China Claims More Patents Than Any Country - Most Are Worthless

(Bloomberg) -- For nearly a decade, China has taken great pride at filing the largest number of domestic patents. It’s proving less keen on keeping them.

Despite huge numbers of filings, most patents are discarded by their fifth year as licensees balk at paying escalating fees. When it comes to design, more than nine out of every ten lapses -- almost the mirror opposite of the U.S.

The high attrition rate is a symptom of the way China has pushed universities, companies and backyard inventors to transform the country into a self-sufficient powerhouse. Subsidies and other incentives are geared toward making patent filings, rather than making sure those claims are useful. So the volume doesn’t translate into quality, with the country still dependent on others for innovative ideas, such as modern smartphones.

“It means these patents really aren’t as valuable as people thought,” said Lu Junfeng, a patent attorney at Shanghai-based JZMC Patent and Trademark Law Office. “If the retention rate is so low for design patents, then it calls into question whether there’s a bigger systematic problem.”

China Claims More Patents Than Any Country - Most Are Worthless

China overtook Japan eight years ago to become the biggest hoarder of domestic patents and has remained in the lead ever since, approving 1.8 million last year alone. President Xi Jinping’s Made in China 2025 program -- now at the center of tensions with the U.S. -- aims to make the country a global leader in technology, and developing a hoard of intellectual property has become a central element of achieving that.

To get a clearer picture on the country’s patent history, it’s important to understand that not all of them are equal. In China there are three different categories: invention, utility model and design.

Invention patents, as the name suggests, are for new ideas that represent “notable progress” in advancing a technology. This category represents what most people understand about patents, a breakthrough in design, process or concept. It accounted for just 23 percent of the patents granted in China last year.

Just like in the U.S., they face a challenging path to approval in a process that can take 18 months and exposes them to testing and scrutiny. Successful ideas are protected for 20 years.

It’s the two other categories, which both have a 10-year life, that swell the headline numbers but are proving far less valuable. An example of a design patent would be the shape of a soda bottle, while a utility model would include something like sliding to unlock a smartphone. Neither is subject to rigorous examination and can be granted within less than a year.

As of last year, more than 91 percent of design patents granted in 2013 had been discarded because people stopped paying to maintain them, according to JZMC Patent and Trademark data compiled for a Bloomberg query. Things aren’t much better for utility models with 61 percent lapsing during the same five-year period, while invention patents had a disposal rate of 37 percent. In comparison, maintenance fees were paid on 85.6 percent of U.S. patents issued in 2013, according to the United States Patent and Trademark Office.

“The fact that design patent disposal rates are so high is astonishing,” said JZMC’s Lu. “People have such a low desire to keep them.”

China Claims More Patents Than Any Country - Most Are Worthless

While the Chinese government provides an incentive for new applications, that’s not the case once a patent is granted, and holders must pay ever-increasing fees just to keep them.

It costs 900 yuan ($131) a year to own an invention patent, a price that rises to as much as 8,000 yuan later in its life. For the other categories, tolls rise from 600 yuan to 2,000 yuan annually in the last two years.

A lax approval process for the less inventive categories has led to a flourishing of filings, where people literally copy a patent in the U.S. and seek approval in China, often with the intention of parlaying that into a settlement fee, said Wang Xiang, head of law firm Orrick’s China IP practice.

Some companies have also been exposed as frauds, seeking to use patent filings to get tax and residency benefits for employees. Since 2008, as part of China’s national policy to encourage innovation, companies certified as “high-tech firms” have won significant tax cuts and annual subsidies of 500,000 yuan in provinces like Hainan.

“There’s probably a lack of motive to strictly vet these companies,” Wang said. “Unfortunately under the existing judicial system, there is no effective deterrence against fraudulent filing or falsifying evidence.”

China Claims More Patents Than Any Country - Most Are Worthless

Chinese regulators are only just starting to notice some of the suspect practices. The Ministry of Science and Technology revoked high-tech licenses for at least 14 companies this year, without citing specific reasons. In an unusual move, the state-owned Xinhua News Agency lambasted China’s IP industry for plagiarism, forgery and other sub-par practices in August. It said the sector was beset by “weak IP, fake demands and some companies fervent on phony innovation.”

“Fake innovation takes up resources for subsidies, hurts innovators who are working hard, and also tampers with objectivity with policy makers,” it said.

To be sure, China’s support for patents has bolstered some sectors like artificial intelligence and cloud computing. Chinese companies filed eight times as many patents related to those technologies as their U.S. counterparts, according to Nigel Swycher of London-based IP consultancy Aistemos.

Tencent Holdings Ltd., with the largest portfolio among the Chinese trio, now holds three times as many patents as Facebook and double that of Amazon.com Inc.’s, Aistemos’s data shows. Alibaba Group Holding Ltd. has also outpaced those U.S. firms.

Yet the high disposal rates mean China still has a long way to go till it becomes the technologically sophisticated nation it aspires to be.

“While Chinese patent qualities have been improving every year, they are still far from close to the U.S. counterparts,” said Orrick’s Wang.

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China Claims More Patents Than Any Country - Most Are Worthless

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