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Peter Finnie

Partner at international IP law firm Gill Jennings & Every

Why China’s impressive patent rates don’t tell the whole story

Figures released last month by UHY Hacker Young showed that China is leading the way in global patent filing for AI and blockchain, with the US trailing close behind. According to the report, China was responsible for 73 per cent of AI and 32 per cent of blockchain patent filings with the World Intellectual Property Organisation (WIPO) in 2017.

These two technology areas were, presumably, chosen because they are two of the most exciting sectors of emerging innovation. However, it’s wrong to assume that China’s vanguard position for patent applications in these fields necessarily means they really are leading when it comes to innovation. These figures, while impressive at first glance, should be viewed in the right context.

Taking a step back, it is worth noting that the total number of patent applications in China in all sectors has dramatically increased over the past decade. Between 2008 and 2017, the number of patent applications filed in China rose from 204,000 to 1.3m: a staggering increase of 600 per cent.

By way of comparison, US filings have remained relatively stable over the same period, increasing a mere 20 per cent from 429,000 in 2008, to 525,000 in 2017. The dominance of China in blockchain and AI patents is, therefore, both unsurprising and less impressive looking at the bigger picture.

State sponsorship is undoubtedly a catalyst behind the rapid increase in Chinese patents. Intellectual property is a major pillar of China’s industrial strategy, with companies qualifying for government subsidies upon filing a patent application. These subsidies are given regardless of whether the patent is actually granted, although further subsidies are available for successful applications.

Government incentives for patent applications are not necessarily suspect. In fact they are a good way to reduce the financial burden on early-stage companies, to help them protect their innovations, and help them bring their products to market quicker. It also doesn’t necessarily mean that the patents being filed are of lesser quality. However, the sheer volume of patent applications being made in China in comparison to 10 years ago, raises some red flags, and there are other telltale signs that the number of applications at face value isn’t resulting in as much innovation as a spectator may expect.

For example, an important detail that isn’t reflected in the top-level figures is that, of those 1.3m patent applications, almost all – 1.25m – were applications filed by Chinese companies. Yet, only 26 per cent of residents had their applications granted, which stands in sharp contrast to the 68 percent of non-residents. This may suggest that domestic patent applications are of a lower quality. Jump to the US, and the ratio of US to foreign success is roughly equal – a 51 per cent success rate for residents vs. 53 per cent patent grants for non-residents.

A lack of quality is also indicated in the hesitancy of Chinese companies to file counterpart patent applications in foreign markets, demonstrated by figures ranking China in fifth place globally. Any organisation seeking to protect its innovations with a patent needs to file an application in each territory it wishes to protect their invention. If the majority of Chinese patents filed have no protection outside of the country, we therefore have to question their potential on a global scale. It’s, therefore, another indicator that quality is falling foul to a game of numbers with the Chinese IP system.

The lack of quality over quantity is very likely to be mirrored in the high number of blockchain and AI filings as, globally, China is the largest patent filer in both these sectors.

Meanwhile, legal checks and balances have arguably tapered any attempts by the US to mirror China’s IP window dressing. The decision in Alice Corp. v. CLS Bank International, a supreme court case in 2014 – which increased the benchmark for what can be considered ‘patentable’ – had a direct effect on lowering the total number of patent applications, and causing only a slight increase in those for trademarks. If such measures were introduced in China, without state encouragement, you can only speculate how many applications would be filed – and succeed.

The patent arms race dominating headlines is a global one, and this should be remembered when trying to work out which figures matter. China is, no doubt, an emerging powerhouse, but the devil is in the detail when it comes to the numbers game. It’s important to get a real view of the global market, so companies can make informed decisions on their global expansion.

For example, Western companies working in AI and blockchain shouldn’t be discouraged from filing in China for fear of competition. In fact, we know that external applications are more likely to be accepted than resident ones, and it could make waves in their expansion in that market. While successful Chinese global corporates contribute to the perception of the growth of Chinese-led innovation, the reality is that the majority of patent applications don’t leave China.

Peter Finnie is a partner at international IP law firm Gill Jennings & Every