Public Interest and Private Rights in the Copyright Law Amendments

June 13 is the last day for submitting comments to China’s National People’s Congress on proposed revisions to China’s Copyright Law.   In this blog,  I discuss draft provisions in the Copyright Law that reflect vague concepts of “public interest” and could thereby grant excessive discretion to China’s copyright enforcers, which are worthy of comments to the NPC.

There are two newly introduced provisions that are of significant concern: Art. 4 and a newly introduced Art. 50.  A long-standing restraint on administrative enforcement that is not in the public interest is also discussed, below:

4. 著作权人和与著作权 有关的权利人行使著作权或者与著 作权有关的权利,不得违反宪法和法 律,不得损害公共利益,不得滥用权 利影响作品的正常传播。国家对作 品的出版、传播依法进行监督管理。

Copyright owners and owners of rights related to copyright shall not violate the Constitution or laws, or jeopardize public interests, or affect normal communications of works by abusing their rights when exercising their copyright and rights related to copyright. The State shall supervise and administrate the publication and dissemination of works in accordance with the law. [emphasis supplied]

50. 滥用著作权或者与著作权有关的权利.,扰乱传播秩序的,由著作权主管部门责令改正,予以警告,没收违法所得,非法经营额五万元以上的,可以并处非法经营额一倍以上五倍以下的罚款,没有非法经营额、非法经营额难以计算或者不足五万元的,可以并处二十五万以下的罚款.

Where anyone abuses copyright or rights related to copyright and disrupts the order of communication, the copyright administration may order  correction, issue a warning, confiscate unlawful gains, and, in the cases of an unlawful turnover exceeding 50,000 yuan, impose a fine of one to five times of the unlawful turnover; or, in the cases of no unlawful turnover or an unlawful turnover that is difficult to calculate or less than 50,000 yuan, impose a fine of up to 250,000 yuan. [emphasis supplied]

Article 4 has had a controversial history.  It was previously the subject of a WTO dispute (DS362).  It originally provided that “Works the publication or distribution of which is prohibited by law shall not be protected by this Law”, thereby denying copyright protection to works that had not yet  been approved by censors.    As I recall, the original inclusion of that language in the Copyright Law had been opposed by many Chinese academics.  After China’s loss in that case, this language was removed, and additional language was added that “The State implements supervision and management over publishing and dissemination according to the law.” The amendment was discussed in a blog of Danny Friedmann of March 10, 2010 (citing Rogier Creemers). 

Article 4 is now proposed to be expanded again.  The new changes require that rightsholders not exercise their copyrights in a manner that affects “normal communication of works.”  What constitutes “normal” communication is unclear from the text.  In addition, Article 50 provides an administrative remedy against anyone who disrupts “the normal order of communication.”  “Normal communication” is also not otherwise defined and may not be the same concept as set forth in Article 4.   One concern may be that this is a “back door” mechanism for copyright authorities to regain the exemption from copyright protection for works that have not obtained censorship approval.  Such governmental “mission creep”  may also be reinforced by the relocation of China’s National Copyright Administration to the CPC Central Propaganda Bureau in the governmental reorganization of March 2018.  This standard of “normal order” of communication or “normal communication of works” is also not found in other IPR or quasi-IPR laws, such as China’s recently enacted E-Commerce Law (2018), which also contains an antitrust provision that  addresses conduct constituting an “abuse of dominance” that “excludes or restricts competition” (See Art. 23).

Xiong Wencong 熊文聪 discusses these two provisions in an exhaustive article 对新增“著作权滥用”条款的几点思考(“Some thoughts on the newly added ‘abuse of copyright’ provisions”) (Chinese language only).  Xiong points to a number of issues of concern, including that  “abuse of rights” should be based on motivations to harm another through exercise of rights, but also need to be constrained by other rules.  As set forth in the draft law, these concepts of abuse of rights are also not be easy for enforcement officials to enforce.  The “public interests” that may be implicated in an “abuse of rights” are difficult to understand except through other established mechanisms, such as antitrust law, and should be not be based on simply harming one individuals’ profitability.

In a possibly related development to the above, Art. 52 of the proposed revision of the Copyright Law expands the requirement of current Art. 48, and thereby perpetuates – and possibly expands –  an existing ambiguity under the Chinese Copyright Law regarding what constitutes “public interest.”

Current Art. 48 provides:

有下列侵权行 为的,应当根据情况,承担停止侵 害、消除影响、赔礼道歉、赔偿损失 等民 事 责 任;同 时 损 害 公 共 利 益 的,可以由著作权行政管理部门责 令停止侵权行为,没收违法所得, 没收、销毁侵权复制品并可处以 罚款

Anyone who commits any of the following acts of infringement shall, depending on the circumstances, bear civil liabilities such as ceasing the infringement, eliminating the bad effects of the act, making an apology or paying compensation for damages; where public interests are impaired, the administrative department for copyright may order the person to discontinue the infringement, confiscate his unlawful gains, confiscate or destroy the copies produced through infringement, and may also impose a fine… [emphasis supplied]

Proposed Article 52 provides:

 有下列侵权行 为,损害公共利益的,除承担本法 第五十一条规定的民事责任外,由 著作权主管部门责令停止侵权行 为,予 以 警 告,没 收 违 法 所 得,没 收、销毁侵权复制品,没收主要用 于制作侵权复制品的材料、工具、 设备 等,

Anyone who commits any of the following acts of infringement and impairs public interests  shall bear civil liabilities in accordance with Article 51 of this Law; besides, the copyright administration shall  order the person to discontinue the infringement, issue a warning, confiscate his unlawful gains, confiscate or destroy the copies produced through infringement, and may also impose a fine; where the circumstances are serious, the said department may, in addition, confiscate the material, tools and instruments mainly used to produce copies through infringement, etc. [emphasis supplied]

Proposed Article 52 maintains the limitation in Art. 48 of the current Copyright Law on administrative enforcement to instances where there is an adverse impact on “public interests”.  In the past there was already a concern that this could undermine the commitments China made in the earlier WTO case (DS362) to provide copyright protection to works not otherwise approved by censors notwithstanding that administrative agencies as well as law enforcement generally should look to focus their resources primarily on areas that invoke strong public interests, notwithstanding previous amendments to Art. 4.   The “public interest” test has also long been viewed as a limitation on certain types of content-neutral copyright administrative enforcement, particularly in dealing with software end-user piracy.  In order to address these concerns China agreed in a 2005 JCCT outcome to announce that software copyright infringement was in fact against the public interest. 

The continued presence of this language should raise concerns about China’s willingness to address software end user piracy through administrative enforcement actions, including controlling government use of pirated software, as required by  Article 1.23 of the Phase 1 Agreement.  Moreover by placing the “public interest” test at the beginning of this article to govern both administrative and potentially civil cases, it might be read to require that civil cases also reflect “public interests”, or at best to authorize government agencies to intervene in private civil matters through ex-officio administrative enforcement.  The restriction might further limit the availability of copyright remedies to uncensored works, thereby violating the WTO decision in DS362.  Additionally, the language might be linked to efforts by NCAC or its parent agency, the Central Propaganda Bureau, to restrict enforcement options for works that might not be consistent with current public interests.  Although no examples are provided in this draft legislation, one wonders whether a popular video game that may be distracting students from other activities or civil cases brought against the government for copyright infringement, including (but not limited to) business software could be perceived as against public interests.

Vague notions of public interest/public harm/abuse of IP interests that are not tied to clear legal concepts such as abuse of dominance under the Antimonopoly Law have not generally brought welcome improvements to other aspects of China’s IP environment.   Thankfully, a long-standing provision in China’s contract law regarding invalidity of provisions that “impair technological progress” was recently removed from China’s civil code.  A similar problem has appeared with respect to enforcing “under-performing” concepts of “good faith” in China’s trademark law and other IP laws.

Vagueness in safe harbors have also not provided ample guidance in the proper exercise of rights, such as in Article 55 of China’s Antimonpoly Law.  The recently proposed revisions to the AML do not propose changes to Art. 55.   Article 55’s ambiguous concept of what conduct constitutes proper exercise of IP rights which might otherwise violate the AML is drawn from similarly vague language in TRIPS Art. 40.   As Prof. Hao Yuan has noted elsewhere in this blog “the IP immunity approach [of this article] has largely been ignored in practice. “   

It is not only the vague language of these provisions that is worrisome.  The expansion of administrative discretion embodied in these three provisions of China’s Copyright Law is also accompanied by an extensive expansion of administrative enforcement capacity contemplated by the draft Copyright Law (Art. 7), which would vest county-level governments with extensive authority over copyright matters.  Efforts to expand administrative authority are a “new normal” for Chinese IP agencies, which is being accomplished through draft IP legislation, expansive interagency cooperation, or even (I would argue) as a vehicle for “deliverables” in the Phase 1 Agreement.  One additional factor in this proposed legislation is the reorganization of the copyright administration under the umbrella of the powerful CPC propaganda bureau, now called in English the Publicity Department.  This agency may legitimately want to further expand its influence over content or practices deemed inappropriate for non-copyright related reasons. Expansion of authority of administrative agencies that are frequently used for enforcement can, of course, be a helpful development for rightsholders.  However, I believe that non-copyright concerns may be best addressed in non-copyright legislation.  If left unchecked, introduction of non-IP concerns that are enforced by administrative agencies could also transform IP from a private right to a regulatory tool and constrain the development of the judiciary as an expert and transparent enforcement vehicle independent from the administrative agencies to enforce these IP rights.

 
Update of July 8, 2020: Here is an article from the July 6, 2020 South China Morning Post expressing concerns about the “public interest” and administrative enforcement aspects of the proposed draft copyright law.

Draft Copyright Law Up for Public Comment

The National People’s Congress released a draft of the Copyright Law for public comment.  Comments are due by June 13, 2020.  The NPC comments on the draft are found here.  The NPC Observer’s concise summary of the legislative history is here.   I had discussed the earlier draft, along with the NPC observer predictions regarding consideration in late 2019, here.  The draft will likely be reviewed again near the end of this year and could pass in late 2020 or 2021.

There have already been some reactions to this draft.  Aaron Wininger pointed out in a recent article the provisions regarding quintuple damages, increased statutory damages, shifting of the burden of proof, and improvement in digital rights management.  He also briefly discusses some other changes, such as the change from “audiovisual works” to “cinematographic works.”  On first glance, the draft does appear to have expanded provisions on technological protection measures and anti-circumvention of technological protection measures, although further study is necessary to determine their consistency with prior laws, regulations, China’s commitments under the WIPO Internet Treaties, etc. (See Art. 48).

“Quintuple damages” and burden-shifting appear to be the “new normal” in revisions to Chinese IP laws. These changes predate the current trade war and are part of a mounting effort to increase civil deterrence.  It remains to be seen how they will be implemented in judicial interpretations and how observable they will be in judicial practice through the publishing of relevant cases.

Prof. Liu Chuntian, a friend and colleague from Renmin University, has written an insightful quick response article regarding the draft on weixin (Chinese language only).  Prof. Liu participated in the drafting of the PRC’s first copyright law.  His principle concerns with the draft include:

  1. The concept of “audiovisual works” replaces the expression “movies and works obtained by methods similar to filming.” This change in definition will provide protection for video games regardless of the technology that employed.   It may also have implications for expanded protection of live webcasting of sporting events, which has been a continual problem under Chinese copyright law, which were often thought be in sufficiently creative to be protected as a cinematographic work.  Prof. Liu suggested that China’s drafters consider borrowing from the practice of other countries, notably Brazil, which expanded copyright protection using the concept of “audiovisual works” regardless of the technology.  This can mitigate the possibility of continuing the conflict in Chinese IP law (and the law of other jurisdictions) between “cinematographic works” and “audiovisual works” which have provided uncertain protections depending on the technology employed.  At the same time, according to Prof. Liu, as the new law stipulates that the right owner in an AV work belongs to the producer, it will also be important to clarify the rights of authors and composers whose works are incorporated into AV works. He suggests that the new law should clearly stipulate that the rights in these works should be controlled by the copyright holder.
  2. Prof. Liu agrees on the importance of the improvements to the civil system, including increased damages and rights to demand production of evidence.
  3. Prof. Liu generally opposes the expansion of copyright administrative authorities to the county (xian) level, noting that it would lead to the creation of over 3,000 copyright offices in China – more than the rest of the world combined. He also takes issue, as do I, with the expansion of administrative enforcement power in the copyright law, and notes that as a private property right the civil system should be the principal vehicle for enforcement. This also appears to be a “new normal” in Chinese IP legislation, which has also been urged on in recent years by US demands for enforcement campaigns and increased punishment, including increased online enforcement for copyright in the Phase 1 Trade Agreement (Arts. 1.13, 1.14).
  4. Prof. Liu also notes that it is important that copyright is considered an aspect of civil law, and that it is guided by civil law principles, including tort and contract law, as well as the on-going drafting of the Civil Code. He notes that currently there is no IP chapter in the Civil Code and it is therefore even more important for the civil law and the copyright law to be integrated.  Consistent with China’s civil law tradition and his desire to ensure that copyright is protected as a private civil right, Prof. Liu places the primacy of the creator of the work as the first subject of protection. He notes “[t]he rights of other people are all rights that come from, are obtained through legal acts, through contracts or authorization mechanisms, and regulate the rights of the acts passed on.  This is the task of other laws.”

I hope to be able to post a translation of the draft soon.  Once a translation is available, Berkeley Law hopes to convene a round table discussion on the amendments to exchange views and assist in providing informed comments.  Please also post your comments or corrections to this posting and send us any translation you have prepared or comments you have submitted so that I may include them in a future blog.

Update of July 20, 2020: Here are the comments of Prof. Andy Sun.

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.

Supreme People’s Court Calls for Public Comments on Enforcement of Intellectual Property Judgments

Addendum of April 18, 2020: Here is an English language unofficial translation of the Implementation Plan and the Guidelines for reference purposes.  If you see any errors, please advise us by comments on this blog.  The translation is provided with no representations or warranties of any kind as to content.  Readers should consult with the Chinese original in the links above, as the translation has no legal significance.  The translation is courtesy of USPTO, which claims no responsibility for any inaccuracies in the translation.

On March 15, 2020, the Supreme People’s Court of China issued a notice soliciting public comments on the Implementation Plan for the Enforcement of Intellectual Property Judgments (Draft for Public Comment) 知识产权判决执行工作实施计划(征求意见稿)and the Guidelines for the Enforcement of Intellectual Property Judgments (Draft for Public Comment) 知识产权判决执行工作指南(征求意见稿 ). Comments are due on May 15, 2020. 

According to one online commentator, one reason for these documents is that in recent years, after the establishment of the punitive compensation mechanism for intellectual property rights in China, a large number of court-enforced cases have emerged. In fact, difficulties in enforcing judgments have been of concern to China’s leadership and the Supreme People’s Court for several years and appear to be independent of the possibility of increased punitive damages. President Xi Jinping identified this issue of enforcement difficulty 执行难 in the Fourth Plenary Session of the 18th CPC Central Committee (2014). The SPC further proposed to solve this problem in two to three years at the Fourth Session of the 12th National People’s Congress. SPC President Zhou Qiang also raised this issue in a report in 2018. None of these high-level pronouncements particularly singled out intellectual property as an area of enforcement concern.

In general enforcement issues that have concerned China involve enforcement of judgments. SPC President Zhou Qiang identified that China has faced such enforcement issues as: (1) judicial difficulties in locating the person and their property because the judgment debtors conceal their property and whereabouts; (2) the traditional liquidation method is subject to a long cycle with a low success rate, and corruption often occurs during liquidation, so the court is unable to liquidate the property to be enforced; (3) local governments and powerful personnel commit corruption and intervene and hinder the enforcement; (4) many unenforced cases accrue year after year, which has led to serious social conflicts.

Enforcement issues that foreigners have identified have included matters arising as part of the judgment, and often before the execution of the judgment including increased infringement compensation, jurisdictional issues of court enforcement, the procedures when a party initiates an enforcement action, enforcement procedures of pre-litigation preservation, enforcement of administrative remedies and criminal remedies including civil compensation for criminal cases, etc.  

This is the first time that the Supreme People’s Court has formulated an implementation plan and work guidelines specifically for intellectual property rights enforcement. While this move is explicitly aimed at strengthening the judicial protection of IP rights and ensuring that effective judgments on IP cases are enforced in accordance with the law, another purpose of this initiative is likely to fulfill China’s commitments under Article 1.28 of The Phase 1 IP Agreement of ensuring expeditious enforcement of IP judgments. Article 1.28 “Enforcement of Judgments” 判决执行 provides:

1.The Parties shall ensure expeditious enforcement of any fine, penalty, payment of monetary damages, injunction, or other remedy for a violation of an intellectual property right ordered in a final judgment by its own court.

2. Measures China shall take include executing work guidelines and implementation plans to ensure expeditious enforcement of judgments, publishing its work guidelines and implementation plans within one month after the date of entry into force of this Agreement, as well as publishing online quarterly reports of implementation results.

As the main part of the Implementation Plan, Section 2 “Specific Implementation Plan” 具体实施计划 includes the following provisions: filing of enforcement of IP judgment (Art. 1), pre-litigation preservation (Art. 2), how to quickly identify and control the property of the executed person (Art. 3), assets evaluation (Art. 5), assets disposal (Art. 6), obligations of the executed person (Art. 7), handling enforcement cases offsite (Art. 10), judicial publicity (Art. 12), etc.  Generally speaking, these provisions point to the specific measures previously promulgated by the SPC, rather than making headway in new policies or experiments, or suggesting more concrete measures or working methods. In this sense, the Implementation Plan highlights out IP judicial enforcement issues are tied to general enforcement concerns.

Addendum of April 18, 2020: Here is an English language and unofficial translation of the Implementation Plan and the Guidelines, for reference purposes.  If you see any errors, please advise us by comments on this blog.  The translation is provided with no representations or warranties of any kind as to content.  Readers should consult with the Chinese original in the links above, as the translation has no legal significance.  The translation is courtesy of USPTO.

According to Article 13 of the Implementation Plan, a special section of “Intellectual Property Judgment Enforcement Publicity” on China’s Enforcement Information Disclosure Website will be published by the end of June 2020, focusing on publicizing the implementation information of intellectual property judgments, so as to facilitate transparency, public understanding,  and supervision. This appears consistent with the requirement for publishing online reports of implementation results in the Phase 1 IP Agreement. In fact, as we have previously noted, the disclosure should not only be limited to the disclosure of the enforcement of IP judgments. In order to ensure that China’s civil enforcement is observable and accessible, China would need to publish all of its IP cases, including cases involving provisional measures, as well as dockets that may include motions and settlements. Many observers, including in this blog, have noticed a large drop in publication of foreign-related IP cases since approximately January 1, 2018, which should also be addressed. Finally, it is unclear from the text of the Implementation Plan or the Phase 1 Agreement, whether China intends to publish the actual enforcement decisions to the same extent that it publishes cases, notwithstanding that many enforcement cases are now available on the SPC’s official website.

In addition, over the past several years, there has been an increasing incidence of multinational IP disputes, particularly in technology sectors. As previously noted, the Phase 1 IP Agreement also does not address the problems arising from these cases. An added problem arising from SEP cases in particular, has arisen over anti-suit injunctions and whether China should issue its own anti-suit injunctions, which was the subject of a recent conference (January 2019) at Renmin University.

In terms of execution of foreign judgments, Article 7(1) of the Guidelines mention that: “If a foreign party applies for execution, it shall submit a written application for execution in Chinese. If there are special provisions in the mutual legal assistance treaty concluded or co-joined by the country where the party is located and China, the treaty provisions shall apply.” This provision noticeably omits any reference to the Article 282 of  Civil Procedure Law, which permits enforcement of foreign judgments on the basis of reciprocity. United States courts have also occasionally enforced Chinese money judgments, including those which have an IP-related element, under the Uniform Foreign Money Judgments Recognition Act.   According to Susan Finder, the SPC is working on drafting a judicial interpretation on this issue at some time in the future.

Based on the Implementation Plan and Guidelines, it remains unclear how the enforcement of IP judgments differs from other judgments and, indeed, why it should be different from other civil, criminal or administrative matters. In the past many judicial reforms have been tested in the IP context.  The past experience of initially testing legal reforms in IP than reaching out to other areas is less evident in these two documents.  While few new specific measures have been proposed, the SPC’s release of these documents does reflect its increasing emphasis on IP rights, perhaps undertaken in response to US pressure. 

Addendum of April 18, 2020: Here is an English language unofficial translation of the Implementation Plan and the Guidelines for reference purposes.  If you see any errors, please advise us by comments on this blog.  The translation is provided with no representations or warranties of any kind as to content.  Readers should consult with the Chinese original in the links above, as the translation has no legal significance.  The translation is courtesy of USPTO, which claims no responsibility for any inaccuracies in the translation.

Written by Mark A. Cohen with the assistance of  Xu Xiaofan

MofCOM Releases Draft Foreign Investment Complaint Rules: How Good Will It Be For Forced Tech Transfer?

On March 23, 2019 the Ministry of Commerce released its  Rules for Foreign Investment Complaints (Draft for Public Comment (外商投资企业投诉工作办法[征求意见稿]) (the “Rules”).  Comments are due by April 22.  This is one of several recent Phase 1 / trade responsive initiatives that have been announced or are expected in the near term from China.  This blog will focus on the IP aspects of the Rules, notably those provisions that can be used to address forced technology transfer and protecting trade secrets.

The Rules seek to implement Article 26 of the Foreign Investment Law, which provides as follows:

The State establishes working mechanisms for complaints by foreign-invested enterprises, promptly handles the issues raised by foreign-invested enterprises or their investors, and coordinates and improves the relevant policy measures.

Where foreign-invested enterprises and their investors consider the administrative acts of administrative organs and their employees to have infringed upon their lawful rights and interests, they may petition for a resolution through the working mechanisms for complaints by foreign-invested enterprises.

Where foreign-invested enterprises and their investors consider the administrative acts of administrative organs and their employees to have infringed upon their lawful rights and interests, in addition to petitioning for a resolution through the working mechanisms for complaints by foreign-invested enterprises in accordance with the provisions of the previous paragraph, they may also petition for administrative reconsideration or initiate administrative litigation in accordance with law.

A major concern by the Trump Administration had been to prohibit forced technology transfer by China, through making tech transfer a condition of foreign investment approval or other means.   Article 2.1 of the Phase 1 Agreement addresses this concern:

  1. Natural or legal persons (“persons”) of a Party shall have effective access to and be able to operate openly and freely in the jurisdiction of the other Party without any force or pressure from the other Party to transfer their technology to persons of the other Party.
  2. Any transfer or licensing of technology between persons of a Party and those of the other Party must be based on market terms that are voluntary and reflect mutual agreement.

Article 23 of  The Foreign Investment Law, which predates the Phase 1 Agreement addressed this concern as well:

Administrative organs and their employees shall, in accordance with law, maintain the confidentiality of the trade secrets of foreign investors or foreign-invested enterprises that they learn in the course of performing their duties, and must not disclose or unlawfully provide them to others.

The proposed Rules set up a working group (工作机构), coordinated by MofCOM with counterpart agencies down to county levels (Art. 2) to handle foreign investment complaints.  This complaint process is not exclusive of other legal remedies, such as administrative reconsideration or litigation, “letters and visits” (petitioning), etc. (Art. 8).  The Rules afford the possibility of initiating parallel track procedures, provided applicable legal limitations periods are adhered to for legal actions.  However, if these alternative legal procedures are accepted, the MofCOM process will be terminated:

Art. 19.3 During the handling of a complaint, if the complainant initiates administrative reconsideration, administrative litigation and other procedures on the same complaint, or an application is filed with a higher level complaint agency or disciplinary inspection, supervision, letters and visits and has been accepted, the complainant shall be deemed to apply for withdrawal of the complaint.

投诉处理期间,投诉人就同一投诉事项提起行政复议、行政诉讼等程序的,或者向上级投诉工作机构或者纪检、监察、信访等部门提出申请并已被受理的,视同投诉人申请撤回投诉。

The Rules also set up the basic procedural requirements for making a complaint, including types of documentation, representation, response time, and potential remedies (Chapter 2).   Once a completed complaint is filed, the Working Group will have seven days to advise the complainant that the complaint has been accepted. Trade secrets and private information are to be protected in the process (Art. 21).  Final decisions are required within sixty days of acceptance (Art. 18).  The complaint acceptance process does afford MofCOM the possibility of delaying due to incomplete complaints (Art. 14).

The principal remedy of this process appears to be a mediated response with the offending agency (依法公正进行协调处理,推动投诉事项的妥善解决) (Arts. 15, also Arts. 17, 19). Other possible outcomes procedures include recommending that local governments change their procedures or rules (Art. 17).

How effective are such procedures likely to be?

Although this process may afford some individuals a useful alternative channel to resolve forced technology transfer and effect policy changes, I am doubtful it will afford much relief in most licensing/trade secret cases.  An earlier administrative effort to protect trade secrets through the National IPR Leading Group also didn’t deliver much relief as far as I know.   Trade secret matters are very difficult to handle in China’s administrative processes due to concerns about local economic influences, uncertain procedures to maintain confidential information, fears of retaliation, etc.  In general, foreign companies have been reluctant to sue national and local Chinese government agencies, with the significant exception of patent and trademark validity challenges.  Of particular concern is that possibility of retaliation against those who file complaints.  As USTR noted in the Section 301 Report:

As U.S. companies have stated for more than a decade, they fear that they will face retaliation or the loss of business opportunities if they come forward to complain about China’s unfair trade practices. Concerns about Chinese retaliation arose in this investigation as well. Multiple submissions noted the great reluctance of U.S. companies to share information on China’s technology transfer regime, given the importance of the China market to their businesses and the fact that Chinese government officials are “not shy about retaliating against critics.”

Moreover, there are competing channels to trade secrets that are improving. China has made significant advances in civil judicial protection of trade secrets, which should be utilized where appropriate.  Technical trade secrets appeals are now being heard by a new national appellate IP court.   SAMR also has plans to draft an administrative rule on stopping trade secret infringement(禁止侵犯商业秘密若干规定).

Finally, it is difficult for me to conceive of a complaint mechanism that essentially is being made to the same agency or group of agencies that approve the actual investment, rather than the agenc(ies) in charge of protecting trade secrets.  Should complaints fail to materialize, it  may also be interpreted by China as a lack of concern about the issue, rather than concerns about the effectiveness and risks of the process.

My perspectives on this process have been clear.  As I stated in an earlier blog:

[N]ewly amended provisions in the new Foreign Investment Law prohibiting forced technology transfer are likely to have little impact absent effective complaint and legal challenge procedures, such as the creation of a foreign investment ombudsman and/or appeals to the newly established IP court.  The inclusion of a non-discrimination position in administrative licensing procedures is also welcome news, although it may be similarly difficult to monitor and enforce.

While there is nothing harmful in the Rules, I continue to believe that appeals to a competent, specialized court or creation of an independent ombudsman would likely best serve foreign interests.