The Economist Pops the China Patent Bubble

January 7, 2013

The Economist turns a skeptical eye towards China’s patent filing statistics for 2011 in a brief article entitled “How Innovative is China?” The article is mostly about valuation, but I’d rather talk about the first part, which deals with registration statistics. No big surprises here for anyone who keeps up on IP registration trends, but it is nice to see this kind of story in a mainstream publication.

As we all know, China regularly puts out IP numbers in the State media, and in recent years, with the meteoric rise in filings, those news stories have been quite self-congratulatory. China’s patent and trademark stats in particular are are now leading the world, but the Economist is not ready to give China any kudos:

In America and Europe, roughly half of patent applications are lodged by foreigners. This used to be true in China, but in the past few years filings by locals have surged to three-quarters of the total. Is this because China has suddenly become more innovative? Or is it because government incentives have prompted people to file lots of iffy patent applications, which the local patent office has a tendency to approve?

True or false? The Economist has the numbers and filing trends right, and it is also true that the rise in domestic filings has benefited from local incentive programs. It’s also true that many of the patents filed in China are “iffy.”

On the other hand, the rise of IP filings in China is not just about incentive programs. Remember that China’s economy has expanded significantly in a very short period of time, the same years during which we’ve seen that rise in IP registrations. This is no coincidence as there is a relationship between economic growth and IP filings. Moreover, China is still, in many ways, a developing nation, and it has taken a while for both foreign and domestic companies to see the value in protecting their IP here by registering it. As the legal system here has improved, more IP owners have taken advantage of it.

Additionally, this “iffy” patent situation is a bit more complicated than you might think after reading the brief Economist article. The suggestion is that these patents are weak because the Patent Office is engaging in local protectionism when it comes to domestic parties with problematic applications. This is nonsense.

The reason why many granted patents are “iffy” stems from the fact that they do not undergo substantive review during the application process. This is true for two types of patents, utility models and industrial designs, but not for invention patents. “Substantive review” includes a check for prior art, necessary to determine whether a patent is indeed novel, which is one of the basic requirements set forth in the Patent Law.

Therefore a design or utility model patent application simply does not have to go through the same procedure than is the case for an invention patent; this is what the law stipulates and is wholly unrelated to the specific actions of individual patent examiners. The result is a whole lot of patents out there that may be fundamentally weak and subject to an invalidation challenge by a third party. These are commonly referred to as “junk patents.” However, this has nothing to do with whether the applicant was foreign or domestic, and it is incorrect to suggest that the Patent Office is somehow engaging in preferential treatment. This is the way it’s supposed to work, folks.

I’ll give the Economist a B+ on this one (I just finished grading exam papers this past weekend, and I can’t seem to break the habit). They got the numbers right and are correct in being at least somewhat skeptical about the boom in patent filings. However, China should be given some props for the positive trends, and the problems with junk patents are built-in to the system and not evidence of a conspiracy between patent examiners and the folks in charge of China’s innovation strategy.