of compulsory licensing to extraordinary circumstances. For example, what legal rules or procedures govern the compulsory licensing – the patent law? Such rules and procedures should be established to make clear that compulsory licensing is an extreme exception to the norm and should be employed only under unusual, critical circumstances that meet well defined criteria.Article 14, above, regarding public notice of compulsory standards, is well intentioned with respect to the goal of transparency, however, it begs the question of its implications for non-participants in the standards process. The article as written could be interpreted to have some default impact upon any patents associated with the standard that has been the subject of the public notice. In other words, a failure to respond to the public notice about a patent within some time period may carry some implication or lien for licensing the patent.The SAC patent policy proposal is not clear and, therefore, endangers the value of, and return on investment for, investments in research and development efforts, thereby disincentivising such investments at a time when they are becoming increasingly important to China and developing nations of the world. A sample of the groups submitting substantive comments follows. The Intellectual Property Owners Association comments ((Re: IPO’s Comments on the Standardization Administration of China’s Draft Provisions on the Administration of Formulating and Revising National Standards Involving Patents http://www.ipo.org/AM/Template.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=24603)) noted that compulsory licensing requirements will negatively impact China:Likewise compulsory licensing, or forced negotiations in the shadow of the threat of compulsory licensing, for mandatory national standards would also lead to reduced innovation. Patents benefit Chinese society by creating long-term incentives for Chinese companies to invest in innovation.In the case of China adopting standards of ISO or IEC or ITU as national standards, further problems arise. There may exist a patent whose owner has made a promise to licence it on a non-discriminatory basis on reasonable terms and conditions ((http://isotc.iso.org/livelink/livelink/fetch/2000/2122/3770791/Common_Policy.htm)) consistent with the combined patent policies of ISO/IEC/ITU or with any one of the similar words describing the same licensing expectation of another global standards setting organisation. How the SAC patent policy proposal will impact the Intellectual property rights owner in such a case could create serious trade issues if the patent owner is required to change the licence promise to that articulated in Article 9.The US Chamber of Commerce and the American Chamber of Commerce People’s Republic of China made a Joint Submission of Comments ((Joint Submission of Comments on the Provisional Rules regarding Administration of the Establishment and Revision of National Standards that involve Patents)) that addressed the unintended consequences of applying the SAC patent policy proposal to standards originally developed elsewhere as mentioned within Article 15. ((Article 15 within Chapter V. Supplementary Provisions describe the process for adopting international standards as national standards:Article 15 When an international standard is adopted in the formulation of a national standard, all possible efforts shall be made to gain a full understanding of the information on the patent involved and the patent right shall be disposed of as specified in Chapter II and Chapter III. ))Moreover, clarification of the rules objective also would be helpful in understanding the scope of the SAC Rules. While their provisions suggest they are directed towards enhancing transparency in the formation and modification of Chinese national standards, they could be extended to apply to industrial and provincial standards, and possibly to implementation in China of international standards or technical specifications developed by standards bodies outside China that may then become the basis for national standards. Such an enlarged scope could have serious unintended consequences for both participants in foreign standardization efforts, and for non-Chinese companies that are active in Chinese standards bodies but relegated to non-voting observer status. As such, the rules could result in de facto discrimination against non-Chinese entities in a manner that would be inconsistent with existing international obligations. The Chambers’ joint comments above note the problem of expansion of scope to “industrial and provincial standards” created by the extension of the SAC patent policy proposal. The SAC patent policy proposal is written expressly to apply to “national standards” and extending it to “industrial and provincial standards” dramatically increases its negative impacts.Article 19 If patent is involved in the formulation and revision of industry standards and local standards, these regulations may be referenced and followedThere are far more standards activities within industrial and provincial standards bodies than within the national standards activity that is the subject of the SAC patent policy proposal. Broad adoption of the SAC patent policy proposal would multiply the problems described in this paper. Usually these industrial and provincial standards are developed by participants in the relevant industry that are well-positioned to understand the relative value of patented technologies and unpatented technologies. Industrial and provincial standards bodies should be encouraged to develop a patent policy for their work that balances the interests of the diverse participants in the standards development process and users of their work and that are best suited for their own situations and industries.SAC has included wording in parts of the patent policy proposal that support transparency and disclosure of information about patents known by individuals participating in standards setting activities.However, The SAC patent policy proposal includes too many unnecessary and damaging restrictions on an IPR owner’s ability to monetise and receive a fair and reasonable return on its investment (Article 9) combined with the broad threats of compulsory licensing in Articles 12, 13, and 14. Such provisions upset the delicate balance that must be achieved among the stakeholders in a modern global standards setting process in order to efficiently develop standards employing the most advanced technologies that achieve reasonable implementation costs.To be viable and relevant, standards whether mandatory or not must often make use of technology that itself often involves patents. The SAC patent policy proposal is unbalanced against an intellectual property owner’s rights and will discourage participation from owners of intellectual property within and outside of China. Implementation of the SAC patent policy proposal as worded will place China in a position to have to accept and promote inferior technologies and/or more costly implementations for important standards.George T. Willingmyre. P.E. is the President and founder of GTW Associates, an International Standards and Trade Policy consultancy. GTW Associates advises companies, associations and governments on the strategic role of standards and conformity assessment practices in competitiveness of businesses, organizations and countries in the global marketplace. Current projects include representing US business interests to national and international organizations; recommending corporate standards strategies and tactics; interpretation of standards processes and IPR policies, litigation support, assisting foreign organizations and businesses with US market access issues.Share this Story:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Google+ (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window)Related"Take Two — China’s Proposed Regulations For Patent-Involving National Standards" by Intellectual Property Watch is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.