Deconstructing the State Council’s Opinion on Building a Strong IP Nation

Statecouncilwordcloud [1239891]

The State Council has been publishing several opinions over the past few years in order to guide China’s efforts to become an innovative economy.  These include an opinion on cloud computing (Feb. 2015),   structural reform to encourage innovation,  innovation and entrepreneurship education (May 2015), on  and on “Internet Plus” (July 2015), amongst other areas.   Now, in 32 articles, the State Council has published its “Opinion of the State Council on Accelerating the Building of a Strong Intellectual Property Nation under New Conditions” (promulgated Dec. 22, 2015) (国务院关于新形势下加快 知识产权强国建设的若干意, 国发〔2015〕71号) (the “Opinion”).

The wordcloud of the Opinion, posted above gives us some idea its themes.  The Opinion furthers the goals of the National IP Strategy, and promises, by 2020, to achieve “decisive results” in important intellectual property reforms.  Its six broad topics include: reforming the IP management system, implementing strict protection of IP, promoting IP creation and utilization, strengthening planning for key industries in their overseas profile and controlling risks, improving the level of international IP cooperation, and strengthening organizing implementation and policy guarantees. However, this summary does not do justice to some of the interesting policy questions it poses that are suggested by a close reading of the text.

Let me give you a taste:

Trade Secrets – A New Law or A Reform to the Antiunfair Competition Law?: The Opinion notes that China plans to “promote completion of trade secret law and regulations, increase trade secret protection in talent migration and technology cooperation.” Oddly, the Opinion doesn’t discuss reforming China’s Antiunfair Competition Law, but appears to favor a stand alone trade secret law.

Is accession to UPOV ’91 Not in the Works? Is new legislation on designs possible?: The Opinion notes that China will “perfect new plant varieties and genetic resources and related traditional knowledge, database protection, and national defense intellectual property related legal systems.  Geographical indications will be legislated in due course.  Research to improve the intellectual property protection system business model and the applied art design patent protection system.”  The lack of reference to accession to UPOV ’91 (for plant variety protection) is concerning, as other parts of the Opinion reference accession to the Hague and Marrakesh treaties (for industrial designs and copyright exceptions, respectively).

Changes in the Tax Law to More Directly Subsidize R&D?: The Opinion notes that China will “implement a research and development expenses tax deduction policy.” Does this suggest that other programs, such as the tax deduction afforded for High and New Technology Enterprises will be phased out?   The Opinion also notes that strategies are also being developed to reduce patent application fees and maintenance costs.

Promoting China’s Technology Exports, but No Focus on Improving the Environment for Technology Imports: The Opinion also separately talks about promoting IP licensing overseas, including supporting model contracts and guidelines, but makes no mention on how to improve the environment for imported technology, which has been the focus of several recent engagements.

Promoting the Development of IP Intensive Industries, Including Preferential Procurement Policies?:  The Opinions notes that China will accelerate support for government procurement programs for products from IP intensive industries.  This language could raise concerns about discriminatory government procurement programs, although there is no detail.

Improving Punitive Damages, Judicial Protection, and International Criminal Justice Cooperation: The Opinion underscores a continued commitment to increasing damages, underscoring the “leading role” of the courts in IP protection and calls for increased international criminal justice cooperation.  Could this be read to suggest that the State Council is not in favor of increased administrative enforcement for patents, as is currently being proposed in the patent law reform?

Improving IP Prosecution Systems: The Opinion calls for continued improvements in electronic filing including support for patent prosecution highway programs.

Improving Regulations for IP Abuse, and Addressing the Challenges of F/RAND Licensing – But Also to Include Consideration for Handling Infringement?  The Opinion calls for improving the regulation of IP abuse and the development of enforcement guidelines.  It also calls for improving the licensing policy for Standards Essential Patents, and “practical rules for stopping infringement.” 完善标准必要专利的公平、合理、无歧视许可政策和停止侵权适用规则。 These practical rules will presumably address the controversial issue of the availability of injunctions for patents encumbered by F/RAND licensing obligations.  However, the recognition that the failure of a prospective licensee to take a license could constitute infringement, rather than an abuse of injunctive relief as was suggested by NDRC in its draft IPR abuse guidelines and suggests that a more holistic approach could be in the works.

This is an important policy-oriented document that encompassing a wide range of domestic and global IP issues.  Does the omission or inclusion of individual terms suggest as much as I have inferred in this blog?  Only time will tell.   Until we know more, I welcome readers’ feedback and impressions.

Beijing Higher People’s Court Recognises “Merchandising Rights” as Tool to Fight Bad-faith Applications

Authored by Mr. Zhao Kefeng (zhaokefeng@anjielaw.com) and Mr. Han Jinwen (hanjinwen@anjielaw.com) at Anjie Law Firm, first published November 3, 2015 and reprinted by permission.

In a recent trademark opposition case involving the famous film Kung Fu Panda , the Beijing  Higher  People’s Court  has confirmed that DreamWorks Animation SKG Inc had prior “merchandising rights”  in the name  of the film and refused to register  the trademark KUNG  FU PANDA.  DreamWorks’ success highlighted the possibility of using merchandising rights to block bad-faith trademark applications in China.
This case is a typical example of pirated trademarks and the facts were simple. A Chinese individual applied for the registration of the trademark KUNG FU PANDA for “car steering wheel covers” in Class 12. DreamWorks filed an opposition against the application as producer of the film Kung Fu Panda. The main ground for the opposition was that the trademark infringed its prior “merchandising rights”.
DreamWorks’ success did not come easily. In the opposition and following appeals, the China Trademark Office, the Trademark Review and Adjudication Board and the Beijing Number 1 Intermediate People’s Court all decided that “merchandising rights” were not among the “legitimate rights” pursuant to the Chinese laws and did not uphold the opposition.
However the Beijing Higher People’s Court disagreed. The court held that the name of a movie or movie character with a high reputation shall benefit from “merchandising rights” if the following conditions are met:
1. the relevant public identifies the name of the movie or character with a particular business entity;  and
2.   the business entity may derive  additional commercial value  or business opportunities from such identification/affiliation.
The judgment also specified essential factors when determining the scope of protection of Merchandising rights: fame and the likelihood of confusion. It was suggested that the courts should evaluate whether the registration and use of the pirated trademark on the designated goods  or services may cause damage  to the real rights owner by taking away trading opportunities.
The judgment is significant as it is the first time that “merchandising rights” have officially been recognized as a type of “prior rights” that can be used to block bad-faith trademark applications. Article 32 of China’s Trademark Law stipulates that a trademark should not infringe any prior rights owned by a third party. The current practice recognizes that “prior rights” include trade names copyright, design patents and the names of famous persons, but merchandising rights had never been  included – until now.
In fact, the Kung Fu Panda case is not the first case in which an IP rights owner has fought for the recognition of merchandising rights.  In an earlier similar opposition case against the trademark 驯龙高手 (‘how to train your dragon’ in Chinese) the Beijing Number 1 Intermediate People’s Court  upheld the opposition by confirming that DreamWorks had “legal interests” in the movie  name, but insisted that “merchandising rights” were not “prior rights” for the purpose of Article  32. In 2011, in a cancellation action against the trademark CRAYON SHIN-CHAN, the Beijing Higher People’s Court confirmed the cancellation of the mark on the grounds of bad faith, without any comments on merchandising rights.  In other earlier cases, the Chinese courts had ruled against infringers who had copied the name of a movie or movie character on the grounds of “unfair competition”.
There is no doubt that the present case is a welcome development in the battle against pirated trademarks. The judgment means that rights owners have an additional weapon to crack down on trademarks that copy or imitate the names of famous movies, characters, actors or songs.
What is interesting, though, is that the case itself is still being debated in China.  After the judgment was published, some scholars questioned whether judges were in fact “making” the law, because “merchandising rights” have not been  recognized by the Chinese  laws. The debate is likely to continue for a while, and IP owners should  keep monitoring the issue.

A Pair of Experiments in the Beijing IP Court

依波路(远东)有限公司

Back in 2012, I noted that “[t]he Chinese civil judiciary is pursuing reform and gaining experience, as Deng Xiaoping noted, by crossing the river by feeling the stones. A disproportionate part of that judicial experience is also being gained from the relatively small numbers of IP cases in the Chinese courts.” One notable and welcome source of those reforms is the new Beijing IP court, which is also serving as a base for experimenting in the development of a system of case law with Chinese characteristics.  I believe that the most notable development in Chinese IP in 2015 has been the role the courts are playing in judicial reform generally.  I have been privileged to hear Chief Judge Su Chi and his team from this court speak several times since his court was established, and have never failed to be impressed by their depth of knowledge and passion for judging.

There have been two notable year-end developments by the Beijing IP court.  One case involved the use of en banc decisions to invalidate a trademark normative document.  In this case the IP Court made an en banc decision to implement Article 21 of the SPC’s Interpretation on Practical Questions regarding the Administrative Litigation law of the PRC中华人民共和国行政诉讼法〉若干问题的解释 (April 28, 2015) (the JI). Article 21 of the JI provides that “When normative documents are not in accordance with law, the People’s Court shall not use it as proof that the administrative action has a legal basis, and shall explain this in the reasoning of its decision.  The People’s Court’s decision shall make recommendations on disposition of the normative document to the enacting agency, which can be copied to the government organs at the same level of the enacting agency, or to one government level higher.” (规范性文件不合法的,人民法院不作为认定行政行为合法的依据,并在裁判理由中予以阐明。作出生效裁判的人民法院应当向规范性文件的制定机关提出处理建议,并可以抄送制定机关的同级人民政府或者上一级行政机关。)

The other case, no less dramatic, involves what may be the publication of a dissenting period. Both of these developments occurred this month (December 2015).

The case arising under Article 21 of the SPC Interpretation involved an interpretation of the State Administration of Industry and Commerce regarding what constitutes a “day” for purposes of implementing a change in trademark classifications.  The IP Court found that the notice’s definition of a “day from a 24 hour period to a month exceeded the scope of power to explain the law, ruling in favor of plaintiff who claimed to have filed its trademark in advance of two other parties who filed one week and three weeks after plaintiffs filing.

When this case was heard in September, Chinese media talked about this as the first effort to “break the ice” by a Chinese court to invalidate administrative “红头文件” – red letterhead documents, i.e., normative documents of the type referenced in the JI.    The court reportedly also experimented in using live testimony and cross-examination in an atypical debate-style process. The pleadings were also entered into as part of the opinion after the party’s signatures confirmation. The decision does not yet appear to be on line, but a summary is attached  here (in Chinese).

Another procedurally significant decision involved the appearance of dissenting opinions in IP cases. Here again, the Beijing IP court is a trail and trial blazer in this recent experiment. The case involved Ernest Borel (Far East) Co. Ltd. and China’s Trademark Review and Adjudication Board. There were different opinions by the court on proof of copyright in the logo of Ernest Borel, including use of the original trademark registration and a subsequent copyright registration to prove that the design belonged to Ernest Borel. The minority opinion supported using these two registrations as a proof of copyright ownership.  Ernest Borel was attempting to prove that it owned the copyright in a logo that was being used by a Shenzhen company in its trademark registration (深圳市依波路保健科技有限公司).

Two notable experiments by an experimental court!

Note that the logo at the top of this article is a logo of Ernest Borel that I found online if for illustrative purposes only.  It does not imply any endorsement of the positions here by Ernest Borel.  It may not also be the trademark that is the subject of the pending case.  Any trademarks and copyrights are the property of their respective owners.

 

Translation of Draft Patent Law Amendment

Further to my blog earlier this month, attached are unofficial translations of the draft Patent Law Amendments, as well as the SIPO Explanations about Draft Amendment to the Patent Law.  Comments on the draft are due at the State Council Legislative Affairs Office by January 1.  The drafts are provided by the USPTO office in Beijing, should be compared against the Chinese original for any important concerns.

This draft may generally be said to elicit several different types of concerns. These include positive changes from the earlier draft in areas of concern.  An example of this might be limitations on proposed enhancement of patent administrative enforcement.  Another area of concern is negative changes from the earlier draft.  An example of this might be inclusion of antimonopoly law concepts regarding IP abuse into the patent law amendments. Another type of amendment is a positive change in an already positive direction.   An example of this might be improvements in civil enforcement and conduct of utility model appraisal reports.  Finally, there are issues that are not under consideration for revision in the patent law, which might be useful for Chinese law makes to consider.  Examples of these might include a more robust and longer grace period, and a longer statute of limitations.  There are also issues involving pharmaceutical regulatory procedures and patent protection that also implicate pharmaceutical regulatory procedures, such as patent linkage or patent term restoration which affected companies may wish to comment on.

Also importantly, the State Council Legislative Affairs Office website describes this draft as a SIPO draft , not an SCLAO draft to support further research by the State Council: “The Legislative Affairs Office of the State Council decided to publish the State Intellectual Property Office submission for consideration by the State Council of The Chinese Patent Law Amendment Bill (draft) and its Explanation, in order to solicit views of all sectors of society to conduct further research, and after modification to submit for consideration by the State Council.” “国务院法制办公室决定,将国家知识产权局报请国务院审议的《中华人民共和国专利法修订草案(送审稿)》(以下简称送审稿)及其说明公布,征求社会各界意见,以便进一步研究、修改后报请国务院审议。”

Also for reference, attached is the link to a translation of the prior draft, and comments of the ABA on that prior draft.

Vringo Settles with ZTE

According to its SEC filing, Vringo has settled its worldwide claims for patent infringement with ZTE.  Vringo’s 8-K filing states, inter alia:

“On December 7, 2015, Vringo, Inc. and its affiliates (the “Company”) entered into a Confidential Settlement and License Agreement (the “Settlement Agreement”) with ZTE Corporation and its affiliates (“ZTE”), pursuant to which the parties agreed to settle all and any pending litigations and proceedings between the parties relating, among others, to patent infringements and patent invalidity claims. In addition, under the Settlement Agreement, the Company granted ZTE a non-exclusive, non-transferable, worldwide perpetual license of certain patents and patent applications owned by the Company.

ZTE will pay the Company a lump sum of $21.5 million in cash within 15 days following the execution of the Settlement Agreement. ZTE will also responsible for the payment of any withholding, value added or other taxes. Within ten days following receipt of the payment by the Company, the parties will withdraw all the pending litigations and proceedings.

The foregoing description of the Settlement Agreement is only a summary and is qualified in its entirety by reference to the Settlement Agreement. The Company intends to file a copy of the Settlement Agreement as exhibit to its Annual Report on Form 10-K for its fiscal year ending December 31, 2015, portions of which will be subject to a FOIA Confidential Treatment Request which will be submitted to the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. The omitted material will be included in the request for confidential treatment.”

A thoughtful blog  by Jack Elllis from IAM, notes that in light of Vringo’s market cap and the increased difficulties of monetizing patents in recent years, the 21.5 million, while less than what many had expected or hoped for, “isn’t at all a bad result. “  This blog also notes that “this was the first time that a US-based NPE launched major litigation on multiple fronts worldwide with the United States being just one theatre – and arguably, not even the main one. Vringo’s adversary ZTE has its major presence in Asia, South America and eastern Europe.”  The blog also summarizes proceedings in 12 of these theater of litigation operations.

I would love to see what the settlement agreement for all of these litigations looks like, particularly due to legal uncertainties in China regarding the regulations that would apply to a license agreement compared with a covenant not to sue.

This settlement will presumably put to rest the threat of sanctions in federal court against ZTE’s general counsel regarding breach of a non-disclosure agreement, which I previously discussed.

GMU Comments on Questionnaire of China University of Politics and Law on AML Revisions

roosevelt-and-the-trusts

Although the ink has not yet been fixed on guidelines for IP abuse in antitrust matters in China, the preparatory work on revisions to China’s Antimonopoly Law (AML) are always underway.   In that connection, the Global Antitrust Institute (GAI) at George Mason University School of Law submitted the attached response to the Questionnaire on AML Revisions  that had been prepared by the China University of Political Science and Law.

I have summarized below some of the key IP-related concerns:

  • Deleting References to Use of Non-Competition Factors in Competition Analysis. The GAI recommended that references to non-competition goals such as “promoting the healthy development of the socialist market economy” be deleted.  This request reflects similar efforts made by the US government in the Strategic and Economic Dialogue where an outcome was the mutual recognition that “the objective of competition policy is to promote consumer welfare and economic efficiency, rather than to promote individual competitors or industries, and . . . enforcement of its competition law should be fair, objective, transparent, and nondiscriminatory.”
  • Deleting Exemptions for State-Owned Enterprises (SOEs). The GAI recommended that SOEs be fully subject to the AML, including liability and fines.  I have often wondered what the effect of additional competition would be on content creators who rely on state-owned entities such as China Film Group (for imports) or China Mobile and China Unicom (for music ring tones). Possibly due to weak competition, a study cited by IFPI noted in that in 2012 in China the estimated total value of the digital music sector in China at RMB30 billion (US$4.9 billion), but the study estimated that a very small share of that revenue (less than 3 per cent) was being shared with the copyright holder.
  • Deleting the Prohibition on Charging “Unfairly High” or Purchasing at “Unfairly Low” Prices. The GAI recommended that this prohibition be deleted in its entirety or, at the very least, revised to explicitly provide an exception for matters involving intellectual property rights.  Among other things, the GAI explained that price regulation risks punishing vigorous competition and government imposed prices that are too high or too low encourage misallocation of resources, soften incentives to engage in efficient conduct, reduce incentives to innovate, and distort markets. These risks are especially acute for IPR’s, because “the very purpose for which nations create and protect IPRs is to induce investment in risky and costly research and development. To achieve a balance between innovation and the protection of competition, monopoly prices should only be unlawful if they are the result of conduct that is unlawful on other grounds.” The most recent 2015 JCCT also specifically requires that China should “take into account the pro-competitive effects of intellectual property,” which arguably also suggests some degree of caution should be exercised in looking solely at prices charged for licensing IP rights.
  • Limiting the Prohibition on Refusals to Deal to Conduct that Creates or Maintains a Monopoly. The GAI explained that, without such a limitation, the prohibition could be interpreted to impose an antitrust-based duty to deal on firms, to micromanage the terms of trade between firms, and to require courts and agencies to administer a burdensome remedy with substantial risk of causing more harm to competition and to consumers than benefits.  Apart from consistency of forced licensing with the Paris Convention, TRIPS and other agreements, through erosion of the right to exclude inherent in a patent, the competition law IP risks to licensors are also underscored by GAI: “potential inventors may be less likely to undertake the research and development that lead to an invention if the inventor’s reward for its efforts is reduced by having to share its technology or goods. Conversely, if businesses know they can easily gain access to the goods or technology of other firms, then they have less incentive to innovate and more incentive instead to free-ride on the risky and expensive research of others.”
  • Specifying that the Legitimate Use of Intellectual Property Rights Includes the Right to Exclude. The GAI has suggested revising Article 55 of the AML, which deals with abuse of IP as follows:

 This Law [the AML] is not applicable to undertakings who exercise their intellectual property rights in accordance with the laws and administrative regulations on intellectual property rights, which includes the right to exclude; however, the Law shall be applicable to undertakings who eliminate or restrict market competition by abusing their intellectual property rights. This Article does not create a standalone violation for the abuse of intellectual property rights. Conduct will only be found to violate this Law if it constitutes a violation of Articles 13 or 14.

As GAI notes “If the government is too willing to step in and appropriate the gains from innovation and dynamic competition, then potential innovators anticipating such interventions will have weak incentives to risk investment in new inventions. Likewise, if the laws governing abuse of IPRs is uncertain or unpredictable (which they would be if the prohibition of “unfairly high pricing” is applied to IPRs), potential innovators will also have weak incentives to innovate.” As I previously noted in addressing NDRC’s IP abuse drafting effort: “the starting point of that discussion … is the incentive afforded by the patent system to disclose technology in order to exclude others and ultimately contribute to the public domain of technology when the patent lapses.”

 A special thanks to Koren W. Wong-Ervin, Director, Global Antitrust Institute, George Mason University School of Law, for sharing these comments and her summary which I have adopted in light of my knowledge of some of the  IP issues in Chinese antitrust enforcement.

The Xmas Phone Call of ’06 And What It Meant to IP Cooperation

ID5The recent, successful launch of the ID5 (the Industrial Design 5) at the USPTO (picture above), with the participation of  OHIM (Office for Harmonization in the Internal Market of the EU), JPO, KIPO and USPTO underscores, yet again, the role of cooperative dynamics in IP reform.  While historically academics and officials had argued that IP reform in countries like China depended on either indigenous pressure (becoming a “stakeholder” in the IP system) or exogenous pressure (301, threats of trade retaliation or ‘linkage diplomacy’ as part of WTO accession or other trade agreements), another form of engagement is that conducted by and among IP offices.

I was fortunate to have played a small role in the evolution of this third dynamic.  On December 24, 2006, while on vacation in Los Angeles, I received a phone call from then USPTO Director Jon Dudas requesting that I call up SIPO’s Commissioner Tian Lipu to explore the possibility of developing an expanded “trilateral” of patent offices (EPO, JPO and USPTO) to include SIPO and KIPO.  On Christmas eve, I placed a phone call to the then Director General of SIPO for International Cooperation, Lv Guoliang 吕国良, extending an invitation for Commissioner Tian and Director Dudas to have a phone call together to see if SIPO might be interested in joining an expanded group, now called the IP5. From that original effort also came the inspiration for grew the TM5 [Trademark Five], and this past week, the ID5.

It is difficult to estimate the importance of these relationships, as they typically involve more technical issues of office operations, with the involvement of trade associations that are focused on the operations of these offices.   However, cooperation amongst the five largest offices also represents the vast majority of patent, trademark or design filings globally, and are also responsible for much of the activity in each of the five offices own dockets, as well as through such mechanisms as the Patent Cooperation Treaty, Madrid Protocol or Hague system for industrial designs.

One way of understanding its importance to China of these mechanisms evolved in response to that Xmas phone call.  In the spring of 2007, the United States took certain public steps towards filing of a WTO case against China.  The three claims that were ultimately filed involved copyright piracy and trademark infringement.  At that time, I was serving as IP attaché in Beijing.  Former Vice Premier Wu Yi told a large audience during IP Week in April 2007 in Beijing that China would “fight the US to the bitter end”.  I was at the conference as was then Ambassador Clark T. Randt, III.  The US Trade Representative, Susan Schwab, was quick to respond that filing of a WTO complaint was not a hostile act.   China had tried to avert the filing of a case by lowing criminal thresholds for IP criminal enforcement earlier in April, but apparently this had been deemed to be too little, too late.  China still warned of “severe damage” to bilateral trade relations and a suspension of some forms of cooperation between the US and China.

Despite threats and retaliation, the IP5 meeting planned for Honolulu, Hawaii in May of 2007 went on as  scheduled.   Since that time in fact, the IP5 has flourished, and has been joined by the TM5, and now the ID5.

What kinds of strategy works best to advance IP reform?  Taking the WTO case as an example, some have argued that the WTO case was a failure for the US  at the time, while others (including some Chinese scholars) have argued differently.  The rapid rise in criminal enforcement in China for IP infringements suggests that even if one accepts the premise that the US did not succeed in having China amend its law, it did draw attention to an important enforcement mechanism that had been underutilized in China, and now has grown to about 13,000 cases per year.    In a sense, the case accomplished its goal of increasing criminal enforcement in appropriate circumstances and in retrospect should be seen as a success for both sides.

Another way of looking at progress is to see what China was interested in advancing despite the WTO case.  Did the IP5 go forward in 2007 because the WTO case did not significantly involve patents, an area which I had considered “orphaned” trade discussions until relatively recently? Did the case demonstrate China’s abiding increase in continuing to engage in patents, an area which it deemed vital for its goals of developing an innovative economy?  Was the success of the IP5 due in part to the close relationship that existed between Jon Dudas and Tian Lipu? Or do these mechanisms succeed because their goals are invariably more technical, practical and obviously win-win?  Clearly, these big office cooperation mechanisms have their advantages, both in promoting practical steps towards improving services for the clients the offices serve, but also in developing trust amongst their leadership.  As USPO Director Michelle Lee noted in the recent launch of the ID5 “as only the five largest industrial design offices can, we must come together collectively to strategically develop tools, practices, and office efficiencies. These agreements will promote the further development of user-friendly, consistent, and interoperable industrial design protection systems. It through this approach that the ID5 will become the success we are all here to ensure.”

Bon voyage, ID5 – a continuing journey that I like to think began on Christmas Eve, 2006.