As a subcategory of intangible asset, the value of intellectual property rights (IPRs), particularly that of patent rights have been increasingly acknowledged by the international IP community. Monetising IPRs helps corporations, SMEs and start-ups to fund R&D and fuel innovation. Taking patent pledge as an example, it enables patentees to secure loans or financial backings from banks or other financial institutions by using their legitimately acquired patent rights as a collateral. In the context of pledge, patentee is referred as a pledger and the lender pledgee.

In response to the growing financing demands in using IPR as a pledge, China’s State Council proposes to improve the IPR pledge registration and IPR assignment & licensing recordal regime in the "Fourteenth Five-Year Plan for the Protection and Utilization of Intellectual Property Rights", which is promulgated on October 28, 2021.

Responding to the State Council initiative, China National Intellectual Property Administration (CNIPA) releases on November 15, 2021, the amended "Measures for Registration of Pledge on Patent Rights" (2021 Measures), which takes effect as of the date of promulgation, to streamline the patent pledge procedure and provide greater clarity in practice.

Legislative evolution of the Measures

China’s Guarantee Law (effective as of October 1, 1995, annulled on January 1, 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" (1996 Interim Measures), which was promulgated on September 19, 1996, and put into effect on October 1 of the same year, fleshed out for the first time, the details in implementing the aforesaid provision in the patent front. 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. The provision is applicable to Chinese entities and individuals, foreigners, foreign enterprises, as well as other foreign organizations with or without a habitual residence or business premises in China.

The State Intellectual Property Office (SIPO, predecessor of CNIPA) released on August 26, 2010, the "Measures for the Registration of Patent Pledge" (2010 Measures), which became effective on October 1 of the same year. The 2010 Measures, which supersedes the 1996 Interim Measures, dropped the wording “registration of patent pledge contract” and switched to “registration of pledge on patent rights” to align with the pertinent provisions in the 2007 Property Law (annulled on January 1, 2021).

Main Changes in the 2021 Measures

Compared with the 2010 Measures, the 2021 Measures has made substantive amendments to the provisions of Articles 6, 7, 10, 11, 13, 14, 16, 19 and 22.

1.       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 first submit electronic copies of the documents, in the premise that an undertaking is given to ensure the consistency between the electronic copies and the original and the originals are to be submitted afterwards (Articles 6 & 7).

2.       A letter of undertaking shall be submitted when the parties go through modification or cancellation procedure for the registration of pledge on patent rights (Articles 13 & 14). The CNIPA will conduct random check on the authenticity of the content dictated in the undertaking, order rectification in case of inconsistency and impose disciplinary measures in case of failure to comply (Article 20).

3.       Article 11 enumerates a few scenarios where the CNIPA will honor the principle of autonomy and allow the pledge registration request of the party concerned:

i.         Where the parties concerned are informed of the fact 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;

ii.        In case that an invention patent application has been filed by the same applicant for the subject matter identical with that of a utility model having the same filing date for which pledge registration is requested, the party concerned being aware of the situation still consents to continue the pledge registration process.

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

5.       The CNIPA vows to shorten the review period for pledge registration, modification and cancellation from 7 working days to 5 working days and the review period for online registration, modification and cancellation is further reduced to 2 working days (Articles 10, 13 & 14).

6.       The CNIPA will grant the pledger and pledgee access to review or duplicate the pledge registration documentations 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 in case any of the following: 1) the pledged patent is declared invalid or terminated; 2) the pledger failed to pay the annuity of the pledged patent within prescribed time; or 3) 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 has been ordered by the people’s court (Article 19).

The "Fourteenth Five-Year Plan for Protection and Utilization of Intellectual Property Rights" set the target of IPR pledge financing at RMB 218.9 billion (around USD 34 billion) in 2020 and RMB 320 billion (around USD 50 billion) in 2025. The 2021 Measures is expected to lay the groundwork for patent pledge. Still, due to the difficulties in IP valuation and risk control, IPR pledge financing will remain a viable yet arduous route to secure financial backings, at least for now.

Authored by Xiaoling Duan