What the 301 Report Says About Future Relations on IP with China

USTR released its Special 301 Report (the “Report”) on April 30, 2021.  The China except is attached here.

The Report addresses a wider range of IP issues than in many prior years.  On the positive side, it continues to  link IP and rule of law issues.  It also does not exclusively focus on Phase 1 Trade Agreement issues. It addresses civil, criminal and administrative enforcement matters and provides a very useful summary of IP-related developments.  On the negative side, it continues the approach of many many prior reports, including an excessive reliance on rightholder submissions without consideration of independent research; a failure to comprehensively consider Chinese and non-Chinese data sources; and inadequate attention to low foreign utilization of China’s IP enforcement regime.   

The Report hints at  future directions of trade-related IP polices involving in  China.  Regarding WTO matters, USTR admits that it “successfully pursued” a WTO case on Chinese licensing practices.  I believe that it is important for Americans to understand that the WTO has not been wholly ineffective in addressing Chinese technology transfer practices. The Report may also suggest a greater receptiveness to multilateral institutions such as the WTO in addressing Chinese IP policies.

The Report is inconclusive about the impact of recent Chinese legislative changes addressing forced technology transfer.  It  notes that USTR “is working with stakeholders to evaluate whether these [new] commitments have resulted in changes in China’s ongoing conduct at the national, provincial, and local levels.”  Stakeholders may be reluctant to admit that they have been pressured to license technology.  Due to difficulties in collecting data on this important topic, the Report might also benefit from including US census data on licensing payments, patent licensing data from USPTO, as well as industry and academic surveys on forced technology transfer.

The 301 Report mixes Phase 1 Trade Agreement concerns with issues not raised in the Phase 1 Trade Agreement as well as newly-arising concerns.   For example, USTR highlights “obstacles to obtaining preliminary injunctive relief”.  However,  PI’s were only discussed in the Phase 1 Trade Agreement in the context of  trade secrets and patent linkage.   USTR similarly notes that “worrying developments such as broad anti-suit injunctions issued by Chinese courts have emerged.” Anti-suit injunctions were not raised in the Phase 1 Trade Agreement.  In fact, anti-suit injunctions are a new concern:

Right holders have also expressed strong concerns about the emerging practice in Chinese courts of issuing anti-suit injunctions in standards essential patents (SEP) disputes, reportedly without notice or opportunity to participate in the injunction proceedings for all parties. Since the first issuance of such an anti-suit injunction in August 2020, Chinese courts have swiftly issued additional anti-suit injunctions in other SEP cases. Several of these anti-suit injunctions are not limited to enjoining enforcement of an order from a specific foreign proceeding but broadly prohibit right holders from asserting their patents anywhere else in the world. These anti-suit injunctions have imposed penalties for violation as high as 1 million RMB (approximately $155,000 USD) per day. Recent high-level statements have raised concerns about whether the proliferation of such anti-suit injunctions has been purposeful, including statements from President Xi about promoting the extraterritorial application of China’s IP law and from China’s IP appellate court about how issuance of China’s first SEP-related anti-suit injunction accelerated global settlement in a SEP dispute and was an example of the court “serving” the “overall work” of the Chinese Communist Party and the Chinese state.”

The Report criticizes China’s lack of full transparency around judicial decisions, which are “selected” and generally fail to publish preliminary injunctions.   I am glad to see that “rule of law” / transparency/ civil law concerns have appeared in the Report.  The phrases “rule of law” and  judicial “independence” each appear twice.   Other concepts discussed are transparency, and excessive/non-transparent use of administrative enforcement, which each appear seven times.  The Report also continues to push back on use of the Social Credit System in IP, perhaps out of rule of law concerns (“The United States objects to any attempt to expand the “social credit system” in the field of IP.”). 

The Report references a joint inter-ministry notice with the courts on destruction of infringing goods that was issued in 2020 (the “Opinion on the Work of ­­­Strengthening Destruction of Infringing Commercial Goods” (关于加强侵权假冒商品销毁工作的意见).  As USTR only sparingly provides sources for its assertions, here is the citation. USTR also calls this document  a “regulation”, although it was not formally promulgated by the State Council, and is another example of high level political – legal documents in IP during the trade war period.

There are several technical issues in the Report that suggest close coordination by USTR with USPTO and  other IP agencies in the US government.  The Report reiterates concerns on plant variety protection from 2020 that “[r]ight holders have raised concerns about plant protection in China, including about the definition of novelty, exemptions from protection, and gaps in protection that exclude species outside a limited number of taxa. Certain plant-based inventions are excluded from protection under the patent law and under China’s plant variety protection system.”  Another example is the discussion of subsidized low quality patents.  This topic was not discussed  in the Phase 1 Agreement. USTR reiterates concerns from the recent USPTO study on the impact of non-market factors on trademark and patent filings in China.  The Report notes that “[t]his situation continues to undermine the integrity of the patent registry. Although CNIPA announced the elimination of patent subsidies by 2025, the actual implementation of that goal remains to be seen.”  It would have been useful if the Report called for State Council Regulations over this national problem, rather than relying on normative policy directives from CNIPA. 

The Report should also be viewed in light of current administration rhetoric around Chinese intellectual property. In April 26 testimony before Congress Amb. Tai said that China has “fallen short” of its Phase 1 commitments in intellectual property.  On May 2, 2021, Secretary Blinken  on television accused China of “unfair trade practices and the theft of U.S. intellectual property” in the “hundreds of billions, if not trillions” of dollars.  These statements underscore that although progress has been made in many areas, bilateral IP issues are expanding in scope and will likely continue to be contentious during the Biden Administration.

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