The Patent Open License system has been in the spotlight ever since the tme the system was introduced into the newly-amended Patent Law of China which came into force on June 1, 2021. According to Artcle 50 of the new Patent Law of China, an open license is a license where the patentee voluntarily declares in writng to the China Natonal Intellectual Property Administraton (CNIPA) that the patentee is willing to license any entty or individual to exploit the patent, and specifies the payment method and the standard of the license fee. According to Artcle 51 of the new Patent Law of China, if an entty or individual intends to implement an openly licensed patent, it or he shall notfy the patentee in writng of its or his willing to implement an open-licensed patent and pay the license fee in accordance with the announced payment method and standard of the license fee, and the patent license is obtained accordingly.
The patent monetarizaton rate (including self-implementaton, licensing, transferring, etc.) is generally low in China, especially in universites and scientfic research insttutes, due to widely existng phenomenon of "emphasizing prosecuton and ignoring implementaton." Further, even for an entty willing to implement patents, for example a small or medium-sized enterprise (SME), introducing a patented technology may be difficult and costly due to informaton asymmetry between supply and demand in the patent market.
In light of the above, the newly-amended Patent Law of China introduces the Patent Open License system, which provides the declaraton, implementaton, and dispute resoluton of patent open licenses. One of the main differences between an open license and a general license is that royalty terms of the open license are not negotated by both partes, but are unilaterally proposed by the patentee and announced in the form of an open license declaraton. This is rather unique in China, while in almost all other countries that implement a patent open license system (including the United Kingdom, Germany, etc.), the royalty terms of the open license should necessarily be negotated by both partes. The open license declaraton is deemed to be a license offer from the patentee to an unspecified person, so it is possible for anyone to quickly obtain an open license, resultng in a fair, simple and fast mechanism for one–to-many licensing, which may bring the opportunites to bridge supply and demand, improve negotaton efficiencies and control transacton costs.
One way to practce open licensing is to use the open license services provided by the CNIPA. In the “Draf Revised Patent Examinaton Guidelines (Draf for Further Solicitaton of Comments)” released by the CNIPA on October 31, 2022, the submission and withdrawal of patent open license declaratons, the registraton and announcement of patent open licenses, the entry into force of patent open license implementaton contracts, the filing of patent open license implementaton contracts, the handling of fee reducton procedures during the implementaton of patent open licenses, and the handling of relevant legal procedures for implementng open-licensed patents are prescribed. A patent open license declaraton shall state the following items: (1) Patent number; (2) Name or designaton of the patentee; (3) Payment methods and standards for patent license fee; (4) Term of the patent license; (5) Contact informaton of the patentee; (6) Patentee’s commitment to fulfill the conditons for the open license declaraton; and (7) Other maters that need to be clarified. According to the Draf Revised Patent Examinaton Guidelines, the CNIPA will examine whether the patent open license declaraton complies with related regulatons, and will notfy the patentee whether the declaraton is allowed to be announced afer the examinaton. The open license declaraton is effectve from the date of announcement.
Currently, the patent open license system is in an important transitonal period before full operaton, during which process the submited open license declaratons shall only be received but not examined by the CNIPA. Once the revised Guidelines for Patent Examinaton come into effect, the detailed operatonal measures of the patent open license system will be clear.
Another way to practce open licensing is to expedite the patent licensing with the help of provincial authorites. In the current transitonal period, in order to accelerate the monetarizaton of IP rights and prepare for the formal implementaton of the patent open license system, a trial program of patent open license is now organized and conducted.
Specifically, the CNIPA recently released a Trial Program on Patent Open License in an effort to put down to the earth the policies in the Outlines for Building an Intellectual Property Power (2021-2035) and the Natonal Plan for Protecton and Applicaton of Intellectual Property Rights during the 14th Five-year Plan Period, to ensure the smooth executon and efficient operaton of the patent open license system, and to propel IP commercializaton. The Trial Program defines measures for provincial level authorites to facilitate the commercializaton of patent licenses, and to organize the subordinate local authorites, companies/enttes and service platorms to start trial projects, enable expedited licensing with intentons and conditons expressed by patentees and published by provincial level authorites. The Trial Program clarifies four trial tasks.
The first task is to establish open license declaraton publicaton platorms. Currently, more than 18 provinces/municipalites have established their own open license declaraton publicaton platorms. For example, as a part of the existng China Technology Exchange Platorm, the municipal IP authority in Beijing has developed a Patent Open License Informaton Publishing and Exchange Service Platorm on which patentees may publish their open license declaratons and potental licensees may notfy the patentees of their willingness to implement the declared patents. As of December 2022, the Platorm has published more than 2,500 patent open licensing projects .
The second task is to expand connecton channels between supply and demand. For example, the municipal IP authority in Beijing has conducted a trial task to promote the commercializaton of scientfic and technological achievements in universites and insttutes in Haidian District by encouraging them to select and report patented technologies with market potental, and organizing the universites and insttutes to perform achievement commercializaton roadshows for the patents selected for open licensing. In this way, SMEs are provided with a broader technology supply channel to acquire new technologies at lower costs.
The third task is to offer supportng services. Local authorites shall publish patent open license trial project guidelines, define formats of patent licensing informaton, check to-be-published informaton, guide pricing policies by encouraging patentees to appropriately reduce the royalty, try phased free licensing and explore a trial-first-and-payment-later mode, and offer support for transactons.
The fourth task is to improve incentve and regulaton measures. The universites and insttutes are encouraged to formulate incentve measures such as financial rewards and talent ttle evaluaton. The provincial level authorites are required to make full use of the existng patent dispute mediaton mechanism to actvely mediate disputes arising during the trial, and if necessary, intellectual property protecton centers and relevant industry associatons could also be involved into the mediaton.
Since the standard of license fee of the open license is not negotated but unilaterally announced in the open license declaraton, prudence should be used to make them reasonable and acceptable. If the standard is far from practcal, it would be rather difficult for the patentee to atract potental licensees. Many patentees suffering from low commercializaton and implementaton of patented technologies, especially universites and insttutes, generally find it relatvely difficult to formulate the standard of royalty because they are not familiar with the market changes and economic situatons.
In view of this, the CNIPA issued “Guidelines for estmatng royaltes in patent open licensing (for trial implementaton)” (hereinafer, referred to as “Guidelines for Royalty” ) on October 14, 2022 , to provide a pricing guidance for provincial authorites that carry out the Trial Program of patent open licensing, so as to guide patentees, especially universites, insttutes, and SMEs to set reasonable prices for open licensing.
The “Guidelines for Royalty” recommends a 5-step process for estmatng open license fees, including:
1) Determining whether the patent is appropriate for open licensing. Patents with market prospects, wide applicaton and strong practcability should be the candidate, and patents in the state of exclusive license should be excluded.
2) Selectng an estmaton method for license fees according to scenarios. The Guidelines for Royalty provide 5 methods to be used by a patentee. If the patented technology has been self-implemented, a method with reference to the benefits generated by the patent through self-implementaton (method 1) is appropriate. If the patented technology has been licensed to others, a method with reference to the royaltes in a general license contract (method 2) is appropriate. If the patented technology has not been implemented by itself or licensed to others, a method with reference to the statstcal data of royalty rates in the same or similar industry (method 3) or a method with reference to internatonal general royalty rates (method 4) is appropriate. If the patentee, as the researcher or developer of the patented technology, has the financial data of the researching and developing, an asset valuaton method (method 5) can be used to estmate the license fees.
3) Determining the calculaton basis of license fees. If method 1 is selected, then the calculaton basis could be the contributon of the patented technology in the sales revenue of the patented product. If method 2 is selected, then the calculaton basis could be the royaltes in a general license contract. If method 3 is selected, then the calculaton basis could be the statstcal data of royaltes in the same or similar industry. If method 4 is selected, then the calculaton basis could be 25% of the profit of the patented product or 5% of the sales of the patented product (hereinafer, referred to as the “25% Rule” (or the “5% Rule” )). Method 5 does not involve determining of the calculaton basis of license fees, but utlizes an expected profit, a cost for re-creatng or re-establishing the patent, or a market price of a reference for the patent to determine the license fees.
4) Setng an adjustment coefficient. The market sales situaton of the patented product and an expected number of open licensees should be considered. For example, if the patented technology is easy to implement, and it is expected that a large number of open licensees may occur according to the “one-to-many” feature of open licensing, then the adjustment coefficient may be reduced. Some examples are provided in the Guidelines for Royalty to use a coefficient value of 0.5~0.75.
5) Estmatng license fees and determining a payment method. The license fees are calculated by multplying the calculaton basis by the adjustment coefficient. The patentee may choose different payment methods such as lump-sum payment, instalment payment within the total payment amount, combinaton of entry fee and royalty, or milestone payment.
According to a footnote of the Guidelines for Royalty, the “25% rule” originates from the report of “Intellectual Property Valuaton Manual for Academic Insttutons” made by the Commitee on Development and Intellectual Property (CDIP) of WIPO, and the “5%” rule originates from a statstc research result conducted by a foreign research insttute on more than 30,000 patent license contracts, which shows that the median sales-based royalty rate is 5%. We think it is not very likely for the Chinese court to support the “25% rule” for the following reasons.
First, the report of CDIP also tells that in January 2011, the U.S. Court of Appeals for the Federal Circuit (CAFC), in deciding an appeal case, found that the “25% rule” is fundamentally flawed and should not be used as a tool for determining a base royalty rate in a hypothetcal negotaton, for that it fails to take into account the unique relatonship between the patent and the accused product, fails to take into account the unique relatonship between the partes; and is essentally arbitrary and does not fit within the model of the hypothetcal negotaton within which it is based. That is, from the perspectve of patent infringement/royalty litgaton, there is currently no such thing as an “internatonal general experience” of using the “25% rule” as a reference baseline.
Second, the baseline of 25% of product profits or 5% of product sales is relatvely high. For a product that involves a large number of patents such as a smartphone, the sum of royaltes calculated for respectve patents based on the “25% rule” may even be higher than the total profit of the product. Therefore, the “25% rule” is not a practcal baseline for rate setng in litgaton.
Third, considering the adjustment coefficient to be multplied with the baseline of 25% of product profits or 5% of product sales, the “25% rule” shall be interpreted as an “upper limit” of royalty rates.
Fourth, determining the royalty based on an arbitrary value like that in the “25% rule” without considering the patented technology, infringing products, the actual situatons of the partes and economical developments does not conform to the current trends of IP litgaton in China.
According to Artcle 51 of the new Patent Law of China, during the implementaton period of the open license, the annual patent fee paid by the patentee shall be reduced accordingly. The above mentoned Draf Revised Patent Examinaton Guidelines provide further regulatons on the reducton of annual patent fee. According to the Guidelines, when the applicant files a patent open license implementaton contract for record by the CNIPA, it deems that the patentee simultaneously requests a reducton in the annual patent fee. If the patent open license implementaton contract is approved for record, the patentee may, during the period of exploitaton of the patent open license, enjoy a reducton in the annual fee for the patent term that has not yet expired since the record date in accordance with regulatons.
The patent open license system is certainly welcomed by patentees right now. It may facilitate patent commercializaton, turning IP rights into profits. With such a system, SMEs may have a broader technology supply channel for acquiring new technologies at lower costs, so as to drive quality developments. Besides academic insttutons and SMEs, a number of large companies have declared patent open licenses, for that they may use the patent open license system to improve negotaton efficiency as well as expand their reach in the supply chain. With its notable advantages, we believe that the patent open license system is expected to be widely used in the near future.