Summer ’19 Events on Licensing, Export Controls and Trade

On June 20, 2019, I will be joining the Licensing Executives Society in a mid-day discussion at the Sheraton Palo Alto Hotel on IP Licensing in China.  I will be joined by: Matthew Laight;  Bird & Bird, Chen Gu, Tencent America; and Ben Wang, former Chief IP Counsel, ZTE TX.

In late July/early August,  I will be joining several colleagues in a discussion on recent changes to export control regulations in the US and China.  The program will be posted soon on AIPLA’s webinar page.  It will include myself, Justin Huff (Jones Day),   Gabriella Liu (Beijing IParagon), and Larry Ward (Dorsey & Whitney).

On June 13, 2019, I joined a webinar hosted by the Federalist Society on “Chinese Misappropriation of U.S. Technology: Assessing the U.S. Response.”  Prof. Mark Schultz from Southern Illinois University School of Law moderated.  I was joined by David Hanke (Arent Fox) and Andy Keiser (Navigators Global).  The focus was on CFIUS and export controls.  Here is a link to the recording.

US Suspends IP Case Against China at the WTO. Quo Vadis Europa?

DS/542, the WTO case that the US filed against China regarding China’s legal regime for foreign technology transfers, has now been suspended by order of the Panel.  The parallel case that was filed later by the European Union has not yet been similarly suspended.

When I was in Beijing earlier this June 2019, I gave several talks regarding US-China trade, and I questioned why the US case was not suspended or dismissed. The US case set forth a very limited “de jure” or “as such” case of violation of certain TRIPS obligations, including national treatment with respect to licensing of patents, as well as TRIPS-inconsistent measures regarding the contribution of patents to joint ventures.  By filing the case immediately after the 301 Report regarding technology transfer and innovation, the US case seemed to be making the point that the WTO was still a viable mechanism for certain of the US complaints regarding China’s technology transfer regime.  It was welcomed by those who believe that the WTO continues to play an important role in trade disputes. Suspending the case now in a sense confirms that Donald Trump accomplished legislative reform more quickly with jaw-boning and tariffs than the WTO could have with dispute settlement proceedings.

However, the White House should also not rush to praise itself on the utility of its approach to using the WTO dispute mechanisms.  As I previously noted, the US complaint was narrow.  It only focused on a few laws and regulations regarding patents.  With the passage earlier this year of numerous legislative reforms, including removal of the most offensive provisions of the Administration of Technology Import/Export Regulations, as well as amendments to the Joint Venture Implementing Regulations what the US sought to challenge as de jure WTO violations have been resolved.  Numerous other issues that were identified in the Section 301 report, whether credible or not, were not raised in the WTO complaint.  In some aspects, this case was long overdue and relatively straight-forward.

Why has the EU case not been dismissed?  One explanation may be that the EU may yet follow the lead of the US in seeking a suspension based on how the current legislative packages are implemented. If the EU does not move to suspend the case,  an alternative explanation is that the EU case was more comprehensive than the US case and therefore harder to suspend or dismiss.  The EU case may yet stand as a raison d’etre for the WTO dispute mechanism.  The EU raised concerns over a wider range of laws, regulations, and policies, including Made in China 2025, antitrust laws and new electric vehicle regulations. It also included catch-all claims that extended to how laws and other normative documents are implemented, including their  “nullify[ing] or impair[ing]” the benefits accruing to the European Union.

In its summary of the EU complaint, the WTO docket sheet narrowed the EU’s complaints down to more closely mirror the US complaints.  If these are indeed the only claims that the EU is now pursuing than a similar suspension would make sense.  However, if the complaint remains unamended, it is the kind of complaint the US might have filed as an outcome of the Section 301 investigation.  This now leaves the EU with the option of continuing to push for additional improvements in tech transfer to China through the WTO system or, instead, pursuing other solutions such as trade diplomacy.

 

Unpacking the Role of IP Legislation in the Trade War

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Here is my attempt to unpack recent legislation and their relevance to the on-going trade dispute.

In recent months, China has amended its Foreign Investment Law, the Technology Import/Export Regulations (“TIER”), the Anti-Unfair Competition Law regarding trade secrets, and the Trademark Law, with new provisions on bad faith filings and damages. A summary of the Trademark Law revisions provided by SIPS is found here. China also amended the Joint Venture Regulations provisions removing provisions that which limited a foreign licensor’s freedom to license technology beyond years or to restrict use of licensed technology after the 10 year period had elapsed.

With the revisions to the TIER and the JV regulations, much of the basis for the US and EU complaints against China at the WTO regarding de jure forced technology transfer may have evaporated (WTO Disputes DS542, and DS549). However, the public dockets do not indicate that the cases have been withdrawn.

China seems to have determined that it has crossed a line in how much it can accommodate US demands. Bloomberg reported on a commentary published after the imposition of escalated sanctions in the influential “China Voice” column of the People’s Daily which accused the US of fabricating forced technology transfer claims. The commentary is entitled “If you want to condemn somebody, don’t worry about the pretext”, with the sub-title, written in classical Chinese: “‘Forced Technology Transfer’ Should Stop!”. (欲加之罪,何患无罪 – “中国强制转让技术论”可以休矣). The title is a quotation from the Zuo Zhuan, a classic of Chinese history written around 400 B.C. that realistically describes the palace intrigues, military tactics, assassinations, etc. from the chaotic “Spring and Autumn” period from 771-476 B.C. The People’s Daily view is also shared by a number of scholars and observers who view the problem as exaggerated or mischaracterized (apart from the TIER and JV regulations). However, this view has been rejected by USTR Lighthizer, as was reported in a recent NPR interview (March 25, 2019):

“CHANG: Though a number of scholars believe the Trump administration is overstating how often forced technology transfers are happening.

LIGHTHIZER: Well, I guess I don’t know who those scholars are. We did an eight-month study on it, and I think it’s the very strong view of the people that we talked to that it’s a very serious problem and has been for a number of years.”

(Update of May 21, 2019: A recent EU Chamber survey in fact showed an increase in businesses reporting that FTT is a concern, from 10% two years ago to 20%.)

There have also been several IP legislative developments that may not be as directly linked to US government trade pressure. Perhaps the most important is the launch of China’s new national appellate IP Court effective January 1, 2019. The NPC has released a draft of the civil code provisions on personality rights (See this translation). Personality rights can be important tools in addressing trademark squatting, such as in the Michael Jordan case with Qiaodan. CNIPA also released Draft Provisions for Regulating Applications for Trademark Registration (关于规范商标申请注册行为的若干规定(征求意见稿) which addresses bad faith registrations. CNIPA released a draft rule for public comment on Protection of Foreign GI’s (国外地理标志产品保护办法 (修订征求意见稿)on February 28, 2019. The comments focus on generic terms and a GI expert committee for examination of foreign GI’s. Here are INTA’s comments on the trademark registration and GI proposed rules. CNIPA also proposed changes to patent examination guidelines on such issues as proof of inventive step and what constitutes “common knowledge.” Here are AIPLA’s comments from April 4, 2019.

Still pending are proposed amendments to the Drug Administration Law, with comments due by May 25, 2019. This is a second public comment draft released by the NPC. Ropes & Gray has provided a useful analysis. The proposed changes to the DAL also include increased punitive damages for counterfeit medicines, in line with increased penalties in the IP laws (Trademark, AUCL, etc.). There are also proposed changes to the patent law which was released for comment earlier this year. Of particular interest to the pharma sector in the proposed changes were provisions calling for patent term restoration. However, a hoped for inclusion of patent linkage through an “artificial infringement” provision to trigger an infringement challenge by reason of a pharmaceutical regulatory approval has not yet materialized. There were also rumors that China and USTR has scaled back regulatory data protection for biologics from the 12 years that had originally been proposed by China in 2018 to the 10 year period provided by the US Mexico Canada Free Trade Agreement.

What is the relationship between all these legislative changes and the trade war? Larry Kudlow, the Director of the National Economic Council, described the legislative snafu that caused the administration to reinstitute tariffs as follows:

“For many years, China trade, it was unfair, nonreciprocal, unbalanced, in many cases, unlawful. And so, we have to correct those and one of the sticking points right now as we would like to see these corrections in an agreement which is codified by law in China, not just the state council announcement. We need to see something much clearer. And until we do, we have to keep our tariffs on, that’s part of the enforcement process as far as we are concerned.”

So what are the unenacted “laws” and what is the State Council “announcement” that Mr. Kudlow is referring to and which in his view launched this new trade war escalation? I doubt that Mr. Kudlow has read China’s Law on Legislation and understands the difference between a Law passed by the NPC and a State Council Regulation, particularly as US and European practice in recent months appears to be oblivious of legislative nomenclature and its role in determining what constitutes a legally binding document.

Perhaps Mr. Kudlow is talking about the NDRC 38 agency MOU published in late 2018 regarding punishments for serious patent infringement, including use of social credit system. The NDRC document is clearly inferior to a Law or State Council Regulation, but it was a directly promulgated document of a State Council agency. As the patent law amendments have not been enacted yet, he may be referring to this delay in enactment and the failure to increase damages for infringement as has been provided by other statutes. In my own view, the focus on punitive or even statutory damages is misguided as is increased administrative enforcement, as the primary reason that damages are low is the failure of most Chinese courts to impose fully compensatory damages and abide by priorities in law for establishing damages. But I hope to have more on that in another blog…

One thing is certain: China has been timing legislative developments with trade diplomacy. This may lead one to believe that China’s approach to the new laws was purely transactional, and/or there were other laws that the US was also expecting but that China has since declined to deliver. The previously mentioned NDRC 38 Agency MOU was enacted before the G-20 meeting but made publicly available shortly thereafter. The “Working Measures [sic] for Outbound Transfer of Intellectual Property Rights (For Trial Implementation), (State Council, Guo Ban Fa [2018] No. 19)” (知识产权对外转让有关工作办法(试行)) which was previously discussed here, appear to have been timed with the 301 announcement in March 2018. In addition, the revocation of TIER provisions, JV implementing regulations, and amendments to the Trademark Law and AUCL revisions all were enacted with incredible efficiency, often denying any opportunity for meaningful public comment in violation of prior procedural practices. A reasonable guess may be that there were some additional laws or regulations that the US was expecting but that China had determined it could not deliver, or deliver in the time frame provided. Nonetheless, the legislative track record thus far is quite impressive.

China’s improved environment for technology transfer and technology collaboration is coming at a time when the United States has tightened up its controls with China. The most notable legislation in this area is the John S. McCain Defense Authorization Act for 2018 (the “Act”), including the enactment of the Foreign Investment Risk Reduction Modernization Act and the Export Controls Act of 2018. These laws extended export control and foreign investment control authorities to foundational and emerging technologies, as well as to non-passive, non-controlling investments. Much of the technologies of concern overlap with Made in China 2025 and other Chinese industrial policy documents. Although the Act did not specifically create “black” and “white” countries as subjects of controls, the Congressional history did point to special concerns about China:

“Congress declares that long-term strategic competition with China is a principal priority for the United States that requires the integration of multiple elements of national power, including diplomatic, economic, intelligence, law enforcement, and military elements, to protect and strengthen national [t]security, [including] … the use of economic tools, including market access and investment to gain access to sensitive United States industries.”

The most recent report which analyzes the impact of US and Chinese regulations on Chinese investment in the United States by Rhodium Group is found here (May 8, 2019). The report notes an “over 80% decline in Chinese FDI in the US to just $5 billion from $29 billion in 2017 and $46 billion in 2016. Accounting for asset divestitures, net 2018 Chinese FDI in the US was -$8 billion. Meanwhile, American FDI in China dropped only slightly to $13 billion in 2018 from $14 billion in 2017.” The Rhodium report also notes that “the chilling impact of politics on US FDI in China was mostly visible in the ICT space where new investment declined significantly last year.” Other countries have also been enacting similar restrictions on FDI in sensitive areas, as pointed out in a recent article by my Berkeley colleague Vinod K. Aggarawal. Note: I will be speaking at a forthcoming AIPLA webinar on export controls and IP strategies on May 23, 2019 as well as at forthcoming events in China (to be announced).

In addition to these legislative efforts, the US has undertaken steps to restrict H1B visas for talented scientists and engineers and the FBI has created a new working group to address economic espionage from China. The Committee of 100 released an important paper in 2017 showing that Asian Americans were more likely to be prosecuted for economic espionage than any other ethnic group, are also subject to higher sentences and were twice as likely as other groups to have cases against them dismissed. Some observers fear that overly broad regulation and enforcement by the United States may now be encouraging exactly what China has sought to do for decades: repatriate to China the vast talent pool of Chinese scientists, engineers, and entrepreneurs to contribute to the technological development of the motherland.

Although there have been few legislative efforts directed to making US science and technology more competitive in response to these perceived threats from China, there have been several general reports and proposals. The National Institute of Science and Technology recently released a green paper, “Return on Investment Initiative for Unleashing American Innovation” (April 2019) to improve federal technology transfer and entrepreneurship. There are increasing calls for Congress to fund the long defunct Office of Technology Assessment, which once played an active role in analyzing US-China technology trade.

Several trade organizations and think tanks have called for increased US funding in science and technology, among them is the recent report of the Task Force of American Innovation, “Second Place America – Increasing Challenges to America’s Scientific Leadership” (May 7, 2019). The R&D graph at the head of this blog showing China’s rapid growth in R&D is from that report. The report notes:

“America’s competitive edge is now at stake, as China and other countries are rapidly increasing investments in research and workforce development in order to assume positions of global leadership. Our nation risks falling perilously behind in the basic scientific research that drives innovation, as our global competitors increase support for cutting-edge research and push to the forefront in fields such as artificial intelligence (AI), robotics, aerospace, advanced manufacturing, and the next generation of telecommunications networks.”

To round out this summary of legislative developments, there have been developments at the USPTO that impact US relations with China on IP. The USPTO published a proposed regulation which will regulate legal services for the rapidly increasing number of Chinese pro se trademark filers in the US (2/15/2019). This proposed regulation would require these applications to use a US licensed attorney. The purported purpose of this change in current practice is “instill greater confidence in the public that U.S. registrations that issue to foreign applicants are not subject to invalidation for reasons such as improper signatures and use claims and enable the USPTO to more effectively use available mechanisms to enforce foreign applicant compliance with statutory and regulatory requirements in trademark matters.” The rule also seems generally consistent with TRIPS Art. 3, which permits WTO members to require “the appointment of an agent within the jurisdiction of a Member … to secure compliance with laws and regulations which are not inconsistent with the provisions of [the TRIPS] Agreement”.

Another important development involves USPTO efforts to clarify subject matter eligibility under Sec. 101 of the patent act, and functional claim limitations for computer-enabled inventions under Section 112. The United States had been weakening and destabilizing protections in these important areas affecting artificial intelligence, fintech and biotech inventions at the precise time when China had been strengthening its protections. These are important steps towards strengthening predictability in our domestic IP system, which may be further strengthened by proposed legislative changes.

Ironically, China’s improvements in its investment and tech transfer environment are coming at a time of heightened concern over a Chinese technological threat and increased US and international regulatory scrutiny. It may be difficult, therefore, to perceive any immediate positive impact from changes in China’s investment environment. Indeed, the media has recently been reporting on decisions of different companies or entrepreneurs to close down R&D operations in each other’s markets. Hopefully, both countries may ultimately create the right mix of IP enforcement and protection, regulatory controls over collaboration and industrial policy to enable bilateral scientific collaboration to once again flourish and contribute to the global economy.

The 600 Billion Dollar China IP Echo Chamber

“Most people use statistics the way a drunkard uses a lamp post, more for support than illumination.”  Mark Twain

What are the losses due to “IP Theft” from China? On a recent trip to Washington, DC, I heard the range of $300 billion to $600 billion repeated from various sources without any critical gloss. These numbers have taken on a greater legitimacy than they likely deserve, in terms of capturing the scope of US concerns, the magnitude of the loss and shaping the Trump administration’s unilateral retaliation.

The 2017 and 2013 reports from the Commission on the Theft of American Intellectual Property (the “Commission”) appear to be the origin of much of this data.  The data was also referred to in the Section 301 Report (p. 8) and in a subsequent White House report “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World” (June 2018).

In 2017, the Commission found that “Chinese theft of American IP currently costs between $225 billion and $600 billion annually.” The Commission pulled together different sources of data, including sales of counterfeit and pirated goods ($29 billion), and that “the value of software pirated in 2015 alone exceeded $52 billion worldwide.” The Commission further noted that there was “a paucity of reliable data on the economic costs of patent infringement” and that American companies were most likely the leading victims of this “IP Theft.”  It estimated losses of at least 0.1% of the $18 trillion U.S. GDP.

The largest single loss contributor to the Commission’s estimate was based on data provided by create.org and later repeated by the White House, that trade secret theft cost between 1% and 3% of US GDP, and totaled between $180 billion and $540 billion.  One critic (Stephen S. Roach) of these loss figures recently noted that “the figures rest on flimsy evidence derived from dubious ‘proxy modeling’ that attempts to value stolen trade secrets via nefarious activities such as narcotics trafficking, corruption, occupational fraud, and illicit financial flows. The Chinese piece of this alleged theft comes from US Customs and Border Patrol data, which reported $1.35 billion in seizures of total counterfeit and pirated goods back in 2015.”  One area of overlapping concern I have with Mr. Roach is the use of Customs seizure data to justify allocating as much of 87% of global “IP Theft” to China. Seizures by US Customs of Chinese originating counterfeit and pirated goods are as high as 87% of global totals. However, this does not mean that China is the source of 87% of the world’s production of these goods, nor does it address trade secret infringement or patent infringement origination. See The 2017 Commission Report at p. 3.  Misunderstanding about the utility of Customs data contributes greatly to the weaknesses of many IP infringement loss estimates.

The 2013 Commission Report noted that “it is safe to say that dollar losses from IP theft are hundreds of billions per year, which is at least in the range of total exports to Asia in 2012 (valued at $320 billion).” This report pulled together several sources, including OECD data that estimated global trade in counterfeit and pirated goods as $200 billion in 2005 (p. 25).  All the studies to date, including this 2013 Report, have recognized the difficulties inherent in doing accurate loss estimations, although many have also not distanced themselves from sources, such as the OECD 2005 data which had not stood the test of time.

Remarkably, the loss data itself has been relatively consistent over approximately two decades despite different methodologies and varying definitions of what constitutes “IP Theft”. During my tenure at the US Embassy (2004-2008), the typical guestimate was $200 billion to $250 billion per year.  These guestimates enjoyed wide currency in Washington.  For example, Congressional Reports, such as H.R. 110-617 “Prioritizing Resources and Organization for Intellectual Property Act of 2008” stated: “[I]ncreasing intellectual property theft in the United States and globally threatens the future economic prosperity of our nation. Conservative estimates indicate that the United States economy loses between $200 and $250 billion per year, and has lost 750,000 jobs, due to intellectual property theft.”  This data was typically based on counterfeit and pirated goods “compris[ing] six to nine percent of all world trade, the bulk of which violates the intellectual property rights of United States businesses and entrepreneurs.”  (Id.). Six to nine percent, however, easily gets rounded up to 10 percent, as Congressman Donnelly from Indiana noted at about the same time:

“It is estimated that these [counterfeit] products comprise almost 10 percent of world trade, that they are costing American companies nearly $250 billion in revenue and an estimated 750,000 jobs.”

The number was also widely adopted by IP advocates. The U.S. Chamber of Commerce in its report What Are Counterfeiting and Piracy Costing the U.S. Economy, (2004) circulated the 200- 250 billion dollar number, as did a National Geographic film. In fact, I used the $250 billion dollar figure when I was IP Attache in Beijing (2004-2008) to urge additional support for my elevation in diplomatic rank, as it seemed rather odd that I had been tasked with a problem costing nearly 750,000 jobs and I had no staff of my own. An article in Ars Technica (2008) noted that this earlier $250 billion/750,000 job number may have its origins in a Forbes magazine article from 1993. There are also references to loss calculations of 200 billion dollars per year appear from as early as 2002 in Congressional reports.   To the extent that these calculations rely upon a base estimate of “approximately” 10 percentage points of world trade being in counterfeit or pirated goods, this data point harkens back to an OECD estimate of world trade in counterfeit goods at 5% in 1998. That number was however revised downward to 1.95% in 2007, at an estimated value of $250 billion. The OECD data seems to be the origin of the $250 billion IP Theft loss figures current at that time.

Other USG studies have shown a more cautious approach. A 2010 Government Accountability Office (“GAO”) study analyzed the economic effects of counterfeit and pirated goods and found that “it was not feasible to develop our own estimates [of the total value of counterfeit or pirated goods] or attempt to quantify the economic impact of counterfeiting and piracy on the U.S. economy.” Noting the lack of data as a primary challenge to quantifying the economic impacts of counterfeiting intellectual property and goods, the GAO concluded that “neither governments nor industry were able to provide solid assessments of their respective situations.”

The U.S. International Trade Commission in a well-researched report,  China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy, (2010) calculated that the theft of U.S. IP from China alone was equivalent in value to $48.2 billion in lost sales, royalties, and license fees. This estimate falls within a broad $14.2-billion to $90.5 billion range.  The breadth of this range is explained by the fact that many firms were unable to calculate their losses. Of the $48.2 billion in total reported losses, approximately $36.6 billion (75.9%) was attributable to lost sales, while the remaining $11.6 billion was attributable to a combination of lost royalty and license payments as well as other unspecified loss.

The current concerns around “IP Theft” as identified in the Section 301 Report include licensing of technology, an issue that is not covered by US Customs seizure data. Any calculation of losses due to IP Theft from non-payment of royalties should include estimates of lost royalties or license fees. Most of the current calculations do not include such data. Nonetheless, as I have noted elsewhere, accurately calculating lost royalties can be especially difficult as many licensors use tax haven jurisdictions to manage patent portfolios. There may be implied licenses in product purchases form OEM suppliers, and there can be valuation challenges. However, China’s relatively small role as a purchaser of US technology and its dominant role as an exporter of high tech or information technology products does suggest that it is a significantly under-licensed (infringing) economy. For example, China has leaped from exporting only 2% of the world’s information technology products in 1996, to 33% in 2015. Yet China has purchased very little technology directly from the US over the years, and its technology payments are a very small share of total trade. There is likely a huge shortfall in unpaid royalties from Chinese manufacturers.

Many discussions around IP theft have also declined to take into account cybercrime and other security threats. According to an often cited 2013 report by the International Data Corporation (IDC), direct costs to enterprises from dealing with malware from counterfeit software were estimated to hit $114 billion in 2013 and “potential losses from data breaches” might have reached nearly $350 billion.” However, data breaches are not necessarily a form of IP infringement, as they can be undertaken for other purposes, including simply injuring the computer system of a competitor through a denial of service attack.

Apart from differences in methodology, there are different definitions of “IP Theft” that should be affecting total loss calculations. The FBI currently  defines “Intellectual property theft” as “robbing people or companies of their ideas, inventions, and creative expressions—known as ‘intellectual property’—which can include everything from trade secrets and proprietary products and parts to movies, music, and software.” This definition notably would exclude any non-willful infringement, i.e., where there is no “robbing” as well as trademarks – which are not specifically enumerated.

In its 2013 Report, the Commission offered some examples of “IP Theft”, which also excluded trademark protection, and failed to discuss patent protection: “IP theft varies widely in both type and method. It ranges from more commonly known forms, such as software and music piracy, to more elaborate types, such as the use of economic espionage tactics to steal complex industrial trade secrets. Each type of IPR violation harms an economy in unique ways and brings with it a discrete set of challenges that make both deterrence and enforcement difficult.”

These approaches to “IP Theft” are different from the meanings advanced for the same term in the last decade. Victoria Espinel, who has had a long and distinguished career in IP and international IP issues, testified in Congress in 2005 when she was with USTR and spoke of “IP Theft”  in terms of the fight against ‘fakes’, declining to mention patents for inventions or trade secrets.   This was consistent with the focus at that time on criminal copyright and trademark focus of US government advocacy in China, including the bringing of a WTO case (DS362):

“Our companies report billions of dollars in lost revenue, irreparable harm to their brands and future sales, all of which ultimately affects U.S. workers who design and produce legitimate products forced to compete against Chinese fakes. We want and look forward to working closely with you and your staff in combating the theft of American IP in China.”

“IP Theft” of the prior decade certainly appears under-inclusive in not focusing on patent or trade secret infringement.  It also fails to reflect that most IP infringement is addressed by civil remedies, where questions of willfulness are secondary to the harm being caused. Criminal remedies, while important, are relatively rare in most legal systems. This approach is consistent with the TRIPS obligation to treat IP as a “private right.” Moreover, the TRIPS Agreement itself does not require member states to criminalize patent infringement or trade secret infringement.  Finally, there may be grey areas including market access barriers, investment restrictions, government procurement restrictions, informal government supported forced technology transfer, or aggressive use of antitrust laws that many would argue need to be included in the definition of “IP Theft”.  Many of these would also be very difficult to quantify.

“IP Theft” is also slightly over-inclusive, as there are also certain forms of bad-faith behavior that may be sanctioned by the state and permissible under international IP rules. For example, rights holders in China face a significant burden of bad faith patent and trademark applications that entail costs of challenging and invalidating these rights, while US-based rights holders often complain about non-practicing entities and patent trolls.

Individuals who might suspect an exaggerated “IP Theft” loss estimate might be surprised to know that there are data points that have typically been omitted from these calculations. For example, US Customs data typically does not include the value of goods excluded from the US market under Section 337 exclusion orders. I am unaware of any methodology that attempted to extrapolate from US damage awards in US courts against Chinese infringers. USTR in its 301 report, was also unable to calculate the value of “forced technology transfers” in joint ventures or technology transfers. Certain rights, such as plant varieties and plant patents are typically not included in loss figures, nor are losses due to design infringements. Consequential damages (attorneys fees/court costs/losses to brand value/harm to public health or safety) are also often not included in the above calculations.

There are also factors that could reduce the loss figures that have often not been used.  Assumptions about the US being the overwhelming victim of “IP Theft” are hard to substantiate. I suspect that different countries and industries bear different costs in different markets. European companies, for example, likely suffer most from trademark and design infringements of luxury goods.  In the United States, over 50% of US patent applications originate with foreigners; logically this may mean that a substantial portion of the injury suffered by US companies overseas due to patent infringement may be attributable to innovations that occurred outside of the United States.

Calculating how much “IP Theft” originates from China also ignores whatever the “baseline” is for infringement in the US.  Historically, for example, the greatest value of software piracy losses were in the United States, According to BSA data for 2017, China’s piracy losses were 6.8 billion, while the US was 8.6 billion. In addition to other deficiencies, US Customs data is based largely on the pro-active behavior of US rightsholders and thereby considerable selection bias. As one example, if “IP Theft” priorities were based on Custom data, apparel, watches and footwear would be the major area of US trade concern with China, as there were the three categories of goods most seized by US Customs in 2017.

“IP Theft” losses also do not necessarily reflect losses due to unredeemed WTO commitments, nor are they based solely on violation of WTO disciplines.  The TRIPS Agreement, for example, does not require members to criminalize willful trade secret theft – which is likely a major contributor to the current calculations. Moreover, if the calculations were one that adhered to WTO procedures, then the various methodologies would also need to look to WTO jurisprudence in terms of calculating damages when a WTO member fails to implement a WTO decision involving IP. A good reference point might be the “Irish Music” (DS160), which the US lost, and where the US was required to pay 1.2 million euros per year as an arbitral award in the early 2000’s. Another reference is the Antigua/gambling dispute, where the island of Antigua was permitted to retaliate against US IP interests in the value of 21 million dollars per year, considerably less than a claim by Antigua of 3.44 billion dollars.

Tying tariffs to losses due to IP theft has other challenges.   While it may help address a sense of national outrage, the unilateral imposition of tariffs on Chinese imports is unlikely to benefit any US victim of IP theft, nor do the tariffs themselves appear to be geared to a particular loss threshold. Instead, the tariffs are loosely based on loss estimates but appear primarily oriented to forcing China to change its behaviors.

A cynical reader looking at the data might conclude that large loss numbers are self-serving and make compelling rhetoric in the echo chamber of Washington, DC. Someone looking over the history of the data might, however, view their weaknesses as due to such factors as difficulties in collecting data, the growth of the Chinese economy and changes in infringement practices, and changing technologies including the growth of the Internet as a vehicle for content and goods delivery. The current focus on “technology” in the scope of IP Theft might be viewed as a belated recognition of how the Chinese economy has become more technology-oriented in the past decade.

In my view the statistics do serve as more than a “support” of the type referred to by Mark Twain, above. They also help to “illuminate” a deeply felt and sustained injury that is otherwise hard to calculate.

Note: The author (Mark Cohen) has contributed to many of the reports noted above, typically in a private capacity.

Corrections to the above are welcomed.

The Changing Legislative Landscape of Trade Secret Protection in China

This blog is a supplement to my prior blog on the recent TM law and AUCL revisions.  Attached is a bilingual translation provided by the Quality Brands Protection Committee (QBPC) of the recent revisions to the Trademark Law and Anti-Unfair Competition Law (AUCL).   This blog focuses on the trade secret amendments.  And thank you, QBPC!

The trade secret amendments by themselves are promising.  The NPC, recognizing their importance, took the unusual step of making the amendments immediately effective, unlike the Trademark Law amendments which have a delayed effective date.

Perhaps the most critical change addressed the problem created by prior amendments to the AUCL which removed natural persons from the scope of covered entities.  The logic at that time appeared to be that natural persons were covered under the definition of trade secrets provided in the General Outline of the Civil Code (GOCC),  中华人民共和国民法总则 (Art. 123).  However, the inconsistency between the AUCL and the GOCC created unnecessity ambiguities that these amendments help address.

The AUCL revisions also expand the remedies for trade secret protection by imposing liability on “inciting” or “abetting” (教唆)trade secret theft.  Inciting or abetting is an inchoate offense under the Chinese Criminal Law (Art. 29), and it also appears in China’s Tort Law (Art. 9), as well as in actual or proposed IP legislation, such as a 2012 Judicial Interpretation regarding online copyright liability.   This would appear to expand the scope of liability for those who facilitate or organize a trade secret infringement.

The AUCL also “borrows” the concept of quintupled damages if bad faith infringement is found.  This is similar to the new TM law revisions that provide for quintuple damages if there is malicious 恶意infringement.  I am not certain, however, if this provision will have its desired effect of deterring infringement, at least in the short term for two reasons: statutory damages still remain the principal remedy in most IP cases, and cases where actual damages are imposed and could be multiplied are also rare. Nonetheless, this provision could become of increasing importance as Chinese courts experiment with calculating actual damages.  Moreover, quintuple damages may not only be in place to deter infringement and better compensate rightsholders but also to assist in improving the leading role of the civil IP system compared to the criminal and administrative systems in China.

The revised law also clarifies that “electronic intrusion” to obtain trade secrets is an enumerated infringing act (Art. 9), which is in line with other computer crime laws in China such as the Criminal Law  (Art. 285).  This language may be helpful in prosecuting those civil cases where a computer intrusion was involved.  Although my data on trade secret cases involving electronic intrusions in China was very limited (from 2012) it had suggested that cyber intrusions were a  small percentage of China’s civil trade secret docket, perhaps because these matters were pursued through other legal channels.   If readers have more recent data or analysis on this issue, please provide them to me in comments to this blog.

The revised AUCL also provides for a burden of proof reversal (Art. 32).  Jim Pooley described  this provision as the “most promising” among trade secret legislative developments, as it “involves shifting the burden of proof in cases where the circumstantial evidence seems strong—such as the development of a similar product in an unusually short time after access to the plaintiff’s secrets—and requiring the defendant to prove independent development.”  According to Article 32 a rights holder that has preliminarily proven that it  has taken reasonable confidentiality measures on the claimed trade secrets and has preliminary evidence reasonably demonstrating 初步证据合理表明 that its trade secrets have been infringed upon, can shift the burden of proof (BOP) to the infringer to prove that the trade secrets claimed by the right holder do not belong to those as prescribed in this law. The preliminary evidence that may be provided by the rights holder includes: “evidence proving that the alleged infringer has channels or opportunities of obtaining the trade secrets and that the information it uses is substantially the same as the trade secrets“ or “evidence proving that the trade secrets have been disclosed or used by the alleged infringer or have risks of being disclosed or used” or “there is other evidence proving that the trade secrets have been infringed upon by the alleged infringer.”

This is a notable development.   However, the history of BOP reversals in China suggests that such provisions have not always had their expected impact.  Importantly, BOP reversals in process patent cases are required to be available under Article 34 of the TRIPS Agreement and under China’s Patent Law (Art. 61). Stringent requirements, such as requiring that the infringing product is identical with the one accused of violating the manufacturing process, have made it difficult to successfully bring these cases in China.  Most importantly, the low level of publication of trade secret cases, as well as the non-publication of interim orders, may mean that the public will have little insight into how courts handle actual cases, including this BOP reversal.   Trade secrets are perhaps the most opaque area of China’s IP enforcement regime, making it also very difficult to judge when significant improvements are being made.

Another difficulty may occur in ascertaining what constitutes a willful infringement and compensating for it.  Trade secret cases necessarily involve an act that circumvents or ignores precautions taken by the rightsholder.  The fact that such an inappropriate act may have been wrong, willful or even premeditated, also does not necessarily mean that the rightsholder suffered serious losses.  A good example of this is the recent case brought by the US Department of Justice against Huawei, involving the theft of T-Mobile technology and related behavior.   A  prior civil jury verdict related to one aspect of that case found that Huawei’s acts constituted trade secret misappropriation, but declined to award damages or to find that the actions were willful and malicious.

Another challenge, also identified by Jill Ge at Clifford Chance, is that Chinese courts may yet remain intent on using patent doctrines such as ‘novelty’ to determine that a given technology is not a protectable trade secret because it is otherwise in the public domain according to patent law doctrines.  Additionally, as I have noted this approach inappropriately “provid[es] a non-infringement defense based on modifying misappropriated technology,” that is a court may determine that the accused infringer did not use the precise technology and therefore there is no trade secret theft, borrowing perhaps from patent law doctrines regarding conduct that constitutes infringement (make, use or sell).  This problem of borrowing patent law doctrines into technical trade secret cases may be magnified by the experience and background of the technologically oriented IP judges in the IP courts or their IP assessors whose experienced has principally been informed by patent litigation.

In an unrelated development which also highlights the importance of making appropriate linkages between the civil and criminal trade secret regimes, US Deputy Assistant Attorney General Adam Hickey  recently gave a speech on national security and trade secret theft (April 24, 2019).  Reflecting on recent criminal prosecutions against Chinse nationals he noted:

“[T]here are trade secret cases where we cannot prove beyond a reasonable doubt that the Chinese government itself directed the theft.  …  But although we could not prove in court that these thefts were directed by the Chinese government, they are in perfect consonance with the Chinese government’s economic policy. “

China’s problem seems to be the reverse of the United States, by its historical underemphasizing of criminal remedies.  Although the AUCL amendments incorporate many notable improvements, they also do not address weaknesses in the criminal IP regime for trade secrets, the low level of criminal trade secret cases, and the widening differences that now exist between civil and criminal cases in such areas as proof of infringement.    All countries seeking to protect trade secrets need to strike the correct social balance between civil and criminal enforcement of trade secret theft.  DOJ’s inabilities to secure convictions also demonstrate the necessity in the US of having effective civil remedies, including 337 actions.    An integrated, stand-alone trade secret law in China that incorporates civil, criminal and administrative remedies, as well as doctrines from labor law, contract law, corporate law, and other areas, could help secure a more advanced, holistic perspective on how China should address trade secret infringements.  To address cross-border trade secret infringements, foreign government judicial cooperation in facilitating discovery, taking depositions, and enforcing judgments would also help improve the bilateral environment in this area.  In addition, China might consider additional policies that make it harder to engage in “efficient” trade secret theft, where costs of being caught are less than the cost of innovating on one’s own.  Such policies might include government procurement debarment for products using stolen technologies, invalidation of patents granted on the basis of misappropriated technologies and debarment from the Chinese patent office, return of any subsidies or grants for developing the technology, and denial or revocation of recognition capital contributions of technology for tax or other purposes, amongst other possibilities.

 

Trademark Law and AUCL Revisions Passed Into Law

Jill Ge of Clifford Chance has brought to my attention that the changes proposed  to the Trademark Law and Anti-Unfair Competition Law that I reported on April 21, have now been passed at the 10th session of the Standing Committee of the 13th National People’s Congress on April 23, 2019. There does not appear to have been the usual process for public comment on these changes.  This was fast!

Here is a link to the iprdaily.cn reporting of this news, a pdf of the article as it appeared on that website, as well as a machine (google)  translation of the article.  I wanted to distribute these to readers quickly in the interest of time.  If any readers have more polished translations that I can use, please send them to me.

No doubt, these changes are intended to help address US concerns over “forced technology transfer”, “IP theft” and related issues.  A significant concern I have about these positive legislative changes is whether they will be accompanied by the requisite transparency of the implementing and enforcing agencies.  Because trade secret cases in particular often include confidential technical or business information, they are often not reported by the courts in public databases.  In recent months, there has also been a reported slowdown in the adjudication of foreign-related cases in the courts, which may also affect reporting on IP litigation by the courts.  Unless there is comprehensive reporting of this information, it will be difficult to assess the problems they had sought to address, their impact, and their compliance with expectations of the NPC, rightsholders or foreign governments.

These legislative changes are also timed with events around IP Week in China, which typically includes releases of statistical data on patent and trademark prosecution, significant cases, policy initiatives, etc.  In light of other pending legislative changes (such as the patent law, the drug administration law, etc.), the government reorganization, the new IP court, a reported “surge” in IP litigation in China in 2018, and US-China trade relations, we can expect that there will be other useful information released in the days ahead.

Update of April 25, 2019:  Here are the NPC Observer’s comments on the revised laws as well as Jim Pooley’s observations on the new AUCL amendments in the context of international developments.

Further Trade-Responsive IP Legislative Developments May Be In the Works…

“When a stranger lives with you in your land, do not mistreat him. The stranger living with you must be treated as one of your native-born. Love him as yourself, for you were strangers in Egypt.” (Leviticus, Vayikra וַיִּקְרָא) .

He Jing of the Anjie law firm brought to my attention today an article in the April 21 Legal Daily which identifies proposed amendments to the Trademark Law, Anti-Unfair Competition Law and Administrative Licensing law that appear to be responsive to United States concerns over unfair treatment of Americans, “forced technology transfer” and IP protection in the current trade war.   Here is a copy of the Legal Daily article.

While we wait for the actual draft, I will place these proposed changes in context.

In my posting on good faith in IP-related trade issues,  I identified several issues which this legislation attempts to address, including warehousing of bad faith trademark registrations without intent to use; and  the removal of “employee” as a covered party (经营者) in China’s revised trade secret law (Anti Unfair Competition Law) which facilitates bad-faith employee behavior.   Actually, I am relieved that China may now be understanding how tolerance of bad faith behavior has had a wide spread impact on foreign perceptions of China’s willingness to protect IP.  These are important new steps.

Other provisions this legislation attempts to address also appear to address long-standing US concerns, such as requiring the destruction of counterfeit goods or materials and tools used for their manufacture.  The destruction of semi-finished counterfeit goods and materials and tools was a subject of DS-362, the China IP enforcement case, particularly regarding Customs’ disposal of goods outside the channels of commerce and the role of semi-finished goods in calculating criminal thresholds.

Other concerns raised in the legislation have been raised bilaterally.  Bad faith trademark registrations had long been discussed bilaterallyProtecting confidential information submitted by foreigners in administrative licensing has also been a long-standing concern of the United States and has been the subject of several JCCT discussions.

Although these changes are positive, I am reluctant to enthusiastically endorse them in the absence of corresponding measures ensuring their implementation.  As previously noted, newly amended provisions in the new Foreign Investment Law prohibiting forced technology transfer are likely to have little impact absent effective complaint and legal challenge procedures, such as the creation of a foreign investment ombudsman and/or appeals to the newly established IP court.  The inclusion of a non-discrimination position in administrative licensing procedures is also welcome news, although it may be similarly difficult to monitor and enforce.

China’s existing trademark law shows the limitations of forcing changes in behavior through legislation.  The trademark law and civil law have had provisions requiring “good faith” behavior, yet there has been little demonstrable impact on the flood of bad faith applications, which had increased to 7.3 million applications in 2018.  Chinese-origin bad faith and fraudulent applications are also causing USPTO to revise its own rules regarding pro se trademark applications from overseas.

As other examples, providing for treble or quintuple damages in patent or trademark proceedings is only useful in those still rare proceedings where statutory damages are not being used to calculate damages.  Similarly, the burden of proof reversals in IP cases, such as trade secrets can be useful but only if they are appropriately and effectively utilized and if motion practice in the courts is observable through online publication. Increasing penalties in administrative trade secret cases sound good on paper, but foreigners little use administrative trade secret enforcement proceedings.  Such proceedings have traditionally been an IP enforcement backwater.  According to the 2011 SAIC Yearbook (p. 855), there were only 57 reported administrative trade secret cases in that year, with an average 77,543 RMB average value and only 1,430,000 RMB (less than five thousand dollars) in fines.  The greatest focus of these cases were individuals, as 26 cases involved natural persons.  The data suggests to me that these cases largely involve employer/employee disputes over trade secret misappropriation, which should be resolvable in the courts.  Perhaps even more striking was the 35% decline in criminal trade secret prosecutions in 2017 to only 26 cases, which was also accompanied by a significant decline in criminal IP cases generally since 2012.   To address tolerance of trade secret theft (and IP infringement) by Chinese society, the most effective approach will be a commitment to criminal trade secret enforcement and an even greater commitment to civil remedies.  The proposed legislation only addresses part of this need.

Substantive changes can only be as effective as they can be monitored.  With respect to changes in substantive trademark and trade secret law, it would be especially useful if the full court dockets and more final cases were published.  If the data cannot be observed, it cannot be monitored for compliance.

While these legislative developments are underway, there is also word that the State Council continues to solicit opinions from the foreign business community on how IP issues are handled on their behalf.  This may also lead to welcome news.

There have also been two separate, non-IPR developments, which may have some bearing on the negotiations over the resolution of the trade war.  According to Bloomberg, the European Union is said to have won a dispute brought by China at the WTO seeking recognition of China’s market economy status (“MES”).    A similar case is pending involving the United States.  The lessons from these cases for IP should be that both the US and the EU should encourage more comprehensive and systemic treatment by China of IP as a private right if China is ever to achieve full MES.

In another development, a WTO panel ruled in favor of Russia in a dispute brought by Ukraine that the “national security” exception afforded by the WTO was not completely self-judging. The case could be read as a warning that the United States does not have unbridled discretion in deciding what constitutes a threat to its national security.  Taken together both cases affirm the WTO’s desire to remain relevant to changing circumstances in China and a changed perspective on international trade of the United States.

I wish everyone a happy Passover, Easter or spring holiday.

Buddha