The SPP’s Increasing Role In Protecting IP

On February 8, 2021, China’s Supreme People’s Procuratorate (SPP) held a press conference, where it was revealed that from 2016 to 2020, procuratorial organs across the country approved the arrest of over 16,300 cases of 28,000 people and prosecuted more than 23,000 cases of more than 45,000 people. This is a much higher volume of criminal prosecutions than USDOJ, which charged 68 cases in FY 2019 according to a report of the White House IP Enforcement Coordinator. 

Another function of the procuracy is to supervise civil and administrative cases. From 2016 to 2020, procuratorial organs across the country accepted a total of 495 civil supervision cases and 205 administrative supervision cases.

Song Jianli 宋建立, Deputy Director of Procuratorial Office of Intellectual Property (POIP) of the SPP, addressed trade secret related criminal issues.  He noted that in recent years most of the targets of crimes involving misappropriation of commercial secrets have been the core technology secrets of enterprises, including the employees or former employees of foreign-invested enterprises, which are high-risk groups for crimes. The procuratorial organs plan to strengthen the protection of trade secrets in key technical fields, focusing on cracking down on trade secret misappropriation crimes involving high-tech technologies and key technologies along with enforcement of other IP rights.  Mr. Song was formerly a judge in the Supreme People’s Court’s (SPC) No. 4 Civil Division  and on the China International Commercial Court, specializing in cross-border civil and commercial cases. He was appointed to his current position last year. He will bring China’s rich civil IP experience, particularly that at the SPC plus his own international experience to bear on civil, administrative, and criminal IP matters.

The POIP of SPP was established on November 6, 2020 as an internal comprehensive case handling organization to integrate the criminal, civil, and administrative procuratorial functions of intellectual property.  Currently, Beijing, Tianjin, Shanghai, Chongqing, Jiangsu, Zhejiang, Fujian and Sichuan Procuratorate have all set up POIPs to carry out a one-year pilot project for the centralized and unified exercise of IP procuratorial functions. At the same time, procuratorial organs in other non-pilot areas were also encouraged to promote IP procuratorial work according to local situations. In the next step, this institutional setting will be gradually promoted as more mature experience is accumulated. The establishment of the POIP is in some respects analogous to the Computer Crime and Intellectual Property Section at USDOJ or their counterpart Computer Hacking and Intellectual Property units in local US Attorney offices.  

Standards for transfer of cases between administrative agencies and law enforcement were agreed between the SPC and SPP in a September, 2020 judicial interpretation. The Quality Brands Protection Committee and its former Chairman, Jack Chang have been urging various reforms for some time including greater involvement of rights holders as victims in criminal procedures and greater integration of criminal prosecution authorities with the administrative enforcement mechanisms for more seamless transfer of cases which meet relevant criminal thresholds.  Section 1.26 of the Phase 1 Trade Agreement between the United States and China similarly provided that “China shall require the administrative authorities to transfer a case for criminal enforcement, if, under an objective standard, there is ‘reasonable suspicion’ based on articulable facts that a criminal violation of an intellectual property right has occurred.” These were also proposals I first raised over 15 years ago, often in programs with my embassy colleague and classmate,  Ira Belkin.  I urged the creation of specialized IP prosecutors and greater involvement of businesses “because IP is primarily a private right.” These recent reforms demonstrate how the Phase 1 Trade Agreement often built upon years of advocacy and engagement in IP and has also helped China prioritize a range of IP reforms.   

 In the press conference, SPP also released the 26th batch of guiding cases to guide the handling of intellectual property crimes. This batch has 5 IP cases including counterfeit trademark, trade secret and copyright law. Two of the cases involved foreign victims including Starbucks, HP and Cisco.  Aaron Wininger has described these cases in his recent posting on procuratorial developments.

Still Time to Register…

I will be talking today, February 25, 2021 on the “Weaponization of Intellectual Property Against China” at a lecture hosted by the University of California at San Diego, with Prof. Barry Naughton as moderator. The lecture begins at 1:00 PM Pacific Time and should last about an hour. There is no charge.

I hope that readers of this blog will bring their own incisive comments and questions about the role intellectual property has played in bilateral relations, especially the concept of “IP Theft.” I am a non-resident fellow at UCSD, and I decided to choose this topic because of the need to deepen the public discussion around the role IP should play in US-China technology, security, and trade issues.

Here is the link to register. I hope to see you there!

Patent Litigation, IP Monetization and Technology Decoupling: Lessons for the Future

The empirical data discussion from the recent 3rd Annual Berkeley-Tsinghua program on transnational IP litigation streams suggests that an increasingly international IP litigation environment is emerging  for Chinese companies outside of China and for foreigners in China.  Chinese and US companies are litigating and licensing IP rights in ways that implicate increasingly diverse jurisdictions and markets.  This increasing diversity may have important implications for how companies and countries engage with China, including the extent to which a technology decoupling can occur between China and the world.  A recording of the Berkeley-Tsinghua discussion is available here.

At the Berkeley-Tsinghua event, Mr. Xiang Pu, CEO of IPHouse discussed patent litigation trends in China and Beijing.  He noted that foreign-related litigation patent litigation dropped in China in 2020. Foreign-related civil cases had increased to a peak of 728 in 2019, with administrative cases (validity and infringement) stable at 272.  Administrative cases remained at 272 in 2019, while civil cases had dropped to 349.  Invention patents were the most litigated right, following by utility models, with a small share of the litigation docket held by designs.  This order of most litigated patent rights has not changed over the prior six years.

The national drop in reported cases in 2020 may not be due to delayed reporting of cases.  In Beijing there was a drop in IP cases to 66,000 in 2020 from a high in 2019 of 80,000.  The Beijing data may also suggest other data trends that have developed or are developing nationwide.  For example, compensation is up across all rights, especially in trademarks.  The typical time to completion of a technology-related case is 9 months. For American cases, the time is approximately 12 months.

Among foreigners, American companies were the most litigious, with about 27% of the cases, followed by Japan, South Korea, and Germany.  These four countries together constituted about 75% of the foreign docket.  American cases have also increased, from about 20% to 31% of the docket from 2017 to 2020.  Still, the overall cohort of foreign related cases compared to China’s exploding domestic docket  remains small.

Other useful data about US companies engaged in patent litigation in China: American cases had a higher level of retrial or appeal than domestic cases, at about 31% versus a national average of 20%.  Fifty percent of the cases American companies brought are against Chinese companies, while 50 percent are against other companies, underscoring the increasing importance of China as an international litigation venue.  The cases averaged 12 months in length, and the patent damages were awarded at about 51.9 % of the requested amount.  The most litigated patent rights were not in the ICT sector (about 6 percent), but in consumer goods such as water bottles, sanitary and dental related goods.  This is a contrast to the patent rights being litigated involving foreign parties overseas, which primarily involve ICT products, as discussed in Melissa Schneider’s presentation from Clarivate on IP litigation involving Chinese companies outside of China.    

According to Ms. Schneider, patent and trademark cases involving Chinese companies are being filed in a diverse set of countries, with the United States the dominant national jurisdiction outside of China. Chinese companies were plaintiffs in these cases only 8% of the time.  When Chinese companies are plaintiffs in patent cases, the dominant venues are the United States, Taiwan, Germany, and Korea.  There is a wider variety of countries in trademark cases, including the United States, Hong Kong, India, France, and Russia

The most active plaintiffs in patent cases outside of China are Huawei and ZTE. The numbers of patent infringement cases in the US involving Chinese parties peaked in 2018, although it has risen again since then.  The primary litigants are Huawei, ZTE, Lenovo and TCL.  Patent infringement subject matter was almost exclusively telecom related. The  primary venues in the United States were the Eastern District of Texas, Delaware, and the Central District of California.

Huawei and ZTE have also become among the top 5 companies involved in SEP litigation worldwide, in most cases as a defendant.  Huawei and ZTE are plaintiffs  in 47% and 24% of their cases, respectively.  Currently about one in three SEP cases worldwide involves a Chinese party.  Chinese companies are asserting SEPs in the Beijing, Guangdong, the US  and Europe (Germany, the United Kingdom, the Netherlands).  Cases greatly increased in 2020 and will likely continue to increase in 2021.  Note: for a separate discussion on SEP-related litigation involving China, you might consider listening to the recent podcast prepared by the Hudson Institute.

John Wiora, the COO of KtMINE, presented an overview of patent-related transactions involving China.   The 2010-2020 data showed a steady increase in US patents being assigned to China-based entities.  There was, however, a big drop in 2020 which may be due to a delay in reporting.  While many of the owners of the patents were based in the United States, the owners came from 70 unique countries.   Canada and the UK were also important owners of these assets.  Much of the movement was from a US-based affiliate of a Chinese company to a Chinese parent, with telecom and related areas the primary technology areas.  ZTE, Baidu, Huawei and Tencent were the leading assignors.  In general, the data show a healthy amount of patent transfer despite – or perhaps because of — the trade war.  Technology areas were also diverse and also included computer hardware and software, as well as the biotech sector.  

Compared to the prior fifteen-year period (1994-2009), there has also been a change in royalty rate calculations.  During the earlier period, royalties were calculated on a net-sales basis for the territory of China.  From 2014-2018 fewer transactions were made on a running royalty but appear to now be lump sum or transaction based.

In Wiora’s view the increase in cases and increases in transactions that are both occurring at the same time may reflect an increasingly healthy judicial environment in China.  In my view, the increases may also be due to increased trade pressure as Chinese companies reduced their R&D in the United States and/or seek to onshore their patent portfolios.  Many of the companies that were involved in relocating patent assets were also the subject of export control sanctions or other embargoes and penalties.

Matthew Chevernak of General Biologic presented on the impact of IP handling and China’s market access reforms, shedding a spotlight on the practical impact of China’s IP reforms in pharmaceutical market access and exclusivity.  In addition to long-standing problems with pharma patents being invalidated or not granted, volume-based procurement results in significant price reductions of products.   Both multinationals and domestic companies face an uncertain future due to China’s market size and the prospect of exclusivity that might come through intellectual property.  On the positive side, both biologic and novel drug approvals have increased in the past several years, and approval times have decreased.  However, once a product is on the national reimbursement drug list, there is a 58% average price cut with volume based procurement eroding the market value of the product. While the Phase 1 Trade Agreement brought notable reforms to the protection of pharmaceutical IP, Mr. Chervenak noted that  it is less clear whether the patent leads to exclusivity in the market.  Exclusivity may “still mean nothing without pricing freedom and opportunity to reach patients.”

In sum, the above data shows that even during a time of trade conflict, there was considerable litigation and patent licensing activity, with an increasingly pronounced role in global markets for Chinese companies and in China for US companies.  Patent disputes and licensing involved a diverse group of technologies as well.  Chinese companies have become more active in SEP litigation overseas.  The United States is an important venue for litigating overseas patent disputes with Chinese entities.  Both the patent licensing and pharma data show the importance of tracking market value and trends to determine the real-world impact of IP-related policies.

The data-driven presentations may be compared with the recently released US Chamber report “Understanding US-China Decoupling: Macro Trends and Industry Impacts.” The Chamber report does not incorporate IP or technology litigation or tech transfer/patent licensing data, although it does rely heavily on trade in technology-intensive goods and services.  Its three top conclusions are consistent with the approaches of these reports: (a) data analysis is critical to policy making; (b) the costs of anything approaching a “full” decoupling are uncomfortably high; and (c) a comprehensive US-China policy program should include polices promoting industry, innovation and technology as well as preserving the rules-based open market order and its institutions.  As with the Berkeley data presentations, the Chamber report also demonstrates the degree to which the Chinese economy is intertwined with the United States and the world, thereby potentially underscoring the value of engagement with allies on China IP issues.