Trade Wars: A New Beginning?

Why is this year’s  Special 301 Report (the “Report”) from USTR (April 29, 2019) different from prior reports?  In prior years, this report often repeated materials found elsewhere, such as in the  National Trade Estimate Report (March 2020).  This year’s Report reflects the Phase 1 Trade Agreement (January 15, 2020) (the “Agreement”) and the subsequent Chinese Action Plan (April 20, 2020). More importantly, it also suggests how the US might wish to see the implementation of the Agreement and negotiate a Phase 2 Agreement. There are a number of welcome surprises that suggest a new beginning.

Most importantly, the Report demonstrates a renewed commitment to the rule of law and the role of markets in protecting IP.  As noted in many of the postings of this blog, these were areas that I found seriously deficient in the Agreement.  The Agreement revitalized administrative campaigns and enforcement mechanisms and encouraged punitive mechanisms.  It generally underemphasized compensatory damages and other civil remedies, including appropriate civil procedures, and did not adequately emphasize the need to let market mechanisms govern IP creation and commercialization.

The Report addresses issues that the Phase 1 Agreement war did not, such as “poor quality patents”, “the presence of competition law concepts in the patent law” and challenges faced in trademark prosecution.  The Report also notes that  there are “obstacles in establishing actual damages in civil proceedings,” including a lack of “preliminary injunctive relief.”  These are useful statements, but even more important are the references to judicial procedures.

The Report states that “Chinese judicial authorities continue to demonstrate a lack of transparency”, including publishing only “selected decisions rather than all preliminary injunctions and final decisions.”  In addition, “administrative enforcement authorities fail to provide rights holders with information.” The issue of transparency has been repeatedly reported on in this blog as key to effective oversight of the Agreement.  The Report also notes that “[a] truly independent judiciary is critical to promote the rule of law and to protect IP rights.”  The Report mentions the need for transparency in China’s IP system five separate times.  By comparison, Chapter 1 of the Agreement mentions transparency once (with respect to Geographical Indications),  and not once with respect to judicial or administrative proceedings.

The Report comes down particularly hard in favor of legal process in its discussion on the social credit system, particularly the CNIPA/NDRC  et al, Memorandum of Cooperation on Joint Disciplinary Actions for Seriously Dishonest Subjects in the Field of Intellectual Property (Patent) 关于对知识产权(专利)领域严重失信主体开展联合惩戒的合作备忘录》(the “Dishonesty Measures”) (December 5, 2018) by noting that “these measure lack critical procedural safeguards, such as notice to the targeted entity, clear factors for determinations, or opportunities for appeal.” The Report further concludes that “The United States objects to any attempt to expand the ‘social credit system’ in the field of IP.”

This statement suggests a further distancing of the administration from rhetoric and outcomes of December 2018-May 2019 when the primary goal appeared to be strong legal commitments to punish IP infringement without explicit consideration of due process.  The Dishonesty Measures were likely enacted to appease US concerns on IP on the margins of the G-20 summit (November 30- December 1, 2018).  The concern then appeared to be that they were not sufficiently well-codified, not that they lacked due process.  Larry Kudlow said after the G-20 in 2019, that IP-related provisions (most likely the Dishonesty Measures) need to be “codified by law in China” and should not just be a “state council announcement.”

I am personally gratified to see the reintroduction of concerns over due process and rule of law into the Administration’s discourse of IP, although I believe the complexity of the relationship between IP protection and the social credit system may require further study.  I suspect that it may be difficult for rightsholders commercializing their rights or seeking to enforce judgments to completely distance themselves from the social credit system.

The Report also notes that the US had initiated dispute resolution proceedings against China at the WTO regarding China’s technology licensing regime and that China revised the measures the US had challenged in March 2019. The Report concludes that “[t]he significance of these revisions is under review.”  The Report does not note that the US had agreed to suspend the WTO case due to these legislative revisions, until May 1, 2020, at which time (the date of writing of this blog) it needs to decide whether or not to reinstate this case.  Perhaps USTR did not want to show its hand regarding what it would do effective May 1, 2020 – two days after the Report was issued.  Presumably, the United States will seek an extension of time in light of the continuing “review.”

Whatever decision is made at the WTO, the US team deserves credit for the legislative changes in licensing, forced tech transfer and trademarks that were made in the spring of 2019 and for re-emphasizing due process, the market, and rule of law, in the Report and in United States advocacy for better IP protection in China.

Collaboration or Confrontation: Beyond the False Dichotomy in US-China IP Relations

Recently several writers have criticized the Trump administration’s strategic choice of confrontation over collaboration with China.  Among them was an open letter published in the July 2, 2019, Washington Post, “China is Not an Enemy,” or “Making China A US Enemy is Counterproductive” (based on its hyperlink) that was signed by several former officials and scholars. Prof. Alastair Iain Johnston of Harvard University also wrote an excellent article, “The Failures of the ‘Failure of Engagement’ with China.”  Chinese commentators have also chimed in.  One of the signatories of the July 2, 2019 letter, Jim McGregor spoke on a podcast about the limitations of collaboration.  A counter-letter, “Stay The Course On China: An Open Letter To President Trump” .  The debate is also an extension of the Stanford University report “China’s Influence and American Interests: Promoting Constructive Vigilance” from 2018, which also generated its share of controversy.

The authors of these studies discuss all aspects of the US-China relationship – trade, security, scientific, intellectual property, etc., and fold these issues into the collaboration vs. confrontation dichotomy. I lack the breadth to discuss all aspects of a complex relationship.  My focus is solely on IP and innovation and the role of collaboration or confrontation. 

An assumption of many of these authors is that we should avoid making China an enemy unnecessarily.  I agree. At the same time, many of the commentators seem to suggest that either IP engagement or confrontation may be counterproductive because of systemic failures of the WTO, or past disappointments.  As Prof. Johnston notes: “[T]here is no doubt that there are persistent WTO incompatible non-tariff trade barriers, including weak intellectual property protection, technology theft, and non-transparent regulatory practices, among others.” 

Overall, the IP-related arguments present a false dichotomy between engagement or confrontation.  Bilateral engagement is only one tool, and it need not be sacrificed to more assertive strategies.  The toolbox includes varied approaches. Softer advocacy might include training programs in China on novel issues, supporting more focused strategies by businesses, joint collaboration on shared challenges and trade agreements that include China (such as a bilateral investment treaty), to name a few.  More assertive postures might involve critical white papers or non-papers, multilateral engagement, WTO or other international law diplomacy or cases, trade agreements that exclude China (TPP), and, in appropriate circumstances, quid pro quo retaliation such as tariffs and sanctions.  Simply put, carrots and sticks are not exclusive of each other.  Moreover, there are a variety of carrots and sticks.  Sticks, however, carry a cost and need to be carefully considered before deploying.

One of the legacies of the Obama administration on IP was that it was over-committed to dialogues.  As Chinese trade diplomacy has been highly transactional, this had permitted China to “buy time” without committing to any trade concession.  For those who lived through Obama’s excesses and opposed them, President Trump has demonstrated himself to be Obama’s Hegelian opposite.

The explosion in IP dialogues during the Obama period is well documented. For example, the 2015 Joint Commission on Commerce and Trade (JCCT), which was co-chaired by the Department of Commerce and USTR and was the highest-ranking trade-specific bilateral dialogue.  It established IP-specific sub-dialogues, exchanges and programs on such topics as: standards, trade secrets, geographical indications, sports broadcasting, media boxes and copyright, on-line enforcement (including referrals to another IP-related working group involving criminal law), case law and databases with the judiciary, bad faith trademarks, copyright legislation, IP legislation and protection of plant varieties.  Additionally IP was discussed outside of the JCCT in dialogues with a range of US agencies, including antitrust (DOJ/FTC), criminal law (DOJ/DHS), innovation (OSTP) and strategic and economic dialogues (State, USTR, Treasury), as well as at the WTO (USTR), WIPO (PTO), and in plurilateral discussions, such as the IP-5 (the five largest patent offices), TM-5 (the five largest trademark offices) and ID-5 (the five largest industrial design offices).  There were also other dialogues, including judicial exchanges (2016) and commercial rule of law (2016), which also focused on IP.

Properly and economically utilized, dialogues can advance understanding where ignorance is a major impediment to resolving differences. They can build trust and long-lasting government to government relationships.  Dialogues may also spread the burden of advocacy among the US government, industry and trade associations and even foreign governments.  Educational training and assistance can also be leveraged for seeking additional concessions.  They also help establish a baseline for a measured approach to escalating issues to increasingly higher political levels.  However, dialogues should never become ends in themselves and need to be periodically evaluated for their effectiveness and efficiency.  

In a typical, hypothetical IP matter, a strategic approach to dialogues and engagement might involve a white-boarded multiple-year plan for the US that reflects the varying interests of the US government, foreign governments, industry, and academia.  The plan might progressively escalate concerns from a discussion around, say, bad faith trademarks, to a seminar on this topic, a meeting between the heads of the US and Chinese trademark offices, a JCCT meeting at a political level, a TM-5 meeting, a program with the International Trademark Association or the EU’s technical “IP Key” assistance effort, comments on proposed legislation, a meeting among cabinet-level officials and/or a WTO case.  These approaches may be consecutive or simultaneous. This type of strategy is also well known in Chinese military history, as “coordinating one’s strategies” 连环计 i.e., never relying on a single strategy but having many to fall back on, which is the 35th of the 36th classical military stratagems 三十六计. 

There have been several successful examples of coordinated engagement in IP that have delivered real changes over the years.  Examples include China’s providing design patent protection for graphical user interfaces, which involved multi-year engagement by industry, academia, the Chinese and US patent offices, and ultimately the offices of the JCCT, to deliver a tangible commitment in Chinese patent office practices.  Another example during the Obama period is the reform of China’s pharmaceutical patent examination process, which involved a similar process.   A longer-term engagement focused on the creation of China’s specialized appellate IP court.  It also involved several judges of the Court of Appeals for the Federal Circuit (CAFC) (including former Chief Judge Rader), the Federal Circuit Bar Association, academia, and others over a nearly 20-year period.  

To be effective, however, dialogues must be strategic.  The 2015 JCCT, by contrast, seemed to have an approach of letting “a 100 dialogues bloom”  (百对话齐放).   

An example of the failure of dialogue and coordinated strategies is found in the US handling of a request of China to revise China’s discriminatory Administration of Technology Import/Export Regulations (TIER).  The 2015 JCCT included a commitment to “support a technology licensing joint seminar to be convened by MOFCOM in the first quarter of 2016.”  This was a strikingly modest ask of the very senior US and Chinese officials that chaired the JCCT: a Chinese Vice Premier and three US Cabinet-level officials.  However, JCCT support was necessary to overcome entrenched Chinese resistance. Moreover, despite the JCCT commitment, China did not follow through on this modest ask.  Despite such high level support, China did not host the seminar.   

During this same time period, the US Chamber of Commerce, Global IP Center,  published a report through its “Track II”, IP Cooperation Dialogue calling for reform in the TIER. The Track II Dialogue seeks to encourage expert non-government IP-engagement and not rely solely on over-politicized official bilateral dialogues.  It includes former judges and patent office officials, as well as academics (including this author). The 2016 Report also did little to convince official China to reform the TIER.

USG persisted.  The 2017 JCCT reiterated the commitment to “hold a joint seminar”. This program was ultimately convened on March 18, 2017,  However, the program concluded with no change in China’s position regarding the reform of the TIER.     

With no demonstrable momentum by China, USTR identified the TIER in its 301 investigation of China’s technology transfer practices.  It also filed a WTO case in March 2018. China finally took notice and amended these discriminatory provisions in 2019. Now that the offending provisions of the TIER have been amended, the WTO case has been suspended.  Today, with the suspension legal case, its full implementation should be monitored.  It appears that “collaboration” did not work, but a more confrontational approach resulted in a positive outcome.

However, while it is likely that China would not have amended the TIER absent the WTO case, dialogue on the TIER also played the important roles of coordinating USG positions, elevating an issue politically, involving other foreign governments, testing the waters with senior leadership in China, and making sure that the US proceeded in a measured and thoughtful manner.   Many foreign governments, including the European Union and Japan were involved in these dialogue efforts and many also supported the WTO case.  Even more striking, the WTO “win” on the TIER is ironic as it came from an administration (Trump) has generally shown opposition to multilateral institutions as well as dialogues.   In fact, the President has demonstrated that a thoughtful combination of collaboration and confrontation with a diversity of approaches may be the most effective for advancing IP and innovation issues.

Nor is it wrong to cast the United States as the sole cause of the demise of softer approaches.  China contributed to the demise of dialogues and similar mechanisms in its use of bilateral meetings as instruments of delay and retaliation.  It responded to the first WTO IP case that the US brought in 2007 as an “act of aggression” that it would “fight to the bitter end” in 2007 (DS/362).  China thereafter suspended many forms of IP-related cooperation with the US.   In the build-up to DS/362, the United States also sought to compel China to publish all its IP cases, which the WTO declined to support (a TRIPS “Article 63” request).  China also did not oblige in that request. 

DS/362  was the only WTO case brought against China on IP prior to the Trump administration. That case dealt with infringement of consumer goods – notably, copyright piracy and trademark counterfeiting, particularly criminal and customs remedies. DS/362 did not involve technology. Anybody claiming that the WTO has been a failure with respect to China’s enforcement of patents and trade secrets should look elsewhere.  That case has not yet been brought.

USTR likely viewed DS/362  was a failure. The US did not succeed in compelling China to amend its criminal IP laws in DS/362, nor in requiring China to make its cases publicly available.  As a consequence of losing the case, the US government lost faith in the WTO as a mechanism for resolving IP-related disputes. USTR instead launched a series of bilateral and multilateral negotiations, including a proposed Anticounterfeiting Trade Agreement and revised model IP texts in bilateral and plurilateral trade agreements.  

The ensuing devaluation of WTO mechanisms was, in my view, premature.  While lawsuits in the US often appear binary in their outcomes, pressuring foreign countries to adopt legal regimes that they are otherwise opposed to at the WTO is much more complex.  Additionally, US impatience is not well-justified as the US itself has also been slow in responding to many WTO rulings.  USTR’s assessment regarding DS/362 may also have reflected its own institutional limitations. USTR is thinly staffed and lacks resources to engage in softer programs such as technical training or monitoring.  USTR relies heavily on industry suggestions, which may also be short-term in nature.  Unlike other US government agencies involved in IP, USTR is not the lead USG agency in a number of important IP exchanges, such as at the World Intellectual Property Organization, Interpol or the World Customs Organization. It does not participate in or promote IP office related exchanges,  does not have IP officers or law enforcement officers posted to China, and does not have a China Resource Center like the USPTO, which provides statistical analyses of IP-trends in China.  Despite this lack of depth, it has two important primary functions: negotiates deals with trade officials and bring disputes. This binary choice is limited when compared to the much broader toolbox that can be used to address an IP issue. 

The arguments that the WTO does not work in addressing IP-related disputes also ignore the success achieved by the Trump administration in seeing the TIER revised, as well as the demonstrable impact that DS/362 had in elevating the importance of criminal trademark and copyright enforcement to China, despite the setback of a loss in dispute proceedings.  The victory the US achieved in the criminal enforcement case materialized in the form of an uptake in criminal IP prosecutions. China increased its criminal IP cases from 904 in 2007 (the date DS/362 was filed) to 15,121 cases, involving 17,869 people in 2012This is a  16 fold increase.  By 2012, the Chinese criminal IP docket also grew to over 200 times the  US criminal IP docket of 2018. which consisted of 117 defendants in 67 cases.  One Chinese Supreme People’s Court judge confided in me that he attributed that increase to the spotlight that the US gave to the importance of criminal IP in China’s evolving IP ecosystem. For some recent analysis on these trends, please see Dan Prud’homme and Zhang Taolue’s excellent book “China’s Intellectual Property Regime for Innovation” (Springer 2019) which summarizes recent research on this increase, and provides data on criminal IP cases, defendants, prosecutions and convictions.  

A similar argument regarding the ultimate success of the US claims might be made about the request of the US that China should make all its IP cases publicly available in 2005/2006 (the so-called “Article 63 Request”). By 2014, China had decided to publish the  majority of its cases of all types.  This publication of cases has been welcomed by the legal and judicial community alike and has helped to provide greater predictability in adjudication, minimize corruption and provide a basis for strategic IP enforcement.  

By contrast to these successes, there was one claim in DS/362 that had no significant positive impact.  This failure was not due to China’s intransigence. In DS/362 USTR also alleged that China’s disposal of seized infringing goods by auction offended WTO requirements to dispose of such goods outside of the channels of commerce.  However, WTO rules only require Chinese Customs to seize goods upon importation (TRIPS Agreement Art. 51). China was and remains primarily an exporter of counterfeit and pirated goods.  The WTO was unable to identify a single instance where China had auctioned off counterfeit goods imported into China.   “No infringing goods destined for importation”, the panel stated “have ever been auctioned…during the period for which statistics are available.” (Para. 7.351).  The Customs claim, criminal IP claim and the case publication achievement all underscore the continual need for good data to support IP engagement of either the “carrot” or “stick” variety.

Arguing over whether China is becoming our enemy and the need for confrontation is redolent of the post-Korean War China rhetoric in the US.  A better approach might be to remake the US government into an institution that better understands, persuades and strategizes on complex technological and IP issues in China.  During the past 30 – 40 years, the US government has defunded or terminated every technology–oriented agency that cared to engage in a significant way with China, including the Office of Technology Assessment in Congress, the Technology Administration in Commerce, and the Office of Science and Technology Policy in the White House.  USTR’s mandate is  too limited to effectively engage in collaboration. USPTO has the deepest technical resources on IP and innovation issues, but lacks political clout. We need to coordinate more closely, and provide incentives for deeper engagement among all US agencies as well as with industry in order to be effective.   These issues have been apparent since at least the time of China’s WTO accession.  As I noted at a conference at the 24th Annual Fordham University IP Conference in 2016 (Session 4B-b “Asia and the Political Landscape”):

MR COHEN:… One of the lessons from WTO accession was — and I don’t know how to say this gently — how … under-informed US industry was about the legal system.  I say that because if you look at the number of civil cases involving intellectual property, in the year that China joined the WTO — and the negotiations occurred in the years before — there were about thirty.  So one could, theoretically, have contacted every company that had filed a lawsuit involving IP and you still wouldn’t have a very large cohort.

So a lot of trade negotiations, unfortunately but necessarily, are based on hypothetical constructs.  What makes a good legal system, with big words like “impartial,” “fair”?…

METALITZ:  So who was under-informed in that situation?  Was it the US negotiators or was it the US industry?  US industry — you’re right — was not bringing these cases.  But that may not have been out of ignorance. That may have been out of a supposition that they would not be useful.

BAI:  May I chime in?… I have seen US government officials talking about China when they don’t get their briefing right…. 

One way to improve policy is to hire the right people.  We need to promote and reward individuals who have the three “magic” skills: knowledge of Chinese law, knowledge of Chinese IP  or technology, and Chinese language skills. These individuals should also be given roles commensurate with their knowledge and skills.  The 2013 Report of the Commission to Stop American IP Theft, also identified this as an issue in the staffing of our embassies overseas: 

Strengthen American diplomatic priorities in the protection of American IP. American ambassadors ought to be assessed on protecting intellectual property, as they are now assessed on promoting trade and exports. Raising the rank of IP attachés in countries in which theft is the most serious enhances their ability to protect American IP. 

The need to restructure US government on tech and IP issues has long affected the quality of our “engagement.”   

Whether confrontation or engagement are pursued, the choice is complex, should be well-coordinated, and will need to evolve based on circumstances.  It should be based on the right information made by well-informed people.  It is not, ultimately, an ideological issue as many of the recent articles might otherwise suggest.  

Revised: July 21, 2019, October 8, 2019.

 

US Suspends IP Case Against China at the WTO. Quo Vadis Europa?

DS/542, the WTO case that the US filed against China regarding China’s legal regime for foreign technology transfers, has now been suspended by order of the Panel.  The parallel case that was filed later by the European Union has not yet been similarly suspended.

When I was in Beijing earlier this June 2019, I gave several talks regarding US-China trade, and I questioned why the US case was not suspended or dismissed. The US case set forth a very limited “de jure” or “as such” case of violation of certain TRIPS obligations, including national treatment with respect to licensing of patents, as well as TRIPS-inconsistent measures regarding the contribution of patents to joint ventures.  By filing the case immediately after the 301 Report regarding technology transfer and innovation, the US case seemed to be making the point that the WTO was still a viable mechanism for certain of the US complaints regarding China’s technology transfer regime.  It was welcomed by those who believe that the WTO continues to play an important role in trade disputes. Suspending the case now in a sense confirms that Donald Trump accomplished legislative reform more quickly with jaw-boning and tariffs than the WTO could have with dispute settlement proceedings.

However, the White House should also not rush to praise itself on the utility of its approach to using the WTO dispute mechanisms.  As I previously noted, the US complaint was narrow.  It only focused on a few laws and regulations regarding patents.  With the passage earlier this year of numerous legislative reforms, including removal of the most offensive provisions of the Administration of Technology Import/Export Regulations, as well as amendments to the Joint Venture Implementing Regulations what the US sought to challenge as de jure WTO violations have been resolved.  Numerous other issues that were identified in the Section 301 report, whether credible or not, were not raised in the WTO complaint.  In some aspects, this case was long overdue and relatively straight-forward.

Why has the EU case not been dismissed?  One explanation may be that the EU may yet follow the lead of the US in seeking a suspension based on how the current legislative packages are implemented. If the EU does not move to suspend the case,  an alternative explanation is that the EU case was more comprehensive than the US case and therefore harder to suspend or dismiss.  The EU case may yet stand as a raison d’etre for the WTO dispute mechanism.  The EU raised concerns over a wider range of laws, regulations, and policies, including Made in China 2025, antitrust laws and new electric vehicle regulations. It also included catch-all claims that extended to how laws and other normative documents are implemented, including their  “nullify[ing] or impair[ing]” the benefits accruing to the European Union.

In its summary of the EU complaint, the WTO docket sheet narrowed the EU’s complaints down to more closely mirror the US complaints.  If these are indeed the only claims that the EU is now pursuing than a similar suspension would make sense.  However, if the complaint remains unamended, it is the kind of complaint the US might have filed as an outcome of the Section 301 investigation.  This now leaves the EU with the option of continuing to push for additional improvements in tech transfer to China through the WTO system or, instead, pursuing other solutions such as trade diplomacy.

 

Unpacking the Role of IP Legislation in the Trade War

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Here is my attempt to unpack recent legislation and their relevance to the on-going trade dispute.

In recent months, China has amended its Foreign Investment Law, the Technology Import/Export Regulations (“TIER”), the Anti-Unfair Competition Law regarding trade secrets, and the Trademark Law, with new provisions on bad faith filings and damages. A summary of the Trademark Law revisions provided by SIPS is found here. China also amended the Joint Venture Regulations provisions removing provisions that which limited a foreign licensor’s freedom to license technology beyond years or to restrict use of licensed technology after the 10 year period had elapsed.

With the revisions to the TIER and the JV regulations, much of the basis for the US and EU complaints against China at the WTO regarding de jure forced technology transfer may have evaporated (WTO Disputes DS542, and DS549). However, the public dockets do not indicate that the cases have been withdrawn.

China seems to have determined that it has crossed a line in how much it can accommodate US demands. Bloomberg reported on a commentary published after the imposition of escalated sanctions in the influential “China Voice” column of the People’s Daily which accused the US of fabricating forced technology transfer claims. The commentary is entitled “If you want to condemn somebody, don’t worry about the pretext”, with the sub-title, written in classical Chinese: “‘Forced Technology Transfer’ Should Stop!”. (欲加之罪,何患无辞 – “中国强制转让技术论”可以休矣). The title is a quotation from the Zuo Zhuan, a classic of Chinese history written around 400 B.C. that realistically describes the palace intrigues, military tactics, assassinations, etc. from the chaotic “Spring and Autumn” period from 771-476 B.C. The People’s Daily view is also shared by a number of scholars and observers who view the problem as exaggerated or mischaracterized (apart from the TIER and JV regulations). However, this view has been rejected by USTR Lighthizer, as was reported in a recent NPR interview (March 25, 2019):

“CHANG: Though a number of scholars believe the Trump administration is overstating how often forced technology transfers are happening.

LIGHTHIZER: Well, I guess I don’t know who those scholars are. We did an eight-month study on it, and I think it’s the very strong view of the people that we talked to that it’s a very serious problem and has been for a number of years.”

(Update of May 21, 2019: A recent EU Chamber survey in fact showed an increase in businesses reporting that FTT is a concern, from 10% two years ago to 20%.)

There have also been several IP legislative developments that may not be as directly linked to US government trade pressure. Perhaps the most important is the launch of China’s new national appellate IP Court effective January 1, 2019. The NPC has released a draft of the civil code provisions on personality rights (See this translation). Personality rights can be important tools in addressing trademark squatting, such as in the Michael Jordan case with Qiaodan. CNIPA also released Draft Provisions for Regulating Applications for Trademark Registration (关于规范商标申请注册行为的若干规定(征求意见稿) which addresses bad faith registrations. CNIPA released a draft rule for public comment on Protection of Foreign GI’s (国外地理标志产品保护办法 (修订征求意见稿)on February 28, 2019. The comments focus on generic terms and a GI expert committee for examination of foreign GI’s. Here are INTA’s comments on the trademark registration and GI proposed rules. CNIPA also proposed changes to patent examination guidelines on such issues as proof of inventive step and what constitutes “common knowledge.” Here are AIPLA’s comments from April 4, 2019.

Still pending are proposed amendments to the Drug Administration Law, with comments due by May 25, 2019. This is a second public comment draft released by the NPC. Ropes & Gray has provided a useful analysis. The proposed changes to the DAL also include increased punitive damages for counterfeit medicines, in line with increased penalties in the IP laws (Trademark, AUCL, etc.). There are also proposed changes to the patent law which was released for comment earlier this year. Of particular interest to the pharma sector in the proposed changes were provisions calling for patent term restoration. However, a hoped for inclusion of patent linkage through an “artificial infringement” provision to trigger an infringement challenge by reason of a pharmaceutical regulatory approval has not yet materialized. There were also rumors that China and USTR has scaled back regulatory data protection for biologics from the 12 years that had originally been proposed by China in 2018 to the 10 year period provided by the US Mexico Canada Free Trade Agreement.

What is the relationship between all these legislative changes and the trade war? Larry Kudlow, the Director of the National Economic Council, described the legislative snafu that caused the administration to reinstitute tariffs as follows:

“For many years, China trade, it was unfair, nonreciprocal, unbalanced, in many cases, unlawful. And so, we have to correct those and one of the sticking points right now as we would like to see these corrections in an agreement which is codified by law in China, not just the state council announcement. We need to see something much clearer. And until we do, we have to keep our tariffs on, that’s part of the enforcement process as far as we are concerned.”

So what are the unenacted “laws” and what is the State Council “announcement” that Mr. Kudlow is referring to and which in his view launched this new trade war escalation? I doubt that Mr. Kudlow has read China’s Law on Legislation and understands the difference between a Law passed by the NPC and a State Council Regulation, particularly as US and European practice in recent months appears to be oblivious of legislative nomenclature and its role in determining what constitutes a legally binding document.

Perhaps Mr. Kudlow is talking about the NDRC 38 agency MOU published in late 2018 regarding punishments for serious patent infringement, including use of social credit system. The NDRC document is clearly inferior to a Law or State Council Regulation, but it was a directly promulgated document of a State Council agency. As the patent law amendments have not been enacted yet, he may be referring to this delay in enactment and the failure to increase damages for infringement as has been provided by other statutes. In my own view, the focus on punitive or even statutory damages is misguided as is increased administrative enforcement, as the primary reason that damages are low is the failure of most Chinese courts to impose fully compensatory damages and abide by priorities in law for establishing damages. But I hope to have more on that in another blog…

One thing is certain: China has been timing legislative developments with trade diplomacy. This may lead one to believe that China’s approach to the new laws was purely transactional, and/or there were other laws that the US was also expecting but that China has since declined to deliver. The previously mentioned NDRC 38 Agency MOU was enacted before the G-20 meeting but made publicly available shortly thereafter. The “Working Measures [sic] for Outbound Transfer of Intellectual Property Rights (For Trial Implementation), (State Council, Guo Ban Fa [2018] No. 19)” (知识产权对外转让有关工作办法(试行)) which was previously discussed here, appear to have been timed with the 301 announcement in March 2018. In addition, the revocation of TIER provisions, JV implementing regulations, and amendments to the Trademark Law and AUCL revisions all were enacted with incredible efficiency, often denying any opportunity for meaningful public comment in violation of prior procedural practices. A reasonable guess may be that there were some additional laws or regulations that the US was expecting but that China had determined it could not deliver, or deliver in the time frame provided. Nonetheless, the legislative track record thus far is quite impressive.

China’s improved environment for technology transfer and technology collaboration is coming at a time when the United States has tightened up its controls with China. The most notable legislation in this area is the John S. McCain Defense Authorization Act for 2018 (the “Act”), including the enactment of the Foreign Investment Risk Reduction Modernization Act and the Export Controls Act of 2018. These laws extended export control and foreign investment control authorities to foundational and emerging technologies, as well as to non-passive, non-controlling investments. Much of the technologies of concern overlap with Made in China 2025 and other Chinese industrial policy documents. Although the Act did not specifically create “black” and “white” countries as subjects of controls, the Congressional history did point to special concerns about China:

“Congress declares that long-term strategic competition with China is a principal priority for the United States that requires the integration of multiple elements of national power, including diplomatic, economic, intelligence, law enforcement, and military elements, to protect and strengthen national [t]security, [including] … the use of economic tools, including market access and investment to gain access to sensitive United States industries.”

The most recent report which analyzes the impact of US and Chinese regulations on Chinese investment in the United States by Rhodium Group is found here (May 8, 2019). The report notes an “over 80% decline in Chinese FDI in the US to just $5 billion from $29 billion in 2017 and $46 billion in 2016. Accounting for asset divestitures, net 2018 Chinese FDI in the US was -$8 billion. Meanwhile, American FDI in China dropped only slightly to $13 billion in 2018 from $14 billion in 2017.” The Rhodium report also notes that “the chilling impact of politics on US FDI in China was mostly visible in the ICT space where new investment declined significantly last year.” Other countries have also been enacting similar restrictions on FDI in sensitive areas, as pointed out in a recent article by my Berkeley colleague Vinod K. Aggarawal. Note: I will be speaking at a forthcoming AIPLA webinar on export controls and IP strategies on May 23, 2019 as well as at forthcoming events in China (to be announced).

In addition to these legislative efforts, the US has undertaken steps to restrict H1B visas for talented scientists and engineers and the FBI has created a new working group to address economic espionage from China. The Committee of 100 released an important paper in 2017 showing that Asian Americans were more likely to be prosecuted for economic espionage than any other ethnic group, are also subject to higher sentences and were twice as likely as other groups to have cases against them dismissed. Some observers fear that overly broad regulation and enforcement by the United States may now be encouraging exactly what China has sought to do for decades: repatriate to China the vast talent pool of Chinese scientists, engineers, and entrepreneurs to contribute to the technological development of the motherland.

Although there have been few legislative efforts directed to making US science and technology more competitive in response to these perceived threats from China, there have been several general reports and proposals. The National Institute of Science and Technology recently released a green paper, “Return on Investment Initiative for Unleashing American Innovation” (April 2019) to improve federal technology transfer and entrepreneurship. There are increasing calls for Congress to fund the long defunct Office of Technology Assessment, which once played an active role in analyzing US-China technology trade.

Several trade organizations and think tanks have called for increased US funding in science and technology, among them is the recent report of the Task Force of American Innovation, “Second Place America – Increasing Challenges to America’s Scientific Leadership” (May 7, 2019). The R&D graph at the head of this blog showing China’s rapid growth in R&D is from that report. The report notes:

“America’s competitive edge is now at stake, as China and other countries are rapidly increasing investments in research and workforce development in order to assume positions of global leadership. Our nation risks falling perilously behind in the basic scientific research that drives innovation, as our global competitors increase support for cutting-edge research and push to the forefront in fields such as artificial intelligence (AI), robotics, aerospace, advanced manufacturing, and the next generation of telecommunications networks.”

To round out this summary of legislative developments, there have been developments at the USPTO that impact US relations with China on IP. The USPTO published a proposed regulation which will regulate legal services for the rapidly increasing number of Chinese pro se trademark filers in the US (2/15/2019). This proposed regulation would require these applications to use a US licensed attorney. The purported purpose of this change in current practice is “instill greater confidence in the public that U.S. registrations that issue to foreign applicants are not subject to invalidation for reasons such as improper signatures and use claims and enable the USPTO to more effectively use available mechanisms to enforce foreign applicant compliance with statutory and regulatory requirements in trademark matters.” The rule also seems generally consistent with TRIPS Art. 3, which permits WTO members to require “the appointment of an agent within the jurisdiction of a Member … to secure compliance with laws and regulations which are not inconsistent with the provisions of [the TRIPS] Agreement”.

Another important development involves USPTO efforts to clarify subject matter eligibility under Sec. 101 of the patent act, and functional claim limitations for computer-enabled inventions under Section 112. The United States had been weakening and destabilizing protections in these important areas affecting artificial intelligence, fintech and biotech inventions at the precise time when China had been strengthening its protections. These are important steps towards strengthening predictability in our domestic IP system, which may be further strengthened by proposed legislative changes.

Ironically, China’s improvements in its investment and tech transfer environment are coming at a time of heightened concern over a Chinese technological threat and increased US and international regulatory scrutiny. It may be difficult, therefore, to perceive any immediate positive impact from changes in China’s investment environment. Indeed, the media has recently been reporting on decisions of different companies or entrepreneurs to close down R&D operations in each other’s markets. Hopefully, both countries may ultimately create the right mix of IP enforcement and protection, regulatory controls over collaboration and industrial policy to enable bilateral scientific collaboration to once again flourish and contribute to the global economy.

The 600 Billion Dollar China IP Echo Chamber

“Most people use statistics the way a drunkard uses a lamp post, more for support than illumination.”  Mark Twain

What are the losses due to “IP Theft” from China? On a recent trip to Washington, DC, I heard the range of $300 billion to $600 billion repeated from various sources without any critical gloss. These numbers have taken on a greater legitimacy than they likely deserve, in terms of capturing the scope of US concerns, the magnitude of the loss and shaping the Trump administration’s unilateral retaliation.

The 2017 and 2013 reports from the Commission on the Theft of American Intellectual Property (the “Commission”) appear to be the origin of much of this data.  The data was also referred to in the Section 301 Report (p. 8) and in a subsequent White House report “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World” (June 2018).

In 2017, the Commission found that “Chinese theft of American IP currently costs between $225 billion and $600 billion annually.” The Commission pulled together different sources of data, including sales of counterfeit and pirated goods ($29 billion), and that “the value of software pirated in 2015 alone exceeded $52 billion worldwide.” The Commission further noted that there was “a paucity of reliable data on the economic costs of patent infringement” and that American companies were most likely the leading victims of this “IP Theft.”  It estimated losses of at least 0.1% of the $18 trillion U.S. GDP.

The largest single loss contributor to the Commission’s estimate was based on data provided by create.org and later repeated by the White House, that trade secret theft cost between 1% and 3% of US GDP, and totaled between $180 billion and $540 billion.  One critic (Stephen S. Roach) of these loss figures recently noted that “the figures rest on flimsy evidence derived from dubious ‘proxy modeling’ that attempts to value stolen trade secrets via nefarious activities such as narcotics trafficking, corruption, occupational fraud, and illicit financial flows. The Chinese piece of this alleged theft comes from US Customs and Border Patrol data, which reported $1.35 billion in seizures of total counterfeit and pirated goods back in 2015.”  One area of overlapping concern I have with Mr. Roach is the use of Customs seizure data to justify allocating as much of 87% of global “IP Theft” to China. Seizures by US Customs of Chinese originating counterfeit and pirated goods are as high as 87% of global totals. However, this does not mean that China is the source of 87% of the world’s production of these goods, nor does it address trade secret infringement or patent infringement origination. See The 2017 Commission Report at p. 3.  Misunderstanding about the utility of Customs data contributes greatly to the weaknesses of many IP infringement loss estimates.

The 2013 Commission Report noted that “it is safe to say that dollar losses from IP theft are hundreds of billions per year, which is at least in the range of total exports to Asia in 2012 (valued at $320 billion).” This report pulled together several sources, including OECD data that estimated global trade in counterfeit and pirated goods as $200 billion in 2005 (p. 25).  All the studies to date, including this 2013 Report, have recognized the difficulties inherent in doing accurate loss estimations, although many have also not distanced themselves from sources, such as the OECD 2005 data which had not stood the test of time.

Remarkably, the loss data itself has been relatively consistent over approximately two decades despite different methodologies and varying definitions of what constitutes “IP Theft”. During my tenure at the US Embassy (2004-2008), the typical guestimate was $200 billion to $250 billion per year.  These guestimates enjoyed wide currency in Washington.  For example, Congressional Reports, such as H.R. 110-617 “Prioritizing Resources and Organization for Intellectual Property Act of 2008” stated: “[I]ncreasing intellectual property theft in the United States and globally threatens the future economic prosperity of our nation. Conservative estimates indicate that the United States economy loses between $200 and $250 billion per year, and has lost 750,000 jobs, due to intellectual property theft.”  This data was typically based on counterfeit and pirated goods “compris[ing] six to nine percent of all world trade, the bulk of which violates the intellectual property rights of United States businesses and entrepreneurs.”  (Id.). Six to nine percent, however, easily gets rounded up to 10 percent, as Congressman Donnelly from Indiana noted at about the same time:

“It is estimated that these [counterfeit] products comprise almost 10 percent of world trade, that they are costing American companies nearly $250 billion in revenue and an estimated 750,000 jobs.”

The number was also widely adopted by IP advocates. The U.S. Chamber of Commerce in its report What Are Counterfeiting and Piracy Costing the U.S. Economy, (2004) circulated the 200- 250 billion dollar number, as did a National Geographic film. In fact, I used the $250 billion dollar figure when I was IP Attache in Beijing (2004-2008) to urge additional support for my elevation in diplomatic rank, as it seemed rather odd that I had been tasked with a problem costing nearly 750,000 jobs and I had no staff of my own. An article in Ars Technica (2008) noted that this earlier $250 billion/750,000 job number may have its origins in a Forbes magazine article from 1993. There are also references to loss calculations of 200 billion dollars per year appear from as early as 2002 in Congressional reports.   To the extent that these calculations rely upon a base estimate of “approximately” 10 percentage points of world trade being in counterfeit or pirated goods, this data point harkens back to an OECD estimate of world trade in counterfeit goods at 5% in 1998. That number was however revised downward to 1.95% in 2007, at an estimated value of $250 billion. The OECD data seems to be the origin of the $250 billion IP Theft loss figures current at that time.

Other USG studies have shown a more cautious approach. A 2010 Government Accountability Office (“GAO”) study analyzed the economic effects of counterfeit and pirated goods and found that “it was not feasible to develop our own estimates [of the total value of counterfeit or pirated goods] or attempt to quantify the economic impact of counterfeiting and piracy on the U.S. economy.” Noting the lack of data as a primary challenge to quantifying the economic impacts of counterfeiting intellectual property and goods, the GAO concluded that “neither governments nor industry were able to provide solid assessments of their respective situations.”

The U.S. International Trade Commission in a well-researched report,  China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy, (2010) calculated that the theft of U.S. IP from China alone was equivalent in value to $48.2 billion in lost sales, royalties, and license fees. This estimate falls within a broad $14.2-billion to $90.5 billion range.  The breadth of this range is explained by the fact that many firms were unable to calculate their losses. Of the $48.2 billion in total reported losses, approximately $36.6 billion (75.9%) was attributable to lost sales, while the remaining $11.6 billion was attributable to a combination of lost royalty and license payments as well as other unspecified loss.

The current concerns around “IP Theft” as identified in the Section 301 Report include licensing of technology, an issue that is not covered by US Customs seizure data. Any calculation of losses due to IP Theft from non-payment of royalties should include estimates of lost royalties or license fees. Most of the current calculations do not include such data. Nonetheless, as I have noted elsewhere, accurately calculating lost royalties can be especially difficult as many licensors use tax haven jurisdictions to manage patent portfolios. There may be implied licenses in product purchases form OEM suppliers, and there can be valuation challenges. However, China’s relatively small role as a purchaser of US technology and its dominant role as an exporter of high tech or information technology products does suggest that it is a significantly under-licensed (infringing) economy. For example, China has leaped from exporting only 2% of the world’s information technology products in 1996, to 33% in 2015. Yet China has purchased very little technology directly from the US over the years, and its technology payments are a very small share of total trade. There is likely a huge shortfall in unpaid royalties from Chinese manufacturers.

Many discussions around IP theft have also declined to take into account cybercrime and other security threats. According to an often cited 2013 report by the International Data Corporation (IDC), direct costs to enterprises from dealing with malware from counterfeit software were estimated to hit $114 billion in 2013 and “potential losses from data breaches” might have reached nearly $350 billion.” However, data breaches are not necessarily a form of IP infringement, as they can be undertaken for other purposes, including simply injuring the computer system of a competitor through a denial of service attack.

Apart from differences in methodology, there are different definitions of “IP Theft” that should be affecting total loss calculations. The FBI currently  defines “Intellectual property theft” as “robbing people or companies of their ideas, inventions, and creative expressions—known as ‘intellectual property’—which can include everything from trade secrets and proprietary products and parts to movies, music, and software.” This definition notably would exclude any non-willful infringement, i.e., where there is no “robbing” as well as trademarks – which are not specifically enumerated.

In its 2013 Report, the Commission offered some examples of “IP Theft”, which also excluded trademark protection, and failed to discuss patent protection: “IP theft varies widely in both type and method. It ranges from more commonly known forms, such as software and music piracy, to more elaborate types, such as the use of economic espionage tactics to steal complex industrial trade secrets. Each type of IPR violation harms an economy in unique ways and brings with it a discrete set of challenges that make both deterrence and enforcement difficult.”

These approaches to “IP Theft” are different from the meanings advanced for the same term in the last decade. Victoria Espinel, who has had a long and distinguished career in IP and international IP issues, testified in Congress in 2005 when she was with USTR and spoke of “IP Theft”  in terms of the fight against ‘fakes’, declining to mention patents for inventions or trade secrets.   This was consistent with the focus at that time on criminal copyright and trademark focus of US government advocacy in China, including the bringing of a WTO case (DS362):

“Our companies report billions of dollars in lost revenue, irreparable harm to their brands and future sales, all of which ultimately affects U.S. workers who design and produce legitimate products forced to compete against Chinese fakes. We want and look forward to working closely with you and your staff in combating the theft of American IP in China.”

“IP Theft” of the prior decade certainly appears under-inclusive in not focusing on patent or trade secret infringement.  It also fails to reflect that most IP infringement is addressed by civil remedies, where questions of willfulness are secondary to the harm being caused. Criminal remedies, while important, are relatively rare in most legal systems. This approach is consistent with the TRIPS obligation to treat IP as a “private right.” Moreover, the TRIPS Agreement itself does not require member states to criminalize patent infringement or trade secret infringement.  Finally, there may be grey areas including market access barriers, investment restrictions, government procurement restrictions, informal government supported forced technology transfer, or aggressive use of antitrust laws that many would argue need to be included in the definition of “IP Theft”.  Many of these would also be very difficult to quantify.

“IP Theft” is also slightly over-inclusive, as there are also certain forms of bad-faith behavior that may be sanctioned by the state and permissible under international IP rules. For example, rights holders in China face a significant burden of bad faith patent and trademark applications that entail costs of challenging and invalidating these rights, while US-based rights holders often complain about non-practicing entities and patent trolls.

Individuals who might suspect an exaggerated “IP Theft” loss estimate might be surprised to know that there are data points that have typically been omitted from these calculations. For example, US Customs data typically does not include the value of goods excluded from the US market under Section 337 exclusion orders. I am unaware of any methodology that attempted to extrapolate from US damage awards in US courts against Chinese infringers. USTR in its 301 report, was also unable to calculate the value of “forced technology transfers” in joint ventures or technology transfers. Certain rights, such as plant varieties and plant patents are typically not included in loss figures, nor are losses due to design infringements. Consequential damages (attorneys fees/court costs/losses to brand value/harm to public health or safety) are also often not included in the above calculations.

There are also factors that could reduce the loss figures that have often not been used.  Assumptions about the US being the overwhelming victim of “IP Theft” are hard to substantiate. I suspect that different countries and industries bear different costs in different markets. European companies, for example, likely suffer most from trademark and design infringements of luxury goods.  In the United States, over 50% of US patent applications originate with foreigners; logically this may mean that a substantial portion of the injury suffered by US companies overseas due to patent infringement may be attributable to innovations that occurred outside of the United States.

Calculating how much “IP Theft” originates from China also ignores whatever the “baseline” is for infringement in the US.  Historically, for example, the greatest value of software piracy losses were in the United States, According to BSA data for 2017, China’s piracy losses were 6.8 billion, while the US was 8.6 billion. In addition to other deficiencies, US Customs data is based largely on the pro-active behavior of US rightsholders and thereby considerable selection bias. As one example, if “IP Theft” priorities were based on Custom data, apparel, watches and footwear would be the major area of US trade concern with China, as there were the three categories of goods most seized by US Customs in 2017.

“IP Theft” losses also do not necessarily reflect losses due to unredeemed WTO commitments, nor are they based solely on violation of WTO disciplines.  The TRIPS Agreement, for example, does not require members to criminalize willful trade secret theft – which is likely a major contributor to the current calculations. Moreover, if the calculations were one that adhered to WTO procedures, then the various methodologies would also need to look to WTO jurisprudence in terms of calculating damages when a WTO member fails to implement a WTO decision involving IP. A good reference point might be the “Irish Music” (DS160), which the US lost, and where the US was required to pay 1.2 million euros per year as an arbitral award in the early 2000’s. Another reference is the Antigua/gambling dispute, where the island of Antigua was permitted to retaliate against US IP interests in the value of 21 million dollars per year, considerably less than a claim by Antigua of 3.44 billion dollars.

Tying tariffs to losses due to IP theft has other challenges.   While it may help address a sense of national outrage, the unilateral imposition of tariffs on Chinese imports is unlikely to benefit any US victim of IP theft, nor do the tariffs themselves appear to be geared to a particular loss threshold. Instead, the tariffs are loosely based on loss estimates but appear primarily oriented to forcing China to change its behaviors.

A cynical reader looking at the data might conclude that large loss numbers are self-serving and make compelling rhetoric in the echo chamber of Washington, DC. Someone looking over the history of the data might, however, view their weaknesses as due to such factors as difficulties in collecting data, the growth of the Chinese economy and changes in infringement practices, and changing technologies including the growth of the Internet as a vehicle for content and goods delivery. The current focus on “technology” in the scope of IP Theft might be viewed as a belated recognition of how the Chinese economy has become more technology-oriented in the past decade.

In my view the statistics do serve as more than a “support” of the type referred to by Mark Twain, above. They also help to “illuminate” a deeply felt and sustained injury that is otherwise hard to calculate.

Note: The author (Mark Cohen) has contributed to many of the reports noted above, typically in a private capacity.

Corrections to the above are welcomed.