SEP protection in pharmaceutical sector —Beijing Sihuan Pharmaceutical Co., Ltd. v. Qilu Pharmaceutical Co., Ltd.

SEP protection in pharmaceutical sector—Beijing Sihuan Pharmaceutical Co., Ltd.v. Qilu Pharmaceutical Co., Ltd.[1]

On 31 October 2018, the Supreme People’s Court (“SPC”)  made a retrial ruling on the closely-watched case  Beijing  Sihuan Pharmaceutical Co., Ltd. (“Sihuan Pharmaceutical”)

v.Qilu Pharmaceutical Co., Ltd. (“Qilu Pharmaceutical”) involving disputes over patent infringement,  which  rejected  the retrial petition filed by Qilu pharmaceutical. KWM acted as the counsel to Sihuan Pharmaceutical  and  participated  in the entire proceedings of the first and second instances as well as the retrial of the case. This case involves highly-concerned issues on protection for standard essential patents (“SEPs”) in the pharmaceutical sector. After a thorough finding of the facts, the courts of the first and second instance and the SPC made an accurate analysis on relevant legal issues such as the  principle of applying claim chart to SEP in the pharmaceutical sector and whether injunctions should be issued, which set a strong precedent for similar cases in the future. The pharmaceutical sector is characterized by long R&D cycle and high cost. The judgment in this case reflects the determination of China’s judicial authorities to encourage innovation and enhance IP protection, which gives more confidence to enterprises of pharmaceutical R&D.

I.Basic facts of the case

Cinepazide Maleate Injection is a kind of medicine for treating cardiovascular and cerebrovascular diseases. Sihuan Pharmaceutical was the patent owner of Cinepazide Maleate Injection and its active pharmaceutical ingredient (API). The patent, No. ZL201110006357.7, was a patent for invention entitled “A high-safety Cinepazide pharmaceutical composition, its preparation method and application” (“Patent 357”). Sihuan Pharmaceutical also owned the patent for invention numbered ZL200910176994.1 and entitled “Cinepazide oxynitride, its preparation method and application,” which protected the application of Cinepazide oxynitride as a reference substance for content test of related substances (“Patent 994”). In addition, Sihuan Pharmaceutical had applied for and obtained several patents for the preparation and inspection methods of this pharmaceutical, and had formed an all-round IP protection for Cinepazide.

Sihuan Pharmaceutical found that Qilu Pharmaceutical had produced Cinepazide Maleate Injection and its API and conducted offering for sale through bidding on the government procurement platform of Inner Mongolia Autonomous Region without license. Thus, in November 2015, it filed a patent infringement lawsuit with the Intermediate People’s Court of Hohhot Municipality. The case was later appealed to the Higher People’s Court of the Inner Mongolia Autonomous Region and reviewed by the SPC. The final judgment held that Qilu Pharmaceutical had constituted patent infringement and issued an injunction at the same time. Qilu Pharmaceutical was ordered to immediately cease producing and using the API of Cinepazide Maleate at issue, to immediately cease producing, selling and offering to sell Cinepazide Maleate Injection at issue, to immediately cease producing Cinepazide Oxynitride and to immediately cease using Cinepazide Oxynitride as a reference substance.

II.Case adjudication

(I)The defendant’s products fell within the scope of protection of the patent at issue according to its business standard

Pharmaceuticals are chemical products. The identification of their technical schemes and the technology comparison as to whether they constitute infringement usually require judicial authentication. In addition, pharmaceuticals must meet national standards before they can be put on sale. In this case, if the technical schemes are already indicated in such standards, then judicial authentication will not be required. In this case, according to Qilu Pharmaceutical’s  YBH01582015  Cinepazide Maleate API standard and YBH01592015 Cinepazide Maleate Injection standard approved by the National Medical Products Administration (“NMPA”), formerly China’s State Food and Drug Administration (“CFDA”), the content of Cinepazide

Oxynitride in the Cinepazide Maleate API produced by Qilu Pharmaceutical should be no more than 0.05%, the content of Cinepazide Oxynitride in its production of Cinepazide Maleate Injection should be no more than 0.15%, and the structural formula of the Oxynitride was consistent with that of the compound recorded in the corresponding claims of Patent 994 and Patent 357. In addition, the above standards all contained the procedures of preparing Cinepazide Oxynitride into a reference substance solution. Considering that pharmaceuticals are special products, which must be produced in strict accordance with their national standards and can only be marketed if such standards were met, and by taking into account the records of the national and business standards of Qilu Pharmaceutical’s corresponding products and the scope of protection of Patent 357 and Patent 994, the court concluded that the Cinepazide Maleate API produced by Qilu Pharmaceutical fell within the scope of protection of Patent 357, the Cinepazide Oxynitride product fell within the scope of protection of Patent 994, and the Cinepazide Oxynitride it produced as a reference substance fell within the scope of protection of Patent 994.

(II)The patent owner of the SEP for pharmaceuticals is not obligated to license its patents on “fair, reasonable and non-discriminatory” terms, and the defendant shall cease patent infringement as its infringement is established

Qilu Pharmaceutical claimed that since the patents at issue were SEPs, Article 24 of the Interpretation of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Cases involving Disputes over Patent Infringement(II) (“Judicial Interpretation of the Patent Law (II)”)[2] shall apply, which suggested that if Sihuan Pharmaceutical had failed to fulfill its “disclosure obligation” and its obligation to license patents on “fair, reasonable and non-discriminatory” (“FRAND”) terms, it would not be entitled to injunctive relief. Thus, whether the above-mentioned judicial interpretation applied to the SEP for pharmaceuticals was the focus of this case.

The SPC held that, pursuant to Paragraph 2, Article 24 of the Judicial Interpretation of the Patent Law (II), the following requirements must be met to apply this provision:

1. the standards of the patents at issue are voluntary standards; 2. the patent owner commits to licensing patents on FRAND terms when stipulating the standards; 3.  the accused infringer has no evident fault. In this case, the standards involved are  the national standards on pharmaceuticals issued by the NMPA and approved by   the Chinese Pharmacopoeia Commission. Such standards are compulsory instead of voluntary. The current laws and administrative regulations concerning pharmaceutical administration and registration do not require patent owners of pharmaceuticals to commit to licensing their pharmaceutical patents on FRAND terms when assisting  in the formulation of national standards for pharmaceuticals. There was no evidence in this case to prove that Sihuan Pharmaceutical had made such commitment when formulating the national standards for pharmaceuticals related to the patents at issue. Therefore, the FRAND terms were not applicable in this case, and the injunctive relief issued by prior judgment to Sihuan Pharmaceutical was in accordance with law.

III.Key points

(I)If the patent owner of SEP commits to licensing its SEPs on FRAND terms, it shall undertake such obligation; if no such commitment is made, it did not have to undertake such obligation.

Pursuant to Paragraph 2, Article 24 of the Judicial Interpretation of the Patent Law (II), the obligation for licensing on FRAND terms comes from the commitment by the patent owner when it stipulates relevant standards. Judge Li Jian of the SPC clearly pointed out in the Interpretation of Article 24 of the Judicial Interpretation   of the Patent Law (II) that “it should be noted that such obligations stipulated in   this Paragraph are premised on the commitment made by the owner of SEP during the process of standard stipulation. If no such commitment has been made, it will  not be appropriate to simply apply the provisions herein.” Thus, we can see that the law clearly stipulates that the obligation for licensing on FRAND terms comes from the commitment of the patent owner, which is not a statutory obligation. Generally,the owner of SEP for pharmaceuticals has no opportunity to make such commitment before stipulating the standards, so there is no reason for such patent owner to assume this obligation.

The issue of patent right is a mechanism to promote technological progress by giving the patent owner monopoly right for a certain period of time, so the patent right itself is a legitimate monopoly right. Even if there is a conflict with the public interest due to the inclusion of patents into standards, restrictions on the exercise of rights by the patent owner should be placed as meticulously as possible. As the exclusivity is the most important feature of patent right, once a patent is included into the standard, it puts statutory restrictions on the patent owner’s exercise of the exclusive right, thus unduly restricting the rights of the patent owner.

Patent right is a civil right. If the patent right exercised by the patent owner      is in conflict with other civil rights, such conflict should be handled according to   the civil principles of fairness, honesty and voluntariness. Specifically, when a patent is included in the standard, the following three conditions must be met for   the patent owner to undertake the obligation for licensing on FRAND terms: First, prior notice. That is, the organization for standardization should inform the patent owner in advance that if its patent is included into the standards, it commits to licensing its patents on FRAND terms to the unspecified public. If the organization for standardization does not inform the patent owner in advance that it shall undertake an obligation for licensing on FRAND terms after its patent is included in the standards, and requires such patent owner to license such patent to the unspecified public on fair, reasonable and non-discriminatory conditions afterwards, it then violates the voluntary principle of civil law. Second, actual commitment. That is, the patent owner does make a commitment of fair, reasonable and non-discriminatory licensing, and the organization for standardization includes the patent into the standards based on the licensing commitment made by the patent owner. If the organization for standardization does not consider whether the patent owner has made a commitment when including the patent into the standards, it is against the principle of fairness to require the patent owner to license its patents after inclusion of the patent into   the standards without asking. Third, necessary implementation. That is, based on the standard text, all operators who implement the standards are required to implement the patent. If the patent is included in the standards while the technical scheme of the patent is optional rather than necessary, then it is obviously unfair to restrict the patent owner’s exclusive right due to the inclusion of the patent in the standards.

The Chinese Pharmacopoeia Committee is responsible for formulating the pharmaceutical standards, while the NMPA is responsible for examining and promulgating such standards. The above authorities can be considered as the standard-setting organizations. Such standard-setting organizations are administrative authorities, however, be it administrative authority or non-government institution, only when the above three conditions are all met and the patent is included in the standards should the patent owner’s claim to cease infringement be considered to be restricted.

It is particularly important to note that the NMPA and the Chinese Pharmacopoeia Committee have focused on the safety and control of pharmaceuticals when formulating national pharmaceutical standards. The NMPA will not put the safety and control of pharmaceuticals in jeopardy for the purpose of coordinating patent rights when they conflict with patent rights as civil rights. Therefore, the exclusive right of SEP should not be restricted in particular.

(II)The patent right should not be restricted if the patent owner did not obtain any evident gains from the inclusion of the patent in the standard

In most fields, operators have no obligation to adopt a certain technology. Only when the patents are included into the standards, may the operators be required to implement the patents when adopting the standards due to the commercial demands of interconnectivity. For example, once patents for communications are included into the standards, with the large-scale adoption of the standards, patents will also be widely implemented, and the patent owner will thus obtain huge commercial returns because of the inclusion. If the patents cannot be included in the standards, the commercial value of the patents will be seriously affected. In particular, a large number of patents have been included into communications standards. If a few patent owners do not license their patents, then operators will not be able to implement a large number of patents that have already been licensed. Therefore, SEPs for communications not only expand their commercial values, but also their exclusivity. In this way, the value of the patent can be divided into two parts, one is generated by its technical contribution, and the other is generated by its inclusion in the standard. The court is entitled to balancing the interests generated by the inclusion in the standard between the patent owner and the public.

However, in the field of pharmaceuticals, different pharmaceuticals have their own standards. Each pharmaceutical usually carries only a few patents, and these patents often belong to the same owner. Different from the field of communications, the purpose of formulating pharmaceutical standards is not to consider the compatibility of products or the network incremental effect brought by interconnectivity, but to pay attention to the safety, efficacy and quality control of pharmaceuticals themselves.

Operators of pharmaceuticals undertake the legal obligation to ensure safety of pharmaceuticals. For example, if there is a toxic impurity in pharmaceuticals, then even if the content of such impurity is not included in the pharmaceutical standard, once the pharmaceutical manufacturer knows that the impurity causes adverse reactions, it is still obliged to control the content of the impurity in production so as to improve the safety of pharmaceuticals. Otherwise, it may be faced with liabilities for administrative violations and civil tort liabilities. Therefore, whether patents for pharmaceuticals are included in the standards does not directly lead to the implementation by the operators. The actual reason for operators to implement patents is that such patents improve the quality of pharmaceuticals or reduce adverse reactions, not because they are included in the pharmaceutical standards. Therefore, the value of pharmaceutical patents does not increase because of the public power of standards. In other words, the value of pharmaceutical patents is generated by their technical contributions. There is no such right of which the value is increased by inclusion in standards. It is obviously unfair to restrict the exercise of patent rights of pharmaceuticals.

The inclusion of patents at issue into the national standards is entirely due to  the patent owner’s investment in innovation and its need for administrative approval of pharmaceutical administration, which has nothing to do with any other subject. Relevant national standards also only include the patent owner’s own individual patent, and there is no patent of any other subject. The protection of such standard patents should derive from the basic jurisprudence of the Patent Law of the People’s

Republic of China. The patent owner has proprietary rights and can request injunctive relief for the patent infringement of others. Such protection is especially important for the pharmaceutical industry: the development of new pharmaceuticals in the pharmaceutical industry often requires huge costs and a very long approval period. If others are allowed to arbitrarily infringe the patent right in the name of implementing “standards” after the approval of the patent owner’s pharmaceuticals, the innovation of the entire pharmaceutical industry will be affected. Throughout the global pharmaceutical industry, innovation in the pharmaceutical field is strongly protected. So far, there has been no precedent in the world that pharmaceutical patents are not subject to injunctive relief due to inclusion in standards.

(III)When pharmaceutical standards are formulated, pharmaceutical patents are passively included into the standards and the patent owner has no right to choose

The essence of SEP stipulated in Article 24 of the Judicial Interpretation of the Patent Law (II) is that the patent owner has the right to choose and to decide whether to explicitly include its patents into the standards and make them SEPs, or to explicitly exclude such patents from the standards to implement them as non-SEPs. The patent owner shall bear corresponding obligations only when it has the right to choose and decide whether to include its patents into the standards, and has made a fair, reasonable and non-discriminatory commitment when formulating such standards.

Pharmaceuticals are special commodities, and their putting on sale and efficacy are related to public health and safety. Pursuant to the Pharmaceutical Administration Law,[3] pharmaceuticals must conform to the national pharmaceutical standards. Therefore, if the patent owner wants to implement its pharmaceutical patents, it must first transform the patented technologies into the national pharmaceutical standards through relevant procedures. In addition, in the process of formulating the standards, the patent owner has no discretion to choose or decide whether to include its patented technologies into standards. Under such circumstances, the patent owner is in a passive position with no choice, so it should not have any obligation to make a licensing commitment on FRAND terms.

The spirits of China’s judicial policies and judgments also support this viewpoint. Article 20 of the Interpretation on Several Issues concerning the Application of Law in the Trial of Cases involving Disputes over Patent Infringement (Draft for Comments) issued by the SPC on 18 June 2009 stipulates that if a patent is included into standards published by a national, industrial or local standard-setting organization with the consent of the patent owner and the standard does not disclose the patent, the court may determine that the patent owner has licensed others to implement the patent while implementing the standards, except that the patent can only be implemented in the standards according to law.  Pharmaceutical patents are such patents that can only  be implemented in the standards as stipulated in the proviso above. Although this provision has not been incorporated into the formal judicial interpretation, the SPC does not deny its meaning. On the contrary, it can be interpreted as a judicial policy.

The case Henan Tiangong Pharmaceutical Co., Ltd. v. Guangxi Nanning Yongjiang Pharmaceutical Co., Ltd.[4] involving disputes over infringement of patent for inventions, which was tried by Higher People’s Court of the Guangxi Zhuang Autonomous Region in 2007, also has some direct relevance. In this case, after obtaining the patent for invention entitled “A Pharmaceutical Composition for Treating Craniocerebral Trauma and Its Syndrome,” the plaintiff provided a national pharmaceutical standard of “Compound Lysine Granules” in order to implement such patent for invention, and then the NMPA issued the quality standard and instructions for use. The defendant argued that its use of the plaintiff’s patent was a legitimate act to implement the national pharmaceutical standard and did not constitute patent infringement. The plaintiff voluntarily and proactively provided the patent to the relevant state authority, making the patent formula a national standard to the public, which should be regarded as allowing others to use such patent. The courts of first and second instances held that due to the particularity of pharmaceuticals, patent   for pharmaceutical invention was different from ordinary patent for invention. After obtaining the patent right, the patent owner for pharmaceutical invention could not directly implement its patent, but was required to transform the pharmaceutical patent technology into the national pharmaceutical standard through the prescribed procedures before obtaining the legitimate right to production. The plaintiff’s applying for patent for invention and converting the patented technology into the national pharmaceutical standard did not mean that the patented technology was available to the public and others were allowed to use it freely without licensing. Although the defendant produced pharmaceuticals in accordance with the national pharmaceutical standards, such implementation of patent was not licensed by the patent owner and thus constituted patent infringement.

(IV)What we can learn from the US patent linkage system for pharmaceuticals

The US is the global leader in scientific R&D and sales of pharmaceuticals, and has the most advanced litigation system and practice involving pharmaceutical patents around the world. There is a well-established pharmaceutical patent linkage system in the US, which links the expiration of the patent for reference listed drugs with the approval of generic drugs for sale, and reduces litigations on pharmaceutical patent infringement.

Pursuant to the US Federal Food, Drug, and Cosmetic Act, drugs must be approved by the Food and Drug Administration (“FDA”) before going on the market. In its application for new drugs, the manufacturer of reference listed drugs is required to submit detailed data on the safety and efficacy of the drug to FDA and list the patent numbers and expiration dates of all patents whose scope of protection covers the drug or its usage. Once a new drug is approved, the relevant information, together with patent information, will be included in the Approved Drug Products with Therapeutic Equivalence Evaluations (i.e. the “Orange Book”), regularly updated and published by FDA.

On the one hand, the duration of patent owned by manufacturers of reference listed drugs nearly runs out after going through the lengthy FDA approval formalities. On the other hand, the generic drug application also requires manufacturers of generic drugs to conduct several rounds of clinical studies and submit test data, which results in the delay in its market sales. In order to solve this contradiction and make up     for the short duration of patent owned by manufacturers of reference listed drugs  and accelerate the market sales of generic drugs, the US passed the Drug Price Competition and Patent Term Restoration Act (the “Hatch-Waxman Act”) in 1984. On the one hand, this Act makes up for the time consumed by FDA approval by extending the duration of patent owned by manufacturers of reference listed drugs (such extension is up to 5 years, and the entire protection period after the drug goes on the market shall not exceed 14 years). On the other hand, it significantly simplifies the approval requirements for generic drugs, which has far-reaching impact on the US pharmaceutical industry.

Pursuant to the Hatch-Waxman Act, manufacturers of generic drugs may apply to FDA for an “Abbreviated New Drug Application” (“ANDA”). In an ANDA application, manufacturers of generic drugs are not required to repeat expensive and laborious clinical trials, but only to prove that the generic drugs have bioequivalence with the reference listed drugs (i.e. there is no statistical difference in absorption degree and speed of drug active ingredients), and the safety and efficacy data in the new drug application of manufacturers of reference listed drugs can be directly used. The Hatch-Waxman Act also specifies the remedies for patent owners of reference listed drugs against competing manufacturers of generic drugs. When submitting    an ANDA application, manufacturers of generic drugs must declare whether their generic drugs infringe the patents carried by reference listed drugs listed in the Orange Book. For each patent listed in the Orange Book, manufacturers of generic drugs are required to make one of the following four types of declarations: (I) the reference listed drug carries no patent listed in the Orange Book; (II) the reference listed drug carries a patent in the Orange Book, but the patent has expired; (III) the generic drug will not be put on the market until the relevant patent expires; (IV) the relevant patent is invalid or the generic drug does not infringe any patent. Among them, declarations I and II do not affect FDA approval of generic drugs, and the generic drug with declaration III can be approved after the duration of patent expires. Declaration IV is most attractive to manufacturers of generic drugs, because the first successful ANDA containing declaration IV will enjoy a 180-day market monopoly period upon approval, but the act of making such declaration will be regarded as patent infringement. If a manufacturer of generic drugs makes declaration IV, it must notify the patent owner in writing of the content of such declaration, and the patent owner may file a lawsuit for patent infringement within 45 days upon receipt of such notification. Once the patent owner files a lawsuit, FDA will suspend the approval of the generic drug application for 30 months unless the court has held that the patent is invalid or the infringement is not established.

This shows that the US encourages manufacturers of generic drugs to challenge the validity of the patents owned by manufacturers of reference listed drugs through a series of system designs such as information disclosure of patents in the Orange Book, abbreviated application and patent declaration of generic drugs, and the monopoly period of the first generic drug, so as to solve the problem of patent infringement prior to the end of approval and thus reduce the potential litigation after the drug goes on the market. As to the patent for reference listed drugs that will inevitably be implemented by manufacturers of generic drug in order to meet pharmaceutical standards, if such patent is valid, manufacturers of generic drugs may find it difficult to make declaration IV and can only choose to make declaration III, i.e. the generic drug cannot be approved for market sales until the duration of patent for the reference listed drug expires.

China has not yet established a mature and effective patent linkage system for pharmaceutical registration. There is no such patent information list with legal effect as the Orange Book and distribution channels. Some relevant regulations are mere formality. The NMPA and the National Intellectual Property Administration perform their respective duties independently and lack cooperation. The functional disconnection leads to the absence of an operable legal environment for administrative approval of drug registration. Neither the non-disclosure of patent by manufacturers of reference listed drugs nor the non-infringement declaration made by manufacturers of generic drugs will be subject to legal liabilities. Therefore, currently the pharmaceutical patent lawsuits in China still need to be treated as usual patent infringement disputes. It is desirable that in recent years, a series of signs have shown that the pharmaceutical patent linkage system is ready to roll out in China. In October 2017, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council issued the Opinions on Deepening the Reform of the Examination and Approval System to Encourage Innovation of Pharmaceutical and Medical Devices, which explicitly included the establishment of pharmaceutical patent linkage system. In January 2020, China and the US signed the Economic and Trade Agreement between the Government of the People’s Republic of China and the Government of the United States of America in Washington, United States. Article 1.11 of the Agreement relates to an effective mechanism for early resolution of patent disputes, and states in particular that the pharmaceutical patent owner has the right to file a lawsuit prior to the allegedly infringing products obtaining permission for going on the market. In March 2020, the General Office of the SPC issued a notice on the Plan of the Supreme People’s Court for Initiation of Judicial Interpretations in 2020, in which interpretations on several issues concerning the application of laws in the trial of pharmaceutical patent linkage disputes were prominently listed. We believe that with the implementation of the pharmaceutical patent linkage system, the pharmaceutical industry in China will surely have a sound development with the goal of encouraging innovation, stimulating competition and benefiting patients.