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

 

Still Time to Register: Practical Issues in CFIUS and Export Controls

The dramatic expansion of the scope of the CFIUS process and its complex interaction with changing export control regimes pose complex challenges to companies in the United States and throughout the world. This seminar will present practical insights on how to navigate these regimes.  If your company or clients are involved in technology collaboration overseas or in attracting foreign investment and talent to research in the United States, you may find this program invaluable.

​​Date: April 10, 2019

Location: Krutch Theatre, Clark Kerr Campus Conference Center, 2601 Warring St, Berkeley, CA 94720

This is the Google Maps link.

Time: 3:00 – 5:30

Cost: No Charge

Preregistration link.

Agenda

3:00 – 3:30 Registration

3:30 – 4:15 Latest Developments in US export controls, CFIUS, FIRRMA and agency implementation of the new regime, and best practices

Moderator: Mark Cohen, UC Berkeley

Discussants: Jeanette Chu (Pricewaterhouse Coopers), Lawrence Ward (Dorsey & Whitney).

4:30 – 5:15 Perspectives from “under the hood” (former officials involved in the CFIUS process and users of the export controls/CFIUS/ system)

Moderator: Mark Cohen

Discussants: Jim Mendenhall (Sidley & Austin) Justin Huff (Jones Day),   Ben Kostrzewa (Hogan Lovells), Greg Slater (Intel), Brian Warshawsky (U of California, Office of the President), Piin-fen Kok (Pacific Pension Institute/impact on portfolio investment),   Yvonne Cheng Yuanyuan (King & Wood Mallesons/Chinese investment perspectives),  Gabrielle Liu (Beijing IP Paragon Law Firm).

5:15 – 5:30 Q&A

5:30  Reception

 

RIP VAN WINKLE RETURNS FOR THE TRADE WAR

A Modern Illustrated Political Fable By an Anonymous Folklorist

ripvanwinkle

Rip Van Winkle VIII, Esq, the great US government intellectual property and trade lawyer and descendant of the Hudson Valley Van Winkles,  fell asleep on December 12, 2001, the day after China joined the WTO.  He woke up earlier this year to find a changed country, engaged in a trade war that undercut all his prior hard work.   He was disappointed at how the US had handled the legacy of China engagement that marked the period before WTO accession.  He had a Yogi Berra-like moment of “Deja-vu all over again “, and felt he had to reach out to the American people to tell his story.  These are my interviews with him.

I asked Rip about the 301 report on Chinese forced technology transfer. “You mean, the report that launched the trade war”, he remarked with a wry smile.  He said that he was surprised by the tactics that the President pursued.   The US “pressured China without imposing tariff sanctions in the 1990s and with considerable success.  For example, China agreed to have a trade secret law back in 1995 or so.  No administration in the 1990s had to pull the tariff trigger on China, although we had a clearer legal basis in international law to do so since China was not yet a WTO member.  We also had the statutory authority to revoke MFN on human rights issues but didn’t do that either.  Now our imposing these sanctions risk dismantling the global trading system.  I understand the frustration about China’s WTO compliance, but I don’t understand why we haven’t more aggressively pursued WTO remedies.”

wto

I asked Rip, “Was it because the issue back in your day was one of China’s compliance with the laws, rather than enforcing than the laws as written? After all, it is hard to bring a case on how adequately a country is enforcing its laws.  There are lots of flexibilities built into the TRIPS Agreement.”

Rip pensively pulled on his long Van Winkle beard and noted ”Back then the efforts were not simply legislative.  China’s enforcement of IP was weak too, and some progress was made: for example, there was a special Customs regime on exports, which is TRIPS+, which survives to this day.  Specialized IP tribunals were also something that he had worked on ‘back in the day.’  There were also a number of special campaigns, task forces, and other efforts.   In fact, people had even been complaining that some of the enforcement had gotten too tough when China launched a ‘strike-hard’ campaign against some of this activity.”

“But, “ I added “today we have high tech issues in addition to counterfeiting and piracy issues.  We have AI, and IOT, and 5G, and genetic engineering, online businesses, plus all the counterfeiting and fake goods.  These are new issues!”

“All true,” said Rip, “and you have other new things that are also fake,” Rip smiled, “fake news and–,” he added sarcastically, “this President.”  Rip appeared puzzled that a reality TV show actor could also become President.

“But I am not surprised by all the fake goods originating from China that are sold throughout the world,”  he continued.  “After all, that was the problem with regional trade in the 1990s.  It was to be anticipated – that was the reason we asked China to control infringing exports in the ’90s. “

“As for technology, we had those challenges as well.  There was the ‘great subsidy’ compilation CD exported from China that infringed on multiple business software copyright owners,”  Rip mused. “That was a high-tech problem.  We found solutions working in Taiwan and China.  And what about the submarine they discovered in Hong Kong to haul counterfeit DVD’s? That was also a high-tech problem.”

Rip pulled out a beaten photo of a diagram of the submarine that was captured by Customs authorities in Macau:

macaucustoms

Photo by Mark Cohen from an original diagram at Macau Customs.

“I don’t get it though” Rip snorted. “Why did the US file a WTO case in 2007 against China’s export of counterfeit goods, DS362?  We all knew that this was not a WTO issue, but one that depended on external pressure on China.  China was only obligated to have Customs remedies on imports. Yet we haven’t yet filed a case against how ineffective China’s IP remedies are, which is a specific WTO requirement?  I expected more, from China’s carefully crafted WTO accession package and from the US and the WTO itself.  We worked so hard on that package.”

“As best we could, we foresaw many of these problems in the 1990s and created the roadmap for legal strategies.  Sure, it wasn’t perfect.  It was a crystal ball exercise.  But look at China’s WTO commitments.  China’s obligations had no grace period.  There was a special safeguard measure.  China was subject to a range of extra commitments as a non-market economy under our dumping law.  China was also subject to extensive new transparency obligations.  Moreover, China’s trade regime was subject to a 15-year annual review.  Its IP regime should now be the subject of WTO cases.”

Rip shook his head: “Only a few weeks after WTO accession in 2001, China implemented a discriminatory technology licensing regime called the Technology Import/Export Regulations, which discriminated against foreigners.   Why did we wait until March 23, 2018 for the US to file a  case against this regulation?  Who else was asleep when I went to sleep? Did someone put sleeping pills in the water?”

It is true, as the press reported, that when Donald Trump met Rip Van Winkle, they both agreed that nothing had changed on China IP.  However, the media once again generated some fake news around that meeting.   Rip disagreed that Trump’s strategy made sense, or that the US should indeed feel like it had exhausted its patience.  After the meeting, Trump tweeted that “Rip Van Winkle is a BAD man”.

djt

That was indeed their only meeting.  Trump referred Rip’s personnel dossier to OPM for further investigation to see if he had been collecting salary during the past 18 years when he should have been on leave without pay or whether he was simply AWOL.

After the incident with Trump, Rip went to Beijing.  He noticed that things had changed.  The street vendors of DVD’s, counterfeit Beanie Babies, and all another manner of fake goods were largely gone.  When he talked to average Beijingers, they seemed to know a great deal about patents, trademarks, and copyrights – perhaps more than the average American.  He was shocked to see that the patent and trademark offices had grown to the largest in the world.  He was pleased to see that China had a system of multiple intellectual property courts, with specialized judges.  He met many American-trained lawyers working in Chinese law firms, in companies, and in government.  This looked very much like the kind of system that the US might have imagined for China back when he was negotiating.

However, there were other ominous changes for the US.  The Chinese patent office was now several times the size of the US patent office, as was the Chinese trademark office.  Moreover, domestic filers dominated in both those offices, as they did in bringing suits to the courts.  In areas such as information technologies, where the US was once the dominant manufacturer and developer, the leading role had been ceded to China.  China now produced 25 to 30% of the world high tech products, supplanting both the US and the EU.   During a southern excursion on this trip, he saw that Shenzhen had grown to a high-tech mecca, well beyond even his dreams.

shenzhen

Rip was amazed to see that the Chinese IP system by some measures at out-paced the US.  The Chinese courts now handled about 280,000 IP cases in 2018, up 40% from 2017, while US domestic patent cases were declining.  Chinese courts handled over 100 times more copyright cases than US courts.  It was also an IP system that didn’t merely serve big state-owned companies.  The percentage of individual filers of patents as well as patent litigants in the Chinese courts were higher than in the US.  Moreover, in areas like software, business method patents and genetic patents, where the US had a lead “back in the day,” the Supreme Court of the US had made it harder to obtain patent rights.  China, however, was making it easier.  And this eBay case decided by the US Supreme Court in 2006 – why did the US decide to make it harder to get an injunction for an IP dispute, thereby weakening the system even further?”

Rip wondered, was there some kind of reverse alchemy at work – were we turning our IP system of “gold” into one of “lead”, and China was now getting the magic touch?alchemy

“It isn’t quite that simple” tweeted Mr. Trump when he heard of Rip’s reporting on the matter.  “We are pursuing structural barriers!!!”

“Well, we had the Structural Impediments Initiative with Japan back when I was in the government– sounds pretty similar to me.” Rip reported, closing an op-ed he wrote by asking the President: “Have you been asleep too?”

Rip thought that it was not surprising that China would benefit from being a low-cost manufacturer and joining the WTO.  The expectation was that China would also continue to make necessary economic reforms, and the US would monitor these reforms.  After the Tiananmen incident, the Western world was also greatly concerned about China’s commitment to liberal political and economic values.  The current regime in China may be pushing back on the legacy of Deng Xiaoping, but that should have made a WTO case that much easier today, by showing that China had reneged on some of its fundamental WTO commitments to bring about economic reform and institute certain minimum rule of law and transparency obligations.  These kinds of cases would also elicit support from many in China and from our trading partners.”

“Why didn’t you learn your lessons?  Is that the reason you brought back Lighthizer to USTR?  I hadn’t seen Bob for decades.  Did he fall asleep for even longer than me, maybe thirty years?” Rip joked, half-heartedly.

”The Japanese tried to persuade us that the reason there was a trade deficit with Japan was because of our lack of knowledge of their system.  Japanese snow, they said, was different from US snow so we couldn’t sell our skis there.  We all know however that this was a sorry excuse for market barriers set up to protect their industries.“

Mtfuji

Japanese snow by Mount Fuji.  Does it look different?

“With China, we knew there were a host of other, more problematic non-market barriers including possible security issues with Taiwan.   When we worked on the TRIPS Agreement,” Rip recalled, “we made it pretty clear that this was an agreement for market economies.  There was a transition period in the TRIPS Agreement for-state controlled economies, and we had extensive provisions around civil remedies, which reflects the private law orientation of TRIPS.  When we went ahead in our own domestic laws to define what constitutes a non-market economy we didn’t even tackle the role of intellectual property, perhaps because we hadn’t thought through the problem of how a non-market economy could exploit IP in its own interests.  The problem we face today is due to an unanticipated turn by China, that it would ease up on economic reforms and not reject IP but instead incorporate IP its state planning mechanisms.”

“Look at the preamble to the TRIPS Agreement,” Rip fumed. “It says intellectual property is a ‘private right.’ As I recall, the Hong Kong delegation put that into the TRIPS Agreement – they anticipated what was going to happen just a few years later in the 90s when they would be reunited with the mainland.”

“We know that IP is a private right and we knew that Chinese state is interfering in markets. We knew China had technology goals, and that the state was not letting individuals maximize their interests in private property rights.  We knew that addressing these issues was core to the success of China’s WTO accession.  We put in a host of other provisions in the TRIPS Agreement – national treatment, most favored nation treatment, due process in IP cases and IP antitrust cases, right to an independent counsel and an independent lawyer, injunctions and preliminary injunctions, the right to a decision based on evidence  — yet, the only WTO case the United States brought against China on IP until 2018 occurred back in 2007 and it involved asking for greater control by China of those markets – for improvements in China’s criminal and Customs IP remedies, as well as its censorship regime.”

“It doesn’t stop there either.  Our antitrust authorities entered into training and other programs that have further enhanced the role of the state by working with China’s former State Planning Commission and others, so that they can further diminish the value of these rights – rights that our companies have a hard time trying to enforce – and that further strengthen the role of the state.  You can’t have IP abuse unless you have IP use….”

“So having lost this 2007 case,” Rip asked “the US government decided it wasn’t worth filing another WTO case for 10 years or so?  What were we asking for – the Chinese government to step in and do more to control property rights?” Rip snorted.   “I don’t like Mr. Trump, but then again I can’t blame him for lousy strategies of 10 years ago.”

“Maybe the US went astray because you bought into the rhetoric of the 1990s which saw intellectual property as a foreign concept to China, one that was inconsistent with Chinese Confucian culture and that was not susceptible to change due to US pressure alone.  These misunderstandings were promoted by academics and Chinese officials, often over the objections of Chinese scholars.  By almost any measure, their assumptions were flawed, and they could not have predicted China’s wholesale and disruptive embrace of intellectual property into its innovation ecosystem. “

“Of all those assumptions, the one that China would not protect IP until it has IP of its own to protect, is the ‘old wives tale’ that…”

I corrected him: “’Old spouse’s tale’–we don’t use this sexist terminology now, and even that is ageist.”

“This old assumption” Rip said looking hopelessly at the sky, “that China needs more IP of its own in order to protect US IP should have been discredited only a few years after I went to sleep – because it was around 2005 that the Chinese trademark office grew to be larger than the US trademark office, and that Chinese TM owners were the dominant applicants.  And that trend has spread to nearly every other sector or indicator – patents, plant varieties, copyright registrations, litigation…. “

“As for this indigenous innovation problem, or Made in China 2025, or Strategic and Emerging Industries, or Medium and Long Range Scientific Plan, or 1000 Talent Program, or High and New Technology Industries, or indigenous innovation, or techno-nationalism, or self-strengthening, or China ‘breaking the IP paradigm’,   or China’s Galapagos-style  for local technical standards – whatever you want to call it  — it is also shocking that you didn’t read the signals from the 1970s and 1980s. “

“It was the science and technology people that were negotiating IP issues with us back then – even through the 90’s – including most notably Vice Premier Wu Yi, a petroleum engineer.  Ma Xiuhong, who I understand later became Vice Minister, was an engineer with the People’s Liberation Army.  My IP negotiating counterpart was Duan Ruichun, from the State Science and Technology Commission.  We sent our lawyers, and they sent their engineers and Ph.D.’s!  Did any of you fellows every study Chinese history and look at how China safeguarded its own technology, like sericulture, from the Romans? Have you read Joseph Needham’s Science and Civilization in China….They knew early on the value of technology!”

“Forced Technology Transfer?!”, Rip added, “How about this language from the Office of Technology Assessment Report (OTA) report on Technology Transfer to China in 1988 that I worked on: ‘Although most U.S. firms approach the China market with the intent to sell products, many find they must include technology transfer if they wish to gain access to the China market.’”

“We were also aware when we wrote that report that China was modernizing with military goals in mind,” Rip noted: “‘Our report went on: ‘If China is to become a major power, it will be through developing its own capabilities throughout the economy. Thus, in the long term, technology transfer will have a great military effect if it spurs innovation, modernized thinking, research and development, and economic growth generally.’”

“This isn’t a state secret!” Rip showed me a picture he was given from the Ministry of Science and Technology website that says “indigenous innovation” next to a Chinese missile.

zizhuchuangxin

“To save the situation of the United States, you might want to look at ourselves.  OTA was closed after that report, as was the Technology Administration of Commerce, and the Office of Science and Technology Policy in the White House was also defunded from engaging in China.”

Rip pulled out his perfectly preserved copy of the OTA report from 1988:

ota

“By the way,” Rip asked “Are there any foreign commercial service officers posted overseas that have technology promotion as an export goal? Has the US census changed its antiquated reporting system where it reports technology transfer as exports of ‘industrial processes’– whatever that means…”   Rip was getting agitated. “I would have thought that the US would at least take steps inside our own government to improve  our knowledge and engagement on these issues.”

Rip scratched his beard, told me that he felt like Diogenes looking for a good man by the light of his lantern in ancient Greece.  Rather than looking for an honest man,  he had no idea where to find anybody who understood technology trade in a US government agency in DC.

diogenes.jpgPainting of Diogenes looking for an honest man

“There are WTO cases that could have been filed.  In addition to investigating whether China has an ‘adequate or effective’ IP regime under the TRIPS Agreement, and all the other general requirements of the TRIPS Agreement I talked about,  there might also be cases about the role of the state as infringer and misappropriator of trade secrets and the state’s role as a cyber-spy,  China’s watering down of IP rights through antitrust and denying due process to US lawyers, and there’s always the possibility of a ‘non-violation’ or ‘situation’ complaint.  I understand there is a moratorium in the TRIPS Council on these generalized ‘non-violation’ complaints, but it still might be worth pursuing them.  We could also look at other remedies, such as using the countervailing duty law that China is using subsidies to undercut what we reasonably expected by China’s accession to the Information Technology Agreement.  Hell, he said, “even our lawyers can’t function well in China because the market is so restricted and they are paying higher taxes on their China revenue than Chinese lawyers, even though they are often providing the same kind of advice on Chinese law or foreign law.  That seems to be a national treatment violation of the GATS to me….”

“Many of these cases would be fact-intensive and difficult,” I said.  “They might also invite retaliation…”

“Difficult? You think you have it bad?” Rip asked indignantly. “China has finally gotten around to publishing its cases, and its patent and trademark databases are pretty transparent.  Back in the day, you had to hire a Chinese lawyer to look at the few databases or books that were only available to them.  The trademark classification system was a secret.  Moreover, most judges didn’t have legal training so judgments might not be well-worded.   In fact, back then lawyers would sit around a table exchanging information about the little pieces of information they had about the “nei-bu” (internal)  laws that were governing their clients’ investments.  We had to bring a 301 case just to get China to publish its laws and regulations.  Now you not only have more information, but you also have Chinese lawyers trained in the US system and US lawyers that have graduated from Chinese law schools.  This is a lot better than the random shots we were taking without much information to improve China’s legal environment.”

“Moreover, now the government actually publishes draft laws and regulations for comment, as well as the laws and lots of the enforcement data.  In fact, the Chinese government has been promoting open government platforms, including publishing of cases.  Today you have more data and much more transparency.  Has anybody looked at the licensing data?  Has anybody looked at how the patent office and courts treat foreigners and whether full national treatment is available?  If you want to avoid retaliation against companies, just use the data….” Rip fumed, “we would have died for this kind of information back in the 1990s.  Youse guys don’t know from difficult. ”  Rip’s New York accent was manifesting itself.

“I also don’t understand why US companies don’t bring many cases to the Chinese courts! I understand about 1% of the IP litigation in China today involves foreigners. That is really pathetic. Companies have kept on running to the US government on the same issues but often didn’t pursue the legal remedies that we negotiated.  Not only do Chinese companies file far more cases, but they also bring cases against their own government if the facts support it.  One group of Chinese citizens actually sued the Supreme People’s Court on a land use matter some years ago.  I think those people had more to fear from retaliation than some American companies.    Some of us seem to be scared of our own shadow.”

“We have to acknowledge some of the recent positive changes too.   I like it that China has a new foreign investment law that says the government can’t compel tech transfer as a condition of investment approval, and they finally discarded their tech transfer regime.  I wish you good luck on supervising those, however, particularly if you don’t do the data-driven analytics.  I also like the new appellate IP court.  It is like our own CAFC, and they are increasing damages in the courts, and have increased transparency and are experimenting with case law. I don’t think the US should be pursuing punitive damages in China however, as much as compensatory actual damages.  We have to let the civil system fulfill its role as the primary arbiter of disputes around private property rights.  You guys in the government should be all over this.  In fact, you should be sharing your views with industry, including your comments on draft laws,  rather than treating your comments and engagements as some kind of secret negotiations.  These are important reforms that could have wider consequences.  And you don’t have to be in a trade war to talk about them with China or with our own industry.”

“But there have also been negative developments, and it seems like you have been ignoring both the good and the bad. Today, it is harder to get a pharmaceutical patent in China than back in 1995, when we finally got China to grant patents for new pharmaceutical compounds.”

“Moreover, back around 20 years ago, I saw that the likelihood that a US company would get a patent granted for a semiconductor patent in some classes was nearly 100%.  By 2014, the grant rate drops dramatically to between forty and sixty percent.” Rip looked around sheepishly on that one: “Are you certain I wasn’t the only one asleep?

“The reasons for these changes are pretty obvious.  China needed foreign investment or international recognition back then.  Motorola’s semiconductor plant was the big foreign investment project in the 1990s when I was getting ready to fall asleep.  We left you with a pretty good, improving track record then on pharma and semiconductor issues.  Now China believes it doesn’t need to offer the same protection.  We wrote the TRIPS agreement to promote private property rights and transparency.  We brought China into the WTO with multiple additional commitments, possibilities for review of China’s IP regime, and to ensure there was no discrimination against industrial sectors in patent grants, litigation, and other areas.  How are those projects going?”

I told Rip that I was unaware of any such projects.

“If you started looking at the data, you might have a different view of what is really going on and how to use the WTO.  For instance, I know many in the US were upset when China didn’t need to change its criminal IP laws in 2007 as a result of a split decision on a WTO case.  But in the next several years the number of criminal IP cases in China went up dramatically.  It seems the US ultimately identified a real problem to China.  You could also say the same thing about US efforts to get China to publish its IP cases in 2007.  Today China has public databases with most cases available online.  You don’t need to win the dispute in a written decision in order to make a difference. ”

”I know the data is incomplete.” He added.  “ I noticed, for example, that not all the cases were being published.  There is lots missing.  But the missing data is also instructive.  Back then, we had real China watchers.”

For a moment, Rip looked like the Wizard from the Wizard of Oz giving a heart to the Tin Man, knowing that he already had one: “These China watchers looked for what was missing in China in the reports, not what China told us about its system.  They learned their lessons from the old Soviet Union, that is, they learned to look at what is missing in a photograph of Red Square or an economic report.”

Tinman

“As for this Confucius Institute problem, I see that the Modern Language Association reports that Chinese language studies are dropping in this country (13% between 2013 and 2016).  Are we supposed to rely on China to teach us about China? I guess that doesn’t matter, since even that pathetic effort is under attack.”

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“By the way, I heard that these problems of Chinese misappropriation of US technology might even affect private and public US science and technology collaboration, where China was entitled to own all improvements to technology licensed to China.  I would hope that the US government and industry would share any information that they have on this so that we can learn from it, and we could have a data-driven discussion around it…!”

Rip was feeling exhausted.  “When I first woke up, I thought this had to be a Sputnik moment.  The US would need to get back on its feet, revitalize its competitiveness and invest in science and science diplomacy.  I was wrong.  This is more of a Pogo moment than a Sputnik one.  We are forgetting technology, misunderstanding China, eroding our IP system, and not utilizing the tools we put into place.”

POGO

“You see, the problem isn’t that China has become the new Japan, nor is the problem that China doesn’t protect IP,” Rip concluded. “The problem is that the US forgot the significance of two elements of IP in China: (a) the Chinese economy is state-controlled and includes economic plans involving IP, and  (b) IP is a private right.”

He sighed, “I recognize that there are other trade issues, but having a foreign state adopt socialist-style economic plans on innovation is a recipe for government intervention into the markets to the disadvantage of foreigners, and for frustrated trade negotiations on IP or innovation.  These should have been addressed consistently and head-on.”

As we closed the interview, Rip looked increasingly exhausted.  He took me on a slow stroll past Lafayette Square in Washington, DC and gave me one final suggestion.  “Why don’t you try and bring back some of the old team, like the folks who worked on the OTA project  – some of those folks are still around – gee, even that greenhorn Craig Allen is now the President of the US-China Business Council, isn’t he?  He was just an intern when we worked together at OTA.  My old friends who worked on that OTA report, the China lawyer Stan Lubman and the China innovation expert Pete Suttmeier, are still around.  They didn’t have the benefit of a twenty-year beauty nap like me, but then again, I would hope they hadn’t fallen asleep at the wheel like the rest of you.”

And with that, Rip looked wistfully at the White House, thinking of his little family hamlet in the Hudson Valley, and the historic sacrifices of his family for his country since the founding of the Republic.   He tucked himself into some worn bedding and closed his eyes to the traffic and tourists.  If you travel to Washington, DC you may still hear him snoring gently near the White House gates.

Don’t think of him as just another homeless person.  He is really waiting for the right moment for the country to wake up again.

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