CNIPA measures are a big step forward for patent pledges in China

The China National Intellectual Property Administration (CNIPA) released amended Measures for Registration of Pledge on Patent Rights on 15 November 2021 – these are designed to streamline the patent pledge procedure and provide greater clarity in practice.

The measures were published in response to China’s State Council promulgation of the Fourteenth Five-Year Plan for the Protection and Utilisation of IP Rights, on 28 October 2021. This proposes improving the pledge registration, and assignment and licensing recordal regime for IP rights.

The international IP community has increasingly acknowledged the value of IP rights, particularly patent rights, as a sub-category of intangible assets, which can be monetised to fund innovation. In particular, patentees can secure loans or financial backing from banks or other financial institutions by using their legitimately acquired patent rights as collateral. In the context of a pledge, the patentee is referred to as a pledger and the lender the pledgee.

Legislative evolution of the measures

China’s Guarantee Law (which came into effect on 1 October 1995 and was annulled on 1 January 2021) explicitly provides that “the property right of patent right, copyright and the exclusive right to use a trademark, which could be legitimately assigned may be used as a pledge”.

The Interim Measures for the Administration of Patent Pledge Contract Registration, which were promulgated on 19 September 1996, and came into effect on 1 October of that year, fleshed out the details in implementing this provision with regard to patents. As a prototype of the 2021 measures, the 1996 interim measures provided that, where a patent right is to be pledged, the pledger and the pledgee shall jointly register the pledge before the China Patent Office. This provision applies to Chinese entities and individuals, foreigners and foreign enterprises, as well as other foreign organisations with or without a habitual residence or business premises in China.

The State Intellectual Property Office (the predecessor of CNIPA) released the Measures for the Registration of Patent Pledge on 26 August 2010, which became effective on 1 October of that year. These superseded the 1996 interim measures, dropped the wording “registration of patent pledge contract” and replaced it with “registration of pledge on patent rights”, so that it aligned with the relevant provisions in the 2007 Property Law (annulled on 1 January 2021).

Main changes in the 2021 measures

Compared with the 2010 measures, those of 2021 have made substantial amendments to the provisions of Articles 6, 7, 10, 11, 13, 14, 16, 19 and 22.

First, in order to streamline the registration procedure, the CNIPA has lowered the threshold of documentation, offering an alternative online registration route where the parties may submit electronic copies of the documents, on the premise that an undertaking is given to ensure consistency between the electronic copies and the originals, following which the originals must be submitted (Articles 6 and 7).

Second, a letter of undertaking shall be submitted when the parties go through the modification or cancellation procedure for the registration of the pledge on patent rights (Articles 13 and 14). The CNIPA will conduct random checks on the authenticity of the content dictated in the undertaking, request rectification where there is inconsistency and impose disciplinary measures in the event of a failure to comply (Article 20).

Article 11 sets out some scenarios in which the CNIPA will honour the principle of autonomy and assent to the pledge registration request of the party in question:

• Where the parties concerned are informed that a patent invalidation proceeding has been initiated against the pledged patent, yet are still willing to take the risks and continue the pledge registration process.
• If an invention patent application has been filed by the same applicant for the subject matter identical to that of a utility model that has the same filing date for which pledge registration is requested and the party concerned, being aware of the situation, still consents to continue with the pledge registration process.

In line with the Civil Code (effective as of 1 January 2021), the 2021 measures also acquiesce in the registration of a patent pledge, where the pledger agrees in the contract that the pledged patent rights will be assigned to the pledgee, should the pledger default on the loans upon the expiration of the agreed period, a scenario explicitly listed in the 2010 measures that would lead to the official dismissal of the patent pledge registration request.

The CNIPA intends to shorten the review period for pledge registration, modification and cancellation from seven working days to five, while the review period for online registration, modification and cancellation is further reduced to two working days (Articles 10, 13 and 14).

The CNIPA will grant the pledger and pledgee access to review or duplicate the pledge registration documentation, where such an application is justified by reasonable causes (Article 16). During the patent pledge period, the CNIPA is obligated to promptly notify the pledgee if any of the following occur:

• the pledged patent is declared invalid or terminated;
• the pledger failed to pay the annuity of the pledged patent within the prescribed time; or
• due to the disputes arising over the ownership of the pledged patent, a request has been made asking the CNIPA to stay the relevant procedures or preservation measures have been ordered by the people’s court (Article 19).

The Fourteenth Five-Year Plan for Protection and Utilisation of Intellectual Property Rights set the target of IP rights pledge financing at Rmb218.9 billion (around $34 billion) in 2020 and Rmb320 billion (around $50 billion) by 2025. While the 2021 measures are expected to lay the groundwork for patent pledges, the difficulties in IP valuation and risk control mean that IP rights pledge financing will remain a viable yet arduous route to securing financial backings, at least for now.