Catching up With The Literature on Forced Tech Transfer…

FTT
(from the OECD report, discussed below)

While President Trump has extended the truce on the trade war, academic and business debate around the nature of “forced technology transfer” (FTT) practices in China and appropriate business and legal strategies continues.

A  study last year by Dan Prud’homme and his team, discussed earlier in this blog, was one important empirical effort looking at the nature and consequences of FTT.  Their FTT Strategy & Risk Forecasting Matrix was intended to guide foreign firms to anticipate risks associated with FTT policies and serve as a starting point for understanding how to further quantify or mitigate these risks.  In January 2019, the OECD also released a study on International Technology Transfer policies which cites to the Prud’homme study and further describes FTT, as well as the various international agreements and practices that may constrain it.  Consistent with the approaches of the US and EU in the currently pending WTO case, the study highlights the importance of joint ventures for transfer of technology in China (para. 90), pointing to equity restrictions as one reason for such licensing arrangements.   Because of the high volume of multinational and governments in tech transfer, the OECD reports also underscores the importance of transparency in the tech transfer process to “distinguish[] voluntary  technology transfer from its more constraining variants.” [para. 92].  Predictably, the report also cites to the same provisions cited by the United States and Europe in the pending WTO case against China regarding its FTT polices [para 65].

A timely and business-oriented to FTT was presented by the IP consulting firm Rouse in a highly useful webinar of February 27, 2019, available here.  The speakers, Tim Smith and Chris Bailey, noted that due to the current trade dispute with the US, Chinese prospective JV and business partners are currently “falling over themselves” not to require tech transfer as a condition to a deal.   The speakers also noted that there had been a resurgence of joint ventures in tech-driven deals with China.  In addition, smaller companies have found that it has become more expensive to develop market share in China making a JV more attractive.  Even if a JV is not mandatory, the access to local capital and expertise can be a rationale for forming a JV.  The additional capital may also lead to higher valuations if an IPO exit is contemplated for the joint enterprise.

The speakers noted that Chinese companies are also increasingly more concerned about less traditional factors of a tech transfer such as whether they can scale up quickly using the technology, how they will handle IP infringements in China, and whether the technology can offer an immediate competitive advantage.

Amongst the newly emerging business structures, the speakers also noted that there have also been  an increasing number of offshore joint ventures formed outside of China that then reinvest China.  The Chinese party may also try to take a stake in a foreign party, and then license the technology into China. The Chinese party thereby may become a financial or strategic investor in the foreign partner.  Contrary to the common understanding, the Rouse speakers also underscored that state-owned enterprises are not as “untouchable” in IP or licensing disputes with foreign partners as private companies.  In some cases they may be better targets for litigation, as they may be more concerned about reputational risks from IP law suits than privately-owned companies.

The presenters also noted that there are deals where China is licensing out have become more common, particularly in new technologies such as AI, VR/AR, electric vehicles and battery technologies.  Western businesses are increasingly looking to Chinese businesses for these innovations.

As is evident from the above, the presenters’ viewed the current WTO dispute around the TIER and other concerns over FTT to be “yesterday’s issue” for practitioners and business people.  They also point to the data from recent surveys showing that a minority of US and European Companies have been asked to transfer technologies by their business partners, often as a condition of obtaining market access. However, they also note that companies have long utilized work arounds to the TIER, which has been on the books since 2002.

The Rouse webinar is particularly instructive in documenting the sophistication of Chinese licensees and future licensors.  Of course, the subsistence of a discriminatory provision as “yesterday’s issue” is also not justification for its continued existence.  If anything, it underscores how much of an unncessary, if not counterproductive,  impediment China’s Administration of Technology Import/Export Regulations (TIER) has become.  From a WTO perspective, even if the TIER is often irrelevant to current transactions, the key issue  in WTO jurisprudence is likely to be whether “expectations of the competitive relationship” offer less favorable treatment to a foreign licensor than a domestic Chinese licensor.   Further, the presence of “additional regulatory hurdles”, such as the necessity of using a domestic subsidiary or an offshore joint venture to sub-license a technology due to discriminatory provisions that exist for a foreign licensor,  does not afford a useful justification for a discriminatory provision.  Indeed such additional regulatory hurdles may constitute de jure discriminatory treatment, as was documented in the case the United States brought against the EU regarding its regime for Geographical Indications (See Para. 7.314, WTO Panel Report)  Due to the increasingly sophisticated experience of Chinese companies, including their willingness to contribute capital or participate in complex multinational licensing structures, the webinar ultimately proved to me that the TIER itself has also largely outlived its usefulness in protecting “vulnerable” Chinese licensees.

An important legislative development that also deals with FTT is China’s revised Foreign Investment Law.  The European Union Chamber of Commerce has released its comments on the draft law here. The comments were due February 24, 2019.  This draft law addresses some foreign concerns about FTT involving foreign investments in China.  The EU’s comments on the FTT provision are as follows:

“Article 22 explicitly prohibits administrative organs and their staff from using administrative means to force the transfer of technology, which echoes the language used in other high-profile policies that have been released in recent years, most notably State Council Document No. 19 (2018). However, this leaves open the possibility for any non-administrative body to use any other means to compel technology transfers. Instead, the Foreign Investment Law should simply prohibit forced technology transfer by any means.”

I personally believe that the language of the draft law, by itself, is insufficient. Other observers, such as Rouse in its webinar, have noted that other incentives to FTT remain, including restrictions arising from national security, foreign investment restrictions, Made in China 2025 incentives, data localization requirements, etc.  Moreover, the draft law does not present a clear pathway to present legal challenges to local authorities, and to minimize any possible retribution when a foreign company complains about extortionary practice.  Prior history shows that foreigners are also highly reluctant to bring law suits against the same local governments that may be involved in regulating their investments. One partial solution is for China’s new national appellate IP court to consider taking jurisdiction over these FTT disputes. The Chinese government might also consider other measures such as creating an ombudsman for foreign investors, fast track administrative reconsideration of investment reviews, improvements to trade secret protection and employee mobility rules, and other measures that constrain the ability of local governments or individuals to directly or indirectly encourage a foreign investor to relinquish its technology, whether through legal or illegal means.  As another example, if the Chinese government seriously wants to address the problem of FTT, the theft of trade secrets that is undertaken in “support” of national or local government technology policies might be subject to enhanced penalties.  Moreover, such cases should be adjudicated by courts other than ones located in the jurisdiction where the misappropriation occurred.

Update from February 28, 2019: A second draft of the Foreign Investment Law has been released and made available in English by the NPC observer.  It is available here.

 

 

 

 

 

 

How to Measure the Steps to a Binding Truce…

“The real question is so we do a memorandum of understanding, …. How long will that take to put into a final binding contract” (President Trump)

“From now on … we are going to use the term ‘trade agreement’” (Amb. Robert Lighthizer)

 

This week President Trump and Amb. Lighthizer debated whether the administration will be concluding an “Memorandum of Understanding” or a “Trade Agreement” with China to resolve the current trade dispute, as detailed in Bloomberg.   However, both countries cannot enter into treaties or agreements ratified by their legislatures in the short time available to them.  The more meaningful question is not whether an “agreement” is binding, but whether the underlying commitments require actions that are binding.

US-China trade agreements have often had the staying power of the dew on a summer’s rose.  One reason was that the underlying commitments did not require clear, binding legal action.  A good example of such a non-binding commitment was the 2010 JCCT agreement on government procurement of indigenously innovated products:

China and the United States will not adopt or maintain measures that make the location of the development or ownership of intellectual property a direct or indirect condition for eligibility for government procurement preferences for products and services. China and the United States will continue to discuss whether this principle applies to other government measures.

What was the “measure” that China was not supposed to adopt or maintain?  To someone unaware of its background,  it appears that the United States had a similar problem as China.  Furthermore, a US reader may think that we asked China to enact a “law” to address discriminatory government procurement.   Oxford defines “measure” as a “legislative bill.”  By contrast, Chinese legal scholars know the term “measure” as vague and not binding.  As an example: the word “measure” appears 32 times in China’s accession documents to the WTO in a descending hierarchical order as “law regulations and/or [other] measures. ” As an ambiguous term, it could mean either a  type of law or regulation (both of which or binding) or a non-binding administrative rule.

The 2010 commitment predictably  led to problems in implementation by localities who did not believe they were bound by this negative commitment.  As my colleague Stanley Lubman noted in a Wall Street Journal blog in July 2011:

[W]hile government policy on procurement has receded from the original position and “indigenous innovation” has been “delinked” from government procurement requirements, implementation of this shift is problematic because acceptance and commitment by sub-central (provincial and municipal) governments are needed to make it meaningful.

The 2016 JCCT Commitment on innovation of indigenous innovated products attempted to clean up the vague language from the 2010 JCCT by acknowledging issuance of a State Council document was required:

The General Affairs Office of the State Council issued a document recently, requiring all local regions and all agencies to further clean up related measures involving linking the indigenous innovation policy to the provision of government procurement preferences, so as to practically implement the commitment made by the Chinese side.  The U.S. side welcomes this development.

This commitment, in its legal terms, is a vast improvement over the 2010 JCCT commitment. It clarified that the obligation was not a bilateral one.  It also required the State Council, an authoritative agency with the power to bind inferior agencies, to issue a “document” (presumably a regulation in the heirarchy noted above).  Finally, it required local governments to “clean up” conflicting “measures” with an identified offending policy.  Using a high level document to address inferior legislative acts also made the commitment more easily verifiable.

This problem of binding commitments and conflicts with local policy is nearly identical to current issues of “forced technology transfer” where local governments may sense that there is currently no national law that doesn’t prohibit them from demanding that foreign technology owners relinquish their rights.  China’s proposed adoption of a Foreign Investment Law that prohibits forced technology transfer would be one positive step in the direction of addressing that issue.  However that law and its enforcers should specifically address contrary policies and incentives that exist throughout the country.  To further ensure enforcement, at a minimum the new national appellate IP court should have original jurisdiction over challenges brought by foreign businesses against these local practices.   The court could provide  transparent, verifiable, professional and fast resolution by accountable authorities independent of direct local influence.

A 2016 GAO report on clean energy cooperation with China provides another example of a meaningless trade commitment.  That reported stated:

The U.S. Patent and Trademark Office has identified a potential discrepancy between Chinese law and the bilateral U.S.-China Science and Technology Agreement upon which the IP Annex to the CERC [Clean Energy Research Center] Protocol is based, according to U.S. Patent and Trademark Office officials. These officials stated that the potential discrepancy is related to ownership of any improvements made to IP licensed between U.S. and Chinese entities.

This language underscores the problem that a bilateral MOU or “agreement” may have no legal significance when there is a contrary State Council regulation, namely China’s Administration of Technology Import-Export Regulations (TIER).  The TIER mandates that the Chinese side own any improvements to technology licensed in bilateral science cooperation projects, and is therefore at odds with the inferior negotiated agreement.  This text leaves the dispute open to future diplomacy, which is not a realistic approach for private business disputes.

There are numerous other examples of poor drafting or drafting of IPR commitments that at best would accomplish only short term goals.  USG and Chinese negotiators in their haste to resolve a difficult set of issues should not lose sight that the underlying commitments of any agreement that meaningfully address US concerns must be phrased in terms of legally binding actions.  These legally binding actions must also be durable, and should not be be countermanded by local measures. They should also be easily susceptible to USG verification.

Upcoming Program on Fashion and IP Law

I will be speaking on February 20, 2019 at Berkeley Law at 12:50 in a Fashion and IP discussion and screening with my former Fordham colleague Prof. Susan Scafidi. We will be screening the recent film Fashion and IP.

The program is free and open to the public.

Fashion and IP Poster - Feb. 20th (1)

 

Here’s a report from last year  of the Council of Fashion Designers of America on the problem of bad faith registrations of trademarks in China which discusses the pervasiveness of the problem, including the costs imposed on small and medium enterprise members, as well as the impact of serial squatters.

This report further underscores the importance of addressing tolerance of bad faith activities in China’s IP regime in current bilateral trade discussions as well as the need to recognize the significant improvements that are being made that have begun to address them.  Amongst the many significant cases addressing bad faith registrations in the clothing sector was the Michael Jordan case in 2016, which was based in part on naming rights and was reported here.  Another significant case from last year involving protection of trademarks and design elements that has significance for the fashion industry was Bayer v. Li Qing, which involved pirating of a Bayer design for its Coppertone lotions for pirate registrations, and Bayer’s assertions of a copyright interest in those designs to defeat the pirate’s assertions of trademark infringement in a declaratory judgment action involving the anti-unfair competition law, trademark and copyright laws.  The case was also notable as the court did not suspend its decisions pending the outcome of trademark invalidity decisions.

Upcoming Berkeley Law Privacy Conference

China is developing a robust commercial privacy and cybersecurity framework. A cybersecurity law took effect in 2017, multiple agencies are issuing guidelines, and a new e-commerce law with privacy and cybersecurity provisions just entered into force on January 1, 2019.  Further privacy legislation is being drafted, as China may be looking to develop a companion to the comprehensive privacy law of Europe. (Meanwhile, the US has no comprehensive privacy or cybersecurity law; Congress will debate the issue this year, but the outcome is quite uncertain.)

This raises a number of provocative question: In terms of the relationship between consumers and corporations, is China becoming more privacy-protective than the US? How should we understand the overall privacy and cybersecurity trends in China? How well does China’s overall legal environment support the implementation of the new and proposed laws?

To try to answer some of these questions, the Berkeley Center for Law & Technology is organizing a one-day conference in San Francisco on March 1.  The agenda is here; registration is here.

Much of the focus will be comparative, with an emphasis on interoperability and cross-border compliance: Given the rapid developments in privacy and cybersecurity law in China and Europe, how can innovative companies that want to offer their goods and services worldwide comply? Topics will include the definition of reasonable cybersecurity standards under the laws of China, the EU and the US; corporate data governance strategies in the face of overlapping requirements; and enforcement.

The event is co-sponsored by Peking University, The EastWest Institute, The United States Information Technology Office (USITO), The Asia Society, JD.com, and New America.