Read the full paper: Trademarks and patents in China: The Impact of Non-Market Factors on Filing Trends and IP Systems

The United States Patent and Trademark Office (USPTO) published a paper on January 13, 2021, discussing Chinese patent and trademark filings, both in China and the United States. The report notes that in 2019 alone, China received 7.8 million trademark applications and 1.5 million utility patent applications. For some context, China accounted for 51.4% of all trademark applications submitted to domestic authorities worldwide in 2019. The paper includes a chart that shows filing numbers for the TM5 (the five largest trademark offices in the world: China, the United States, South Korea, Japan, and Europe) and the stark contrast therein. While the China National Intellectual Property Administration received 7,301,991 direct filings and 68,718 international registration, the next highest member, the USPTO, only received 442,791 and 24,416, respectively. The patenting numbers are similarly staggering. The point of the USPTO’s paper is that, while trademark and patent application volume have traditionally been viewed as “a proxy for the intensity of [a country’s] brand creation and innovation,” there are other factors of China’s IP filing dominance.

Non-Market Factors Affecting China’s Trademark Filing Volume

The paper’s substantive discussion begins with a discussion of four non-market factors that appear to be influencing the number of trademark applications filed in China: subsidies, inaccurate and fraudulent claims, bad-faith applicants, and unused trademarks registered good faith to counter bad-faith registrations.

Factor 1: Subsidies

Subsidies have become a prickly issue for both China’s patent and trademark systems. When it comes to trademarks, the incentive amount often far exceeds the cost of filing a USPTO mark. For example, in 2013, Shenzhen issued operating procedures that allowed applicants a subsidy equal to $750 for trademark registrations within eligible foreign jurisdictions. In contrast, the cost of filing in the United States is $225. Between 2013 and 2017, U.S. trademark filings from China increase 1264%, and 42% of those filings were from Shenzhen alone.

With the increase in filings, the USPTO has also noticed and studied a rise in fraudulent specimens—which involve an applicant that may, for instance, edit an image of a common good or service to include a logo representing the sought-after trademark. These can also come in the form of fake Amazon listings that show generic products purported to be related to the mark in question.

Subsidization is similarly a troubling issue in the patent sector. For instance, the Beijing government in 2019 raised the subsidy cap for international patent applications by state-owned enterprises to the equivalent of $3 million. Beijing offers these patentees $7,500 per foreign patent subsidy, which is substantially higher than the average cost of obtaining a patent in many jurisdictions and encourages filing “weaker” or “narrower” patents that require less examination by the granting patent offices.

Factor 2: Government Mandates and other Incentives

On January 6, 2020, CNIPA announced that China was planning to clean up the subsidy problem. But then, in March of the same year, China issued a directive to its state-owned enterprises to increase filings under the international Madrid System by 50%. These mandates and other directives represent another form of incentivization that may increase suspicious filings.

Factor 3: Bad Faith Applicants

Bad-faith applications lack an intention to use marks to distinguish legitimate goods and services. Instead, they are meant to “ransom” them to their legitimate owners and sell goods and services that appear similar to those of legitimate owners to “free ride” on the owners’ goodwill. Another factor may be to block legitimate owners from entering the Chinese markets.

Factor 4: Good Faith Registration of Unused Marks

One effect of the bad faith applications is that legitimate brand owners attempt to seek protection for unused marks proactively to try to counter bad-faith registrations that may be filed. In other words, brand owners with sufficient financial means may file for unused registrations that they may wish to use in the future so that they can acquire the mark before the bad-faith applicant swoops it up.

Implications for Trademark and Patent Systems

The paper discusses the impact that this ocean-swell of Chinese IP filings and the troubling set of emerging trends. For one, the volume is beginning to stretch the capacity of China’s trademark examiners and reviewing authorities. They also “clutter the registry” and may have the effect of narrowing the scope of protections available to mark holders engaged in the legitimate sale of goods and services.

Another troubling trend is the stark increase in “defensive filings”—filing unused marks as a counter-measure to the bad-faith filings seeking to snatch up future territory. From a practical perspective, the necessity of defensive filings makes IP a much more expensive prospect for small-to-midsize Chinese businesses, many of whom cannot afford the cost of filing for marks with no real value.

When it comes to the patent situation, subsidies and government mandates seem to influence the issued patents’ commercial value. The commercial value can be measured by analyzing the rate that inventors file for patent protection outside of China and how they commercialize their issued patents.

In 2018, there were five foreign filings for every 100 domestic patent applications in China. This rate is a stark contrast from the United States, where the clip of foreign applications per domestic application is 80%. The ratio is even higher for other IP5 countries like France and the United Kingdom. These numbers suggest that Chinese applicants seek subsidies rather than real market power in filing so many patents. The paper also discusses the low rates at which Chinese patent-holders license IP as a percentage of total trade (ranking 44th globally).

Conclusion

In analyzing the USPTO’s paper, it is apparent that the agency sees an issue with the number of Chinese subsidies for IP applications and its effect on the overall innovation ecosystem. This issue is not localized to the USPTO’s purview, as other agencies and departments of government have taken issue with the effect of China’s “National Champions” on capital markets. There have been suggestions that China is seeking to “clean up” the problem, but there has been a lack of transparency as of late in monitoring these measures’ effect.