The WTO IP Cases That Weren’t

Every once in a while, someone asks me: “What WTO claims could the US possibly have made against China?” 

The question is especially relevant in light of the recent decision of the incoming Biden Administration to nominate Katherine Tai a Chinese-speaking, veteran WTO litigator with an understanding of Chinese industrial policy and a solid track record on multilateral engagement.   Many of the more important IP-related issues in China are today wrapped up in industrial policy.

I offer these thoughts in order to better assess past US efforts at the WTO and for such time, if any, that the WTO becomes a preferred venue for resolution of United-States China IP disputes.    As USTR did not bring a single IPR case against China during the Obama Administration, I hope these suggestions are helpful.  I believe that it is time to rethink the US reluctance to bring WTO cases at the WTO.  In fact, the best WTO track record on China IPR ironically belongs to the Trump Administration which brought  a successful IPR case in the first fifteen months of its tenure.  If a Biden Administration wishes to demonstrate that cases can have an impact, it may similarly wish to consider launching IPR dispute cases at the WTO or pursuant to the Phase 1 Trade Agreement early in its term.

I have rated each of these potential claims with stars: *  = “should be rejected or no need to file”; ** = “requires further study or might be worth filing if circumstances change” ; *** = “elements of this claim have merit or might be considered after further research for filing in the mid-term” and **** =  “the claim has a good risk/reward proposition or might be considered for filing in the near term.”  I have generally not factored into these calculations the possibility of defensive risks or alternative options.  A defensive risk reflects the possibility that the US might be charged for violation of the TRIPS Agreement.  An example of a defensive risk may be the extensive invocation of national security exemptions for IP and other issues during the Trump Administration (Art. 72, TRIPS Agreement).  Alternative options might typically include such strategies such as bilateral negotiations, dispute resolution under the Phase 1 Trade Agreement, seeking to accelerate existing reforms underway in China, or some form of collaborative pressure with other countries.

This list is not exhaustive.  I list the claim in the order of the Section in which it principally appears in the TRIPS Agreement (I-III, V), and under other WTO Agreements. 

A. General Provisions and Basic Principles The Preamble to the TRIPS Agreement provides that IP is a “private right.”  Although many countries incorporate IP into their economic strategies, China often strongly supports IP as a government license or public utility.  The structural issue manifests itself in China in various forms, including: the role of industrial planning in intellectual property; aggressive use of antitrust laws; historical dominance of public enforcement mechanisms; and a relatively weak civil system.  Katherine Tai’s background in Chinese industrial policy involving the rare earth dispute should be well suited to looking at the complex IPR environment in China.  Although this “private right” language in the TRIPS preamble does not create a specific obligation, it does provide “colour, texture and shading”  to other WTO obligations.   This language might be used to inform other, more specific industrial policy related claims. It can also be used at such time as the WTO authorizes “non-violation” cases under TRIPS (discussed below under Section V). The United States might also urge a “private right” and/or “non-violation” case against China as part of a package of conditions towards reviving the WTO and its dispute settlement mechanisms. (**)

B. Art 3:  “National Treatment”:  Although the US government routinely claims that foreigners are being discriminated against by the courts or IP agencies in China, the evidence thus far is weak.  Moreover, foreign governments have been reluctant demand greater transparency from China to support such a claim.  Based on academic research, the strongest cases for discriminatory treatment appear to be in patent prosecution in sector-specific areas  and might be supported by a “private right” claim of the Preamble, i.e., that Chinese industrial policy is guiding action of the patent office.  It might also be supported by TRIPS Art. 27, which provides that patents should be available without discrimination as to the place of invention, field of technology transfer and whether products are imported or locally produced.   A case might be brought after acquiring enough data, including comparisons to other markets.  A highly data-dependent case has the added advantage of mitigating the risks of retaliation against specific companies. Among the technology areas of concern, the following might be of particular focus: the high invalidity rate of foreign pharmaceutical patents at the Patent Reexamination Board; the possibility of discriminatory treatment in the handling of Standards Essential Patents; and discriminatory treatment in technologies identified as core to state industrial policy interests such as those identified in Made in China 2025 or China’s Strategic and Emerging Industries.  These claims must also be benchmarked against the extent of discrimination by most patent offices against foreign technology  (**).

C. Article 3/fn. 3: National treatment in the “enforcement of IP rights:”  There are likely limited  claims of discrimination in enforcement of IP rights under China’s IP regime.  In fact, in many sectors foreigners seem to do better than the average Chinese litigant.  De jure claims may exist in terms of China’s current trade secret regime where administrative enforcement has long been not available as a matter of law for a foreigner victim or, more recently, a foreign trade secret (****).  In addition, there may be de facto discrimination in the availability of certain remedies.  Administrative enforcement of copyrights for foreigners had historically been low, and data has not been made available in recent years (**).  Some types of remedies, such as administrative trademark enforcement, have been disproportionately used on behalf of foreigners while others such as patent enforcement may be underutilized.  A general de facto national treatment administrative enforcement claim, however, likely lacks adequate evidence and may present a poor risk/benefit calculation (*).

D. Article 3/fn.3: National treatment in the “use of IP rights”: The strongest recent de jure claims involving national treatment in the “use of IP rights” were likely the cases that the United States and Europe separately brought against China’s Administration of Technology Import/Export Regulations (DS542 and DS549), which have resulted in statutory changes in China.  The Biden administration will inherit DS542 as an ongoing case.  There are other possible national treatment “use” claims.  China has long argued that “high priced” payment of royalties to foreigners are oppressive and that prices need to be determined according to Chinese standards, including for global rate settings.  For an early version of this narrative see: “Multinationals’ Anti-Competition Behavior in China and Counter-Measures Therefore,” State Administration for Industry and Commerce, Section (1)D, Issued by the Anti- Monopoly Division, Fair Trade Bureau, (March 1, 2004).  Occasionally Chinese judges have also expressed their antipathy to foreign demands for royalty payments, and encouraged Chinese companies to aggressively use antitrust lawsuits.  Policies may be set forth in a range of documents, including court decisions, judicial guidance, regulations and rules, and interviews with senior officials. The setting of prices to limit foreign royalty payments also implicates state intervention in the market of “private rights”(above).  This case might be a de jure (“as such”) or de facto (an “as applied”) case. 

E. Other “national treatment use” claims might involve forced technology transfer  in China’s foreign investment regime.  To the extent such practices have not been fully addressed, there is a TRIPS National Treatment claim, as well as potential violations of China’s protocols of accession, the Phase 1 Trade Agreement, and the TRIPS preamble “private right” provision. The Phase 1 Trade Agreement may offer an alternative mechanism for resolution of these claims.  Finally, there are extensive subsidies, preferences and  support given to domestic innovative companies that may be actionable including subsidization for participation in standards setting bodies, subsidies for domestic and overseas patent filings, domestic technical standards that require purchasing of domestically innovated products, and other forms of assistance to purchase domestically innovated products that may constitute violation of “national treatment use” obligations (***).

II. Standards Concerning the Availability, Scope and Use of IP Rights

F. I believe that China is generally in compliance with most of the provisions regarding substantive IP rights in the TRIPS Agreement.   At the time of the first WTO case filed against China (DS362), the United States filed only one claim involving China’s standard for protection of IP, which involved copyright protection for un-approved/not yet censored works.  As time passes and all countries better understand their obligations in light of emerging trends, it can be expected that other technical corrections can appear. For example, the recently amended Copyright Law, removes numerous references to “citizens” as subjects of copyright protection and replaces it with the more TRIPS-compliant “natural persons.”

Among the remaining areas of concern is TRIPS Art. 30: “Exception to Rights Conferred” for patents.  China’s experimental use exception and its Bolar exemption for infringement of pharmaceuticals raise concerns over whether these practices “unreasonably conflict with a normal exploitation of the patent, taking account of the legitimate interests of third parties.”  Given the developing world hostility to pharmaceutical patents and IP rights and China’s increasing interest in innovation in this sector, I believe that pharmaceutical issues are probably better addressed bilaterally, as they were in the Phase 1 Trade Agreement (**).

G. Art. 39: “Members shall protect undisclosed information.”  This unique phraseology requires WTO members to actively “protect” trade secrets.  It occurs three times in Article 39.  It is not found with respect to any other IP rights in the TRIPS Agreement.  By contrast,  TRIPS requires civil remedies for all IP rights and has relatively limited requirements for ex officio action.  Even Article 61 regarding criminal enforcement of IP rights does not explicitly require public prosecution of IP crimes.  This affirmative obligation of members in Art. 39 to “protect” trade secrets also applies to undisclosed pharmaceutical test data, which is often called “regulatory data protection” (RDP).  

A case around “Members shall protect” assumes added importance as the Phase 1 Trade Agreement addresses civil and criminal trade secret misappropriation.  It does little to address claims of Chinese state involvement in trade secret misappropriation.  If the United States could prove Chinese government involvement in economic espionage and there were limited defensive risks, a case might be filed claiming the failure of China, as a member of the WTO, to “protect undisclosed information.”  (***).  A case might also be brought regarding lack of effective RDP, which was not actively addressed in the Phase 1 Trade Agreement, but which has been under active consideration for reform and was noted by USTR in its Fact Sheet on the Phase 1 Trade Agreement as a topic for Phase 2 negotiations (**).

H. Art. 40:  “Control of Anti-Competitive Practices in Contractual Licenses.” No WTO case has been heard under Art. 40, which is the principal provision addressing the intersection of antitrust and IP.   Due to the lack of cases, the failure of WTO members to agree to take up antitrust more broadly, and the increasing importance of licensing of technology for technologies such as 5G, AI, pharmaceuticals, and clean energy, a better understanding of the use and limits of Art. 40 would be helpful to licensors and licensees alike.  Importantly, Article 40(2) also sets forth the conditions of antitrust claims in licensing, which may also serve as guard rails to China and other countries thinking of invoking aggressive antitrust measures against foreign licensors.  It states that WTO members may: (a) specify in their legislation, (b) licensing practices or conditions, (c) that may in particular conditions, (d) constitute an abuse of intellectual property, (e) having an adverse effect on competition, (f) in the relevant market. As applied, the legislation may be implemented by (g) appropriate measures to (h) prevent or control such practices.  The legislation would appear to prohibit member states legislating in general terms.  Rather, the IP regime must be “particular’ and implemented “appropriate[ly]”.  For example, a failure to indicate what constitutes IP “abuse” may constitute a lack of adequate particularity.  The provision also prohibits per se violations of “abuse” of IP rights, without demonstrating an anticompetitive “effect” in the “relevant market.”  Article 40 evinces an intent of the drafters of the TRIPS Agreement to limit antitrust claims that might otherwise undercut the basic protections of IP rights.

Article 40 opens the possibility for additional WTO oversight of antitrust-related activity in the field of intellectual property at least three different ways.  First de jure and de facto claims might be made through the review of “legislation” and “appropriate measures”  to see if they demonstrate an “adverse effect” on “competition”.  I believe that Article 40 ultimately requires some form of economic analysis to support an antitrust action.  Second, Article 40 binds WTO members through footnote 3 to not discriminate against foreigners, and through the preamble it could limit the role of antitrust in domestic technology policy.  Third, Article 40 may be used to balance the  conflicts that exist between intellectual property and antitrust.  Such balancing might include: the pro-competitive effect of intellectual property to “promot[e] innovation” with the need to promote the “dissemination of technology” (TRIPS, Art. 7);  the balance between the extent to which harsh antitrust penalties may be imposed in a relatively weak Chinese IP regime; and the balance between territorial concepts of intellectual property in the TRIPS Agreement and its incorporated treaties, such as the Paris Convention, with the power of antitrust regulators and courts to look at actions that affect domestic markets which may arise from ownership of rights overseas and to issue remedies that could affect the value of rights held overseas (***).

I. Art. 40 / Due Process: Another outstanding issue under Article 40 is the extent to which due process considerations that attach to the general enforcement of IP rights in Art 41 et seq of the TRIPS Agreement also govern antitrust investigations.   If they do attach, China’s antitrust authorities would be subject to a host of TRIPS procedural requirements in IP-related antitrust matters, including “fair and equitable” procedures; timely “written notice,” (an issue that has appeared in Chinese antitrust and licensing cases as well in service of process in civil cases generally): the right to representation by “independent legal counsel,”  the right to “substantiate…claims and to present all relevant evidence,”  the protection of “confidential information,” decisions made “preferably in writing,” “based on evidence”  and “made available to the parties,” an opportunity for meaningful “judicial review” of administrative decisions,  etc.  China has made  antitrust “due process” type commitments in the past to the United States, which the US obtained outside of the WTO context.  These commitments should be monitored and if violated could form part of a WTO dispute (**).

III. Enforcement

J. General – “Independent Legal Counsel,” damages that are  “adequate to compensate,” etc.  The enforcement provisions of the TRIPS Agreement are both vague and weighty. Concepts such as “fair and equitable” procedures (Art. 42) can reasonably admit of several conflicting interpretations and may be limited to the standards of a given legal system.  The TRIPS enforcement provisions uniquely establish a right to be represented by “independent legal counsel” (Art. 42).  It is unclear what constitutes such “independent legal counsel.”  In its most common definition, it likely means counsel that does not have a conflict of interest.  More broadly, it could be interpreted as counsel that is independent of the Communist Party or other political supervisory authority.  This is one of the of the few IP claims in the TRIPS Agreement that significantly overlaps with rule of law concerns.  The various procedural requirements for enforcement taken together may make a strong basis for an IP enforcement complaint (**). 

K. Another concern is that Chinese damages remain too low (Art. 45), notwithstanding the availability of other remedies such as injunctive relief and recent improvements to increase the availability of actual damages rather than statutory damages.  A claim of inadequate damages for patent infringement may also be posited with a claim of abuse of the competition remedy for licensing practice (Art. 40) to demonstrate that China’s claims of abusive foreign licensing practices in China are not generally supported by the ability of foreigners to protect their rights or monetize their assets in China’s legal system.  It is hard to conceive of abuse of IP rights unless there are deterrent remedies, including adequate compensation, for IP infringement. Low civil damages may also suggest a weak civil system, and weak protection for IP as a “private right” (**).

L. Arts. 42/49/ 61 – Civil Procedures, Administrative Procedures and Criminal Procedures.  The TRIPS Agreement has a relatively simple approach to understanding what the procedural requirements are for civil, criminal or administrative remedies which is that civil, criminal and administrative remedies need to follow the civil, criminal and administrative procedures.  Civil remedies also need to follow “fair and equitable” civil procedures (Art. 42).  Administrative procedures involving a civil remedy “shall conform to principles equivalent in substance to” civil procedures (Art. 49).  Criminal penalties need  to made available according to criminal process (Art. 61).  One of the outstanding deficiencies in China’s IP regime is that China’s administrative enforcement is quasi-penal in nature but does not use criminal process.  Moreover, when a civil remedy, such as an administrative injunction is issued, the TRIPS Agreement requires use of civil-type procedures.  Different appellate review and transparency standards also attach to administrative investigations in China compared to civil proceedings.  While this “procedural” argument has technical merit, it is unclear to me what the precise benefit would be to foreign companies.  Many foreign companies routinely rely on China’s administrative system These companies may be opposed to any effort to undermine a system that works well in their favor for particular rights.  Moreover the administrative enforcement system remains non-transparent and a  case might involve difficult efforts to obtain supporting evidence.  Some evidence, however, might be obtained through other mechanisms, such as the Phase 1 Trade Agreement dispute resolution procedures in order to determine the impact of the special campaigns launched by the Phase 1 Trade Agreement (*).

M. “Effective and appropriate” enforcement:  the obligation to provide effective and appropriate enforcement is at the heart of the TRIPS Agreement (Preamble, et seq.).  The language is vague.  Moreover, TRIPS provides member states with considerable flexibility in implementing its terms “taking into account differences in national systems” (Preamble).  Unless there is clear evidence of an area where China’s IP enforcement environment is clearly “inadequate” or not “appropriate,” the language by itself may be too vague and flexible to be enforced (*).

N. Art. 61: Determining the commercial scale for “criminal procedures and penalties” involving “wilful trademark counterfeiting or copyright piracy” remains an ongoing concern with China.  In the WTO case that the US previously filed (DS362) the United States unsuccessfully claimed that China’s high criminal IP thresholds decriminalized certain commercial scale activities in violation of Art. 61.  The WTO did not determine that Members have unfettered discretion in determining what are appropriate criminal thresholds.  The recently signed Regional Comprehensive Economic Partnership free trade agreement (RCEP) attempts to advance China’s position in DS362 in footnote 61 of the RCEP IP chapter, which recognizes “sovereign jurisdiction over police powers” and flexibility in determining what constitutes “commercial scale.”  Left unaddressed, this alternative approach to Trips Art. 61 could undermine over a decade of work by USTR and others to help establish a common consensus over best practices for criminal IP enforcement.   Article 26 of the Vienna Convention on the Law of Treaties might be invoked to claim that RCEP fn. 61 violates the Vienne Convention obligation to implement treaties in “good faith.”  On the negative side, any WTO case brought against member states on the basis that RCEP violates the TRIPS Agreement, could also implicate US allies that signed RCEP.     Moreover, RCEP signatories will claim that the TRIPS Agreement continues to govern IP-related obligations under RCEP.  A claim might also be made that the Paris Convention, which is incorporated by reference in the TRIPS Agreement  requires WTO members to assure “effective protection” against unfair competition.  As a first step, and In lieu of a WTO case, the United States may also seek to block acceptance of RCEP at the WTO due to the “more restrictive” obligations it imposes on member states by reason of TRIPS minus provisions, including its flexible approach to criminal IP infringements.  See GATT Art. XXIV, and the Understanding on the Interpretation of Article XXIV of the GATT 1994 (****).

V.  Dispute Prevention and Settlement

O.  Article 63: “final judicial decisions and administrative rulings of general application… shall be published.”   This Article has a long history in FTA and WTO jurisprudence.  Most WTO members likely view it as only applicable to common law countries due to their tradition of precedent  However, China  – – along with many other civil law jurisdictions — has an evolving system of precedent.  China should publish cases that have “general application” whether or not they are strictly binding because of their “general application” beyond the facts in suit.  These would include cases that are considered “guiding” cases, “model” cases or other cases that are intended to instruct or guide judges, lawyers, rightsholders or the public.  While most of the influential cases are already publicly available, there are some that are not. Often these unpublished cases are known to the public due to securities commission filings based on their material impact on a publicly held company.  Preliminary injunctions or other provisional measures should also not be exempt from Article 63, provided that the decision is final. China seems to take the view that only when a case is final is there an obligation to publish.  An example of such a case is Eli Lilly vs. Huang case, which involved the first preliminary injunction for a trade secret infringement and effectively settled that dispute.  As many of the important cases involving new or unsettled law may involve foreigners and may therefore be unpublished, there may be a disparate impact on foreign rights holders which could also implicate national treatment obligations in publication of cases.  The decline in publication of foreign-related IP cases is another example of how transparency can be a form of political discourse in China.  For more information on the relationship between transparency and politics in IP case publication see my powerpoint from 2019 at p. 9, as well as my blog on Nationalism, Transparency and Rule of Law  (****). 

P. Article 63.3/Article 40.3: These provisions require WTO members to respond to requests regarding specific cases by providing relevant information.  As China does not necessarily publish important cases, these requests should be made frequently.  The United States sought to compel China to make available all of the IP cases it had statistically reported in an Article 63 request before filing the China IP enforcement WTO case against China.  Although that request was overly broad, the United States might consider a more limited request in the context of any other WTO dispute that specifically addresses the need for additional cases to better support a claim as well as the difficulties in otherwise obtaining information about a claim.  This could be especially critical if a claim is made on the basis of overall data rather than on specific cases (****).

Q. Article 64(2) provides for a moratorium on “non-violation” TRIPS cases.  This moratorium has been repeatedly extended over the objections of the United States.  Non-violation cases are generally available if one government can show that it has been deprived of a reasonably expected benefit because of another government’s action, or because of any other “situation” that exists.   One condition for the United States to only consider approving appointments to the Appellate Body and reinstitute full WTO dispute resolution procedures could be the removal of the moratorium of the non-violation procedures for IP-related disputes (**). 

Actions Under Other WTO Agreements

R. The WTO Dispute Settlement Understanding, Art. 10  provides that dispute settlement procedures “should not be considered or intended as contentious acts.” This provision  constrains the ability of member states to retaliate against the filing of WTO cases.  During the DS362 dispute China did engage in range of retaliatory activities, mostly in the form of threats and the ceasing all forms of IP-related cooperation.  The US should be prepared to file  complaints if US interests are the subject of significant retaliation by reason of the filing of a  WTO case. (***).

S. There are claims under other WTO agreements that also have a direct bearing on China’s IP regime.  For example, China’s subsidization of IP-intensive, information technology products, might be the subject of a “Non-Violation” case under the Information Technology Agreement.  The CATO Institute advocated  for such actions in 2018 (****).  The United States may also wish to open up legal services markets or IP-related legal services markets, particularly due to increasing inequities and gaps in China’s original service commitments which failed to account for the presence of foreign lawyers in Chinese law firms, or that US-admitted lawyers from China in Chinese law firms that would enjoy competitive tax treatment in China as well as preferential market access (***).  Alternatively, the US could also seek to impose reciprocal market access provisions on Chinese lawyers and companies.  The USPTO has already curtailed pro- se filing of US trademarks by Chinese companies legal services offered by US-admitted lawyers practicing in Chinese law firms.

Litigation of any kind involves balancing risks and rewards.  Remedies may be inadequate.  There may be higher priorities for a company or government.  There may be alternative means of resolving disputes. Litigation can also greatly harm relations with your adversary.  China also has many pro-IP policies, that are “TRIPS plus” that should not be negatively impacted.  A negative precedent that could harm one in other contexts might also be established. There is also the possibility of retaliatory measures, including retaliatory litigation.  On the positive site, a helpful precedent might be established, specific claims may be better understood by the trade community, a spotlight may be shown on areas where legal reform is necessary, informal dispute resolution is never necessarily precluded, and the dispute may also help convince China that a particular reform would be helpful to its economy.  As an example of a helpful impact, DS62, which the United States lost, nonetheless had enhanced China’s understanding of criminal IP enforcement, helping to increase filings of criminal cases in China from 904 to 15,121 in the five years subsequent to the case.

The Phase 1 Trade Agreement established an important bilateral IPR dispute resolution mechanism (Chapter 7) in addition to WTO mechanisms.  The Deputy USTR is the sole designated agency on the US side to lead these disputes, whereas the Chinese side authorizes the Vice Premier to designate a Vice Minister. This situation perpetuates the possibilities of ill-informed negotiations on complex issues on the US side as the full range of trade-related issues may escape the mastery of any one individual or agency. WTO dispute mechanisms have an advantage of generally being run by subject matter experts, with some degree of transparency and accessibility to other WTO members and civil society.  The Phase 1 Mechanism may also be sub-optimal for disputes which require support from other member countries.

To be clear, I am not suggesting that the United States should actively pursue any of these WTO claims.  Additional research would be required on every single one of them.  I am also refuting the arguments that: the United States somehow exhausted all possible WTO remedies with the two IP cases it brought over a 20-year period; the WTO is irrelevant and out of date;  and that the United States was fully entitled to unilaterally impose sanctions and leave the WTO dispute resolution mechanism.   On IP, the United States has historically been hyper-cautious in using WTO mechanisms against China.  If the United States wants to “build back better” in the trade context and establish collaborative relations with our allies regarding China, President-elect Biden and USTR-designate Tai may wish to consider a different approach to IP-related disputes at the WTO.  Any approach should  be multi-disciplinary and forward looking, which are strengths that Katherine Tai brought to a prior rare earths dispute.  A dispute should also recognize that the China of today is vastly more sophisticated in its approach towards IP than when China acceded to the WTO in 2001.  Any strategy should  be based on solid information and not hyperbole.  It should also not be limited to the TRIPS Agreement alone.  Such an undertaking will need to draw on a range of legal and trade disciplines.  

Consider this blog as a set of suggestions  — a  “whiteboard” in essay form.  I look forward to your comments.  

IPO Comments on the Trade Secret Rules

The Intellectual Property Owners Association (IPO)  has submitted bilingual comments to SAMR on the draft Trade Secret Rules 《商业秘密保护规定(征求意见稿) 》.   The comments are found here and at the IPO website   I blogged about these rules previously here

IPO’s substantive trade secret comments on a range of issues governed by both the Phase 1 Trade Agreement and emerging best practices are especially welcome. In my view, IPO also correctly notes that “[t]he Draft Rules contemplate an expansive role for administrative authorities in connection with trade secret enforcement.” It properly advocates for harmonization with the people’s courts in such matters as “uniformity, predictability, transparency, oversight, and procedural protections that are provided to the affected parties through judicial review.”   IPO also notes that rule making like this would be better if accomplished through than State Council Regulations to ensure that they are sufficiently authoritative.  I also agree. 

Thank you IPO for making these publicly available!

The Cart Before the Horse in China’s Patent Linkage Regime

Since China’s legislature amended the patent law on October 17, 2020 and China’s National Medical Products Administration (NMPA) and  its National IP Administration (CNIPA) published the Implementation Measures for the Early Resolution Procedures for Drug Patent Disputes (Trial) (Draft for Comment) ( 国家药监局综合司 国家知识产权局办公室公开征求《药品专利纠纷早期解决机制实施办法(试行)(征求意见稿)》意见) (the “Rule”) on September 11, 2020, several people have written to me who are bewildered about the sequence of rules being proposed on patent linkage in advance of the enactment of patent linkage into law.  This post analyzes whether this “cart before the horse” scenario should be a concern for US pharmaceutical companies, and what this counter-intuitive sequencing may suggest for China’s new patent linkage regime.  

This is indeed an unexpected circumstance.  There was no advance word that the Rule was being prepared for public release. CNIPA and NMPA’s parent agency, the State Administration for Market Regulation (SAMR), did not include a patent linkage rule in its 2020 legislative work plan.  CNIPA also had not included a patent linkage rule among its top 100 IP projects for 2020.  However both SAMR and CNIPA did include the more general Implementing Regulations for a revised patent law in their anticipated legislative work for 2020.   By contrast, the Beijing IP Court issued a research report on Patent Linkage (中国药品专利链接制度研究) in late September, which advocated judicial reforms to support a linkage regime.  In addition, the Supreme People’s Court in its 2020 annual plan announced its intention to draft a judicial interpretation (JI) for patent linkage cases.  They have not yet released their draft JI.

This “cart before the horse” Rule may trace part of its origins to the Phase 1 Trade Agreement (January 15, 2020) (the “Agreement”).  The Agreement did not explicitly require that the civil courts play the leading role for patent linkage disputes. The Agreement also failed to establish an “artificial infringement” regime for the Courts to rule that an application for marketing approval of a patent drug constitutes infringement. Instead, it required that China adopt “procedures for judicial or administrative proceedings and expeditious remedies”, and that China “may … provide” administrative remedies for resolution of linkage disputes (Art. 1.11).   In so doing, the Agreement left open the possibility that the administrative agencies would play the dominant role in a patent linkage regime.

More generally, the Agreement also authorized a leading role for administrative IP enforcement in a range of areas with its repeated references to campaign-style administrative enforcement.  The Agreement also did not acknowledge or seek improvements to China’s notable IP-related judicial reforms.   The Agreement was also immediately preceded by an important State Council/Party Central Committee plan that called for strengthening of administrative enforcement (Nov. 24, 2019), and that was considered in its time to be a high-level policy precursor to the Agreement. This policy evolution has also been accompanied by changes to all of China’s major IP laws including the Trademark law, the Patent Law, the Anti-Unfair Competition Law, as well as proposed Copyright Law Amendments, that all further commit China to strengthened administrative enforcement of IP.

CNIPA and NMPA took the next step of securing a key role for their agencies in patent linkage when they drafted and published the Rule.  I use the term “Rule” (規章) or “Departmental Rule” (部門規章) in this blog as a term of art, consistent with China’s Law on Legislation 立法法.  The nomenclature is also consistent with China’s own descriptions of its legal system  upon acceding to the WTO.  A Rule is a legislative document enacted by a departmental agency that is inferior to a Law (法律)that has been passed by the National People’s Congress or  a State Council-enacted Regulation (法規).  As set forth in the hierarchy of the Law on Legislation, it is also inferior to many types of local legislation.  As with other Rules, NMPA/CNIPA does not use the word “rule” in its September 11 pronouncement.  It instead calls its legislation “procedures” (办法). However, do not be misled! The Law on Legislation does not use “Procedures”  as a term to categorize legislation, even if regulatory agencies use this term in their own enactments.  When a Departmental Agency enacts a legislative document it is typically a “Rule” under the Law on Legislation based on the enacting agency and the legislative process. The categorization of legislation is often not immediately clear from its own wording.  Moreover, the legal status can also become murkier if sui generis or inter-agency procedures not otherwise in the Law on Legislation are involved.

In amending the Patent Law, the NPC cemented the leading role of NMPA and CNIPA by declining to legislate on linkage in detail and delegating rule-making authority to these agencies. According to Article 76,  “procedures” (or a “Rule”) will be drafted by NMPA and CNIPA to govern “pharmaceutical approvals and applications for marketing approvals.” Article 76 further requires the “procedures” to be delivered to the State Council for its approval before implementation (国务院药品监督管理部门会同国务院专利行政部门制定药品上市许可审批与药品上市许可申请阶段专利权纠纷解决 接办法,报国务院同意后实施).  By delegating drafting authority to NMPA and CNIPA and legislating that the State Council will be the final arbiter of its contents, the Patent Law has likely placed the NMPA and CNIPA Rule within that murky class of sui generis enactments.   

In its final form the State-Council approved patent linkage Rule is unlikely to be in conflict with any explicit Patent Law Amendment provisions. The State Council approval mechanism also still leaves open the possibility for additional policy interventions that are consistent with the Patent Law.  One important modification that might be considered would be to authorize the Ministry of Justice (MOJ) take a more active role in the drafting of the Rule or craft the Rule as a Regulation promulgated by the State Council itself. Pursuant to the administrative restructuring of March 13, 2018, MOJ is required to perform the legislative functions formerly performed by the Legislative Affairs Office of the State Council  (《第十三届全国人民代表大会第一次会议 关于国务院机构改革方案的决定》,批准《国务院机构改革方案》, which previously prepared Regulations.   

If the State Council were to take a leading role in drafting on patent linkage, past practice would suggest it will ensure that all agencies concerned would have an opportunity to comment.  The agencies would not only include NMPA and CNIPA but could also include the courts, trade, health, science or industrial planning and development agencies, as well as authorities responsible for personnel and budgeting.   A Regulation or sui generis Rule which involves all relevant agencies might also obviate the  failures of a prior linkage rule in 2002 which relied exclusively on administrative rule making.  As the late Prof. Benjamin Liu wryly observed at that time: “the SFDA  [predecessor agency to NMPA] does not always succeed with its gate-keeping function.”  Deputy Director Ding Jianhua of SFDA also succinctly stated the problem:   “SFDA is not responsible for IPR.” [1]

Judicial involvement in this legislation is needed to harmonize the legal complexities of patent linkage which complex issues of patent law, civil law, administrative law, and pharmaceutical regulation.  A lack of judicial involvement confounded the implementation of the 2002 rule.  This 2002 Rule (and subsequent amendments) was further stymied by later legislative changes in the patent law when China added a “Bolar exemption” to exempt pre-marketing approval efforts by generic companies from claims of infringement.  In Prof. Liu’s words, this exemption  “swallowed the rule of patent linkage.”  Bolar exemptions are well-known in international practice, being an exemption from civil infringement claims and are within the purview of the courts.  Overly-broad Bolar exemptions can raise concerns over compliance with TRIPS and other international IP obligations.

China’s vast administrative system must surmount other challenges to lead a patent linkage regime. These challenges include: a lack of administrative enforcement transparency; uncertainty regarding coordination between judicial and administrative enforcement; differing legal appeal routes and standards for litigating infringement which may lead to undermining of one system over another; concern for the systemic impacts on China’s IP regime by relying on administrative interventions rather than the civil system; limited foreign utilization of the patent administrative enforcement system particularly for high value pharmaceutical rights; and the inherent “fox guarding the hen house” fear when the administrative agencies that grant patent rights and marketing authorizations are also tasked with enforcing these important rights. 

Long-term observers may also fret that CNIPA and NMPA are an “odd couple” to administer a linkage regime  Although they are housed in the same mega-agency, SAMR, NMPA in recent years has been a leading advocate for  patent linkage, while  CNIPA had been viewed as less supportive. There are also continuing concerns over CNIPA’s excessive invalidation of pharma patents.

At this stage, the most appropriate corrective to these various challenges would be to leverage the State Council’s authority to take a leadership role in implementing Article 76 of the Patent Law, as well insure that there is conforming language in the Patent Law Implementing Regulations which MOJ will likely be coordinating in the near future.  An effective linkage regime for China will not only need to balance the interests of generics and innovators in China’s linkage regime, but also between the courts and the range of concerned administrative agencies.

Where will China go next at this important juncture on patent linkage?  Berkeley Law will be convening a webinar on China’s patent linkage regime as part of a multi-part series on food and drug law.  I will be joined by He Jing from the GEN law firm, Cui Can from Morrison and Forster, Dr. Karen Guo from Novo Nordisk and Xuejiao Hu from Beigene.  The event will take place on November 17.  Registration information is available here


[1] Benjamin Liu, ”Fighting Poison with Poison? The Chinese Experience with Pharmaceutical Patent Linkage,” 11 J. Marshall Rev. Intell. Prop. L. 623 (2012).

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