Today’s blog post has been kindly drafted to you by our IPR expert Dr. Toby Mak from Tee & Howe Intellectual Property Attorneys and Ms. Constance Rhebergen from Bracewell LLP . In their article, which was first published in UK Chartered Institute of Patent Attorneys (CIPA) Journal, Dr. Mak and Ms. Rhebergen give a detailed overview of China’s patent security interest market and explain how to register for patent security. Lending money to patentees with patent on mortgage is gaining popularity in China and this is something that European SMEs could also benefit from.
In China, intellectual property assets, including patents, have certain similarities to other property rights such as real estate and tangible property, and the owner is able to dispose of such asset in any legally allowable manner. Typical transactions involving real estate include buying and selling, renting, and mortgaging. Although patents are extensively the subject of buying and selling (assignment), and renting (licensing), mortgaging (security interest or pledge) of patent rights is less common and often overlooked. Some top reasons contributing to this include the difficulty and expense in evaluation of security interest status of patents, instability of rights due to invalidation challenges, and the challenge of foreclosing upon a security interest to ensure realization (whether recovery of monies or transfer of secured asset), particularly compared to a required selling of real estate.
While intellectual property shares certain similarities with real estate and tangible property, the treatment of intellectual property differs in important aspects and is not intuitive. Therefore, expertise regarding intellectual property security should be included in early stage development of strategy to ensure optimization of rights and value, both for financial institutions offering financing and companies involved in transactions. Notably, while there is large group of patent attorneys knowledgeable about prosecution, managing security interests in patents is not necessarily part of their training. Similarly, while corporate attorneys focus on security interests and financing, these specialist may be unversed in the unique aspects of intellectual property. Identifying the right expert early in the process allows for structures and for drafting that will streamline efforts at a later date.
The Chinese government has been actively promoting commercial uses of intellectual property including patents since 2008, and patent mortgage or security interest is one of such uses. Various governmental notices were issued to regulate and promote these, including the following:
- Notice of the State Council on Issuing the Outline of the National Intellectual Property Strategy (issued in 2008, available at http://www.lawinfochina.com/display.aspx?lib=law&id=6958&CGid=)
- Several Opinions of the State Council on Further Promoting the Development of Small- and Medium-sized Enterprises (issued in 2009, available at http://www.lawinfochina.com/display.aspx?lib=law&id=8147&CGid=)
- Notice of the Ministry of Finance, Ministry of Industry and Information Technology, China Banking Regulatory Commission, State Intellectual Property Office, State Administration for Industry and Commerce and National Copyright Administration on Strengthening the Intellectual Property Pledge Financing and Evaluation Management to Support the Development of Small- and Medium-sized Enterprises (issued in 2010, available at http://www.sipo.gov.cn/ztzl/ywzt/zlzydjyxkba/zcfg/201403/t20140305_912388.html)
- Notice of China Banking Regulatory Commission, State Intellectual Property Office, State Administration for Industry and Commerce and National Copyright Administration on Guiding Opinions regarding Intellectual Property Pledge Financing of Commercial Banks (issued in 2013, available at http://www.sipo.gov.cn/ztzl/ywzt/zlzydjyxkba/zcfg/201403/P020140305536049138377.pdf)
Patent security interest registration statistics from 2009 to 2013
Unlike banks in other jurisdictions, all banks in China are state-owned. Therefore, they are bound by the above policy documents, resulting in willingness of many Chinese banks in engaging patent security interest, lending money to patentees with patent on mortgage. Below are figures from 2008 to the first 6 months of 2013, which could give the readers some ideas of the trends in this area.
The following could be noted from the above figures and the SIPO 2009 and 2010 detailed reports, and subsequent SIPO’s reports:
- The number of effective registrations in a year refer to the number of patents against which security interest were registered in that year.
- In 2013, only the numbers for the first two seasons were provided individually. Therefore, although there seems to be a significant drop in the number in the above charts, the trends were in fact increased. For example, there was in fact a 34% increase in the number of effective security registrations comparing to half of the number of 2012 registrations.
- The monetary amounts involved were staggering. In 2009, about 7.45 billion RMB was involved (about 884 million GBP), on average a patentee borrowed 11.34 million RMB from the bank with one patent (about 1.35 million GBP). The total value in 2008 was 1.38 billion RMB (about 163 million GBP), and thus 2009 showed a substantial increase in the total value of registered security interest. The number keep increasing to 55.594 billion RMB in 2015 (about 6.479 billion GBP).
- According to the most recent report from the SIPO on 5 January 2017, the amount of security interest recorded at the SIPO was 43.6 billion RMB (about 5.45 billion GBP), decreased by 21.6% comparing to that of 2015.
- According to the SIPO’s 2009 and 2010 reports, most of the registered security interest registrations had a period of between 1 to 2 years (about 50% of the total security interest registrations in 2009 and 2010).
- The numbers of released security interest consistently fell behind those of the security interest registrations. As mentioned above, according to the SIPO’s reports, most of the security interest registrations are for 1 to 2 years in 2009 and 2010. Assuming that these were also true in 2011 to the first half of 2013, this may infer that a significant number of the mortgagees could not recover the loan from these borrowing activities, in which 2011 was a particularly bad year. However, it should also note that these discrepancies may be due to lack of awareness, or even due to laziness, to register for the release of security interest.
- In 2009 and 2010, the numbers of invention patents and utility models came head to head for effective security registrations. However, since 2011, the ratio between the numbers of invention patents and utility models became about 1:2. Therefore, utility model is commercially more active than invention patent as far as security interest is concerned.
- Comparing to invention patent and utility model, design patent was a lot less active in security interest registration, with a percentage of about 5 % in the number of effective security interest registrations.
- There were only very few security registrations based on PCT national phase entries into China.
- All of the mortgagers and mortgagees involved were Chinese entities, other than only six entries involving foreign entities (five in effective registrations, one in released registrations) from 2009 to the first half of 2013 among over 11,700 registrations.
- Mortgagers, as expected, are mostly technology companies, but there were also significant number of individual patentees.
- Mortgagees, other than Chinese banks (including their local branches), technology investment/incubation companies were also involved.
- The registrations tended to be done in batches.
- The SIPO stopped providing security interest registration figures from 2013 with the explanation “misunderstanding to the figures resulting in many incorrect analysis of the actual patent security interest environment in China”.
What is required for patent security registrations in China
According to the relevant regulations issued by the SIPO in 2010, the following should be noted:
- The Chinese SIPO is the only official body responsible for such registrations.
- A written agreement between the mortgager and the mortgagee is required to register security interest on patents. The written agreement pledging the patent assets can be a separate contract relating only to patents, or can be a main contract that include mortgage clauses directed to intellectual property.
- For a patent with multiple patentees, all co-owners must consent to the security interest for the security interest to be valid and enforceable.
- The documents and information below are required in order to register patent security with the SIPO:
- A completed application form.
- Power of Attorney if an agent is appointed (this is necessary for foreign entity).
- Identification of the involved parties, for example, identification card of an individual, or business registration for a company.
- The written patent security interest contract including the following:
- Name and address of the mortgager(s) and the mortgagee(s).
- The kind and amount of the security interest.
- Time period of paying the loan.
- The number of patent(s) involved, and the respective title, patent number, application date, and grant date of each patent (note that only granted patents can be secured. Patent applications are not eligible for security interest registration).
- The scope of the security interest.
- The following could also be specified in the patent security interest agreement:
- Payment obligations for annual maintenance fee for the patent(s) during the mortgage period.
- Assignment and licensing of the patent(s) during the mortgage period.
- Handling of invalidation or change of ownership (due to entitlement proceeding, yes such procedure exists in China) during the mortgage period.
- If the patent(s) were transferred to the mortgagee due to enforcement of the patent security interest contract, handing over of relevant technical information.
- The SIPO would refuse the security registration if one of the following occurred:
- The mortgager(s) is different from the patentee(s) on the Patent Register.
- The patent has ceased (due to non-payment of annual maintenance fee or the full term has expired), or is announced to be invalid.
- The patent is still an application and not yet granted.
- The patent is within the 6-month grace period for late payment of annual maintenance fee.
- Invalidation or entitlement proceeding has been initiated against the patent.
- The time limit for the mortgager to repay the debt to the mortgagee exceeds the full term expiry of the patent.
- The contract recites that the patent should belong to the mortgagee if the mortgager failed to repay the debt within the time period prescribed in the patent security interest agreement.
- The patent security interest agreement does not have consent from all of the co-owners for patent owned by multiple patentees (this usually means the agreement is not signed by all of the patentees).
- The patent is subject to another in force security interest registration that was registered first.
- An in force patent security interest registration would be revoked ab initio if any one of a) to i) occurred (mainly a), b), d), and e), which could occur after a security interest registration comes into force, as other issues should result in the upfront refusal of the security interest registration. In particular, i) is a Catch 22 situation……).
- An in force patent security registration would be released if one of the following occurred:
- The debt has been paid by the mortgager.
- The security interest has been realized. (this is the literal translation, which is believed to mean that the security interest has been sold to someone else.)
- The mortgagee abandoned the claim to the security interest.
- The security interest agreement becomes invalid or void as the corresponding main contract becomes invalid or void, for example in light of a court decision.
- Once a patent security interest registration is effective, the SIPO will publish the following:
- Identity of the mortgager
- Identity of the mortgagee
- Main classification of the patent
- Patent number
- Patent grant date
- Date of registration of the patent security interest
- Once the patent security interest registration is effective, the SIPO will not record the following without the consent from the mortgagee:
- Surrender of the patent
- Assignment of the patent on notice of the security interest
- Licensing of the patent
- The SIPO will also notify the mortgagee upon non-payment of the annual maintenance fee of a patent subject to effective security interest registration.
- As in mortgages of other forms of properties, registering the security interest at the proper authority could provide various protections to the mortgagee. In the case of an effective security interest registration on a Chinese patent, a mortgagee will be notified of non-payment of the annual maintenance fee, and assignment and licensing of the patent could not take place without the mortgagee’s consent.
- According to the relevant regulations issued by the SIPO in 2010, other than that the SIPO is the only authority for registering security interest on Chinese patents, security interest on a Chinese patent would only become effective after the security interest registration is recorded at the SIPO. Therefore, it is vital for an such interest to be registered at the SIPO, and leaving security interest unregistered could result in difficulties in enforcing the security interest, particularly if the mortgager deceased or was dissolved.
- It should be noted that the patent security registration system at the SIPO adopts a first-to-register system, allowing only one registration to be effective at any time. These have the following consequences:
- Whoever has an effective security interest registration prevails, which could later registrations from becoming effective.
- After borrowing money from one bank and have the security interest registered at the SIP, it is very unlikely that the patentee could use the same patent to borrow money from another bank. This restriction could become understandable bearing in mind that all Chinese banks are state-owned.
- As a mortgagee, the consequences of not checking the Chinese security interest register before engaging in mortgage of Chinese patent could be disastrous. If there existed an effective security interest registration, this could mean that the intended mortgagee’s interest would not be recognized at all in China.
- However, the statistics show that this has been ignored by foreign mortgagees (only six entries involving foreign entities, five in effective registrations, one in released registrations, from 2009 to 2013).
- This could become a big mess in the event that a bankruptcy proceeding is filed by the mortgager being the owner of a Chinese patent, and the mortgagee owning the security agreement wishes to perfect its security rights on the Chinese patent if no security interest has been registered at the SIPO, particularly if both the mortgager and the mortgagee are foreign entities. First of all, it is not sure whether a foreign court realizes, or if so would take into account of, the fact that security interest on a Chinese patent is not effective until the security interest has been successfully registered at the Chinese SIPO. If the bankruptcy manager is clever and knowledgeable to raise this point at the bankruptcy court, it is not sure how this would end. Even if an assignment was signed under the order of a foreign court (a Chinese court would not issue such an order, as the security interest is not effective in China in the first place), the assignment is subject to revocation or at least challenge, for example, by a licensee of the patent. Even more so, if assignment or licence of the patent was recorded at the SIPO before the mortgagee taking any action, the mortgagee has no way to stop the recordal of the assignment or licence, as legally speaking the mortgagee has no right on the patent.
- According to the SIPO’s regulations and the relevant law, security interest on a patent would only become effective after such is successfully registered at the SIPO. This means that an unregistered security agreement would not be recognized and enforceable in China by the mortgagee and any third-party who later buys/licenses/mortgages the patent.
- Therefore, it is vital to anyone involved in Chinese patent transaction to perform a search for security interest registration. An unwitting business person who pays for a Chinese patent but later discover that the Chinese patent is subject to a security interest may find they have lost their entire investment. Performing due diligence early in the negotiation protects the lender or the buyer and may provide additional information that weighs on the value of the portfolio.
- On the other hand, checking existence of security interest may not be as easy as one may think. First, the database can only be searched using the patent number, which restricts the searcher to searching each asset individually. There is no current availability to search by the name of the Assignee. For large portfolios, this because unwieldy and expensive. It is also necessary to check whether the patent is in force, and if not, whether it is possible to still restore the patent. If additionally one only has a batch of publication numbers or incorrect application numbers, an experienced patent attorney would be useful in these situations. Including an intellectual property expert on a deal team is critical when intellectual property assets form an underlying asset for a loan.
- Unlike the US, the SIPO is obliged to ensure that the security agreement fulfil the requirements outlined above before registering such.
- It should be noted that without the mortgagee’s consent, an effective security interest registration would prevent assignment or licensing of a patent to be recorded at the SIPO. This is different from the US practice, for which the assignment could still be recorded, but the new patentee/licensee is on notice of and is subject to the security interest.
- Very little case law surrounds the handling of patent security interests therefore, using best practices in securing patents will avoid uncertainty as to interpretation and future expense or loss.
- Intellectual Property experts should also be involved in the drafting of clauses related to intellectual property in order to optimize rights. As noted above, only granted patents are subject to security interest recordals. Therefore, patent applications are left without substantial protection. Security interests in future assets generally cannot be granted, so it is important to include an intellectual property professional in the preparation of instruments to create a mechanism to allow for securing of patents that later come into existence as a result of the identified patent applications.
- The SIPO’s regulations do not specify a period of time allocated for making the filing of the registration. It is interesting to note that the SIPO’s regulations does not prohibit an agreement with the time period of paying the loan already expired to be registered, but it is difficult to imagine that the SIPO would register such expired agreements. In any event, the SIPO’s regulations do not stipulate any time limit for registration. In some countries, notably those with an English law history, there are restrictive time periods in which security interests must be registered or the right to register is lost. Such registrations are often not with the patent office but are at an organization such as the companies house or the secretary of state. Certain countries, such as the US, have a hybrid system where there is a specific time period for registration to gain maximum protection, but the right to register continues after that time period has elapsed provided, however, that another party may acquire superior rights by filing first. A third category of countries like China have no time limit for registration. Regardless of the system, early planning and execution of the registration is advantageous.
- It is interesting to note that the SIPO’s regulations prohibit the mortgagee to automatically own the patent if the mortgager failed to repay the debt within the time period prescribed in the patent security interest agreement. According to the writers’ knowledge, this is uncommon in the field of security interest. This may be driven by public interest, which may have the effect of forcing the mortgagee to put the patent in auction for better distribution of technologies.
- Any parties involving in Chinese patent transaction should be aware of these, particularly those having patent portfolio with security interest. If your security interest on a Chinese patent has not been registered or the security interest situation has not been checked, do so as soon as possible – it is still not too late.
Authors: Toby MAK, Tee & Howe Intellectual Property Attorneys and
Constance RHEBERGEN, Bracewell LLP
This article was published in the April 2017 issue of the UK Chartered Institute of Patent Attorneys (CIPA) Journal, and is re-posted here with the kind permission from the UK CIPA. The UK CIPA Journal covers updates, articles and case law reviews on IP in the UK, Europe, and around the world. The Journal is available for subscription at GBP130 per year, and for free by becoming a foreign member at GBP405 per year. For more information on the CIPA Journal please email firstname.lastname@example.org.
Law Firm: Tee & Howe Intellectual Property Attorneys
Short Bio of the Author:
Dr. Toby Mak is a registered Chinese Patent Attorney and has a PhD degree in Chemistry. Toby has over 10 years of experience in the patents and designs industry, with substantial exposure to the handling of both contentious and non-contentious matters. Before joining Tee & Howe, he worked at one of largest Hong Kong law firm on IP matters for more than 8 years. His clients include investors, local and overseas research institutes, multinational power tool company, manufacturer of adhesives and elastomers, universities, video-on-demand company, and companies specialized in gene detection and pharmaceutical compositions development. He is a member of the All-China Patent Agents Association and AIPPI, and a foreign member of the UK Chartered Institute of Patent Attorneys.
Law Firm: Bracewell LLP
Short Bio of the Author:
Constance Rhebergen serves as head of the Bracewll LLP technology and intellectual property section. She is known for quickly determining what clients need, and more importantly, what it takes to achieve these goals. Her multi-national clients benefit from her experience as an engineering consultant. In addition to her responsibilities, she has served as a member of the firm’s management committee.
As a registered patent attorney, Ms. Rhebergen is extremely well placed to counsel and represent business clients in the identification, protection, licensing and transfer of intellectual property assets and in providing patent infringement and validity opinions. She brings to bear a comprehensive range of skills to advise businesses and government agencies in the United States, Latin America, Europe, MENA region and beyond with a proficiency on all matters concerning intellectual property, portfolio management and international intellectual property law disputes.
Ms. Rhebergen has a rich blend of skills honed over years of practice. As a result, she is highly proficient across a range of technologies, including energy, chemical and process applications, mechanical arts, and computer software. Industries served include oil and gas, hydrocarbon, processing, chemical processing, petrochemicals, agriculture and food, computer software, oil well drilling, synfuel, sports, education, telephone, wastewater, mechanical equipment, instrumentation and explosives.