An Update on Data-Driven Reports on China’s IP Enforcement Environment

Several useful empirical reports on China’s IP environment have been released in the past few weeks.  I summarize four of them:

Trademark Litigation

Jerry Xia and his colleagues at the Anjie firm have written ”Trademark litigation Forum Shopping in China – What the Data Tells Us” (the “Trademark Report”) (July 8, 2020).

The Report looks at over 11,000 court judgments from 2019.  Only two of the top ten cities for hearing trademark matters were “Tier 1” jurisdictions, namely Shanghai and Shenzhen.  The authors argue that the experience of less well-known courts, including basic courts, is underestimated by many lawyers.  In some jurisdictions, such as in Zhejiang and Jiangsu, win rates for plaintiffs are as high as 100%.  These courts were also among the most efficient courts in adjudicating trademark disputes.   By comparison, the Beijing IP Court awarded fewer favorable decisions to plaintiffs and was slower, but it also awarded higher damages.

The Trademark Report argues that concerns about local protectionism in IP cases for foreign plaintiffs may be exaggerated.  The authors note that the probability of winning based on the available data is generally higher for foreign parties than domestic parties.  A similar argument is advanced in the Software Copyright Litigation Report (discussed below), as well as in other empirical studies.

The Trademark Report is available to subscribers of the World Trademark Review (issue 84).  It is behind a paywall for the next two months.  Registered non-subscribers may view two articles free per month.

SEP Litigation

LexField Law offices released a report by Zhao Qishan and Lu Zhen “Statistics of Chinese SEP Cases in 2011-2019” (the “SEP Report”).  The report is available here.

The SEP Report notes that from 2011 to December 2019, Chinese courts accepted 160 cases related to SEPs.  Not surprisingly, most of the cases involve foreign entities and relate to the telecommunication industry (96.25%).  Most of the cases were filed with the courts in Beijing, Guangdong, Shanghai, and Jiangsu.  Both practicing and non-practicing entities were plaintiffs.  Ten companies were responsible for 125 of the 160 cases reported, with practicing entities as the primary defendants.   Foreigners are the principal plaintiffs, but only by a slight margin.  The cases largely involved patent infringement disputes.  Cases asking the court to determine FRAND terms during license negotiations are also on the rise.  About 72% of the cases were withdrawn before final judgment.  The Huawei/Samsung settlement alone was responsible for the withdrawal of 28 cases.

The SEP Report provides a useful overview of the amount of litigation occurring over the past 9 years on SEPs, including understanding the role of foreign plaintiffs including NPE’s and China’s increasing importance in global SEP litigation.  As many SEP cases are not published, a major contribution of this article is in the description of various cases, as well as a collection of the docket numbers and case summaries.   A useful counterpart article on the foreign experience of SEP litigation in China is Gaetan de Rasenfosse’s article from 2017 on “Discrimination against foreigners in the patent system: Evidence from standard-essential patents on patent validity.”

 Software Copyright Litigation

Rouse published a China Software Litigation Report  (the “Software Report”) on July 7, 2020. The Software Report is based upon its proprietary CIELA database in conjunction with its network firm Lusheng and is available for free upon completion of this request form.  The Software Report aims to demonstrate how foreign litigants have fared in civil software piracy litigation in China and helps to delineate useful strategies in light of evolving judicial practices, the Phase 1 Trade Agreement commitments on software piracy as well as anticipated changes in the Copyright Law.

The Software Report reveals that out of 1,303 first instance cases reported in CIELA from 2006-2019, first instance cases brought by foreign plaintiffs numbered 285. In the authors’ view the key to success in software copyright infringement cases is proof of infringement.  In particular,  plaintiffs who secured evidence preservation orders were more likely to be successful.  The authors also suggest on-line usage tracking data as proof of copyright infringement.

One long-standing issue in software copyright enforcement has been concerns that governmental entities may have de facto immunity from successful lawsuits.  The data also does not support the assumption that State-Owned Enterprises may be immune to a successful lawsuit.  While the sample size of cases brought against SOEs is small, the win rate by foreign plaintiffs against different SOE’s is high as 85.7% (14 cases).  No data is presented on success rates in suing the government itself.   This issue also arose in a recent Berkeley Law webinar on copyright reform in China in response.  The panel observed that while there were successful cases against SOE’s in China for software copyright infringement, foreign companies are generally reluctant to sue foreign governments anywhere in the world.

Guangdong and Shanghai are the top venues for foreign and domestic litigants of software copyright disputes.  Forum shopping does not appear to be a useful strategy as software piracy choices are limited to suing where the infringing act is occurring. Unless the defendant has more than one location where piracy is taking place, action will need to be taken in the defendant’s home jurisdiction

The writers also note a high win rate for foreign plaintiffs in their sector (85.3%).  This average for foreigners is brought down by two of the most prolific plaintiffs in the dataset, who filed “bulk lawsuits” and received a markedly lower win rate.  Microsoft had an exemplary win rate according to the CIELA data – 63 cases filed and 63 wins.  The authors make out convincing arguments for greater use of civil remedies in the foreign software owners’ toolbox to address claims of rampant piracy.

Note that IAM did a short analysis of the Software Report, as did AsiaIP.

Trade Secret Cases         

Jerry Xia and Yulu Wang’s ”Analysis of Guiding Trade Secret Cases in China Published during the World IP Day in 2020” (the “Trade Secret Report”)  is available here in Chinese and machine translation.

Jerry Xia presented The Trade Secret Report at a recent Berkeley webinar on trade secret developments in China. According to the authors, of the more than 600 typical cases published in 2020, there were only 47 trade secret cases, accounting for less than 7.8% of the total.  By comparison, according to a Beijing Higher People’s Court study, from 2013 to 2017, a total of 338 cases of unfair competition involving trade secrets were concluded by judgment in the courts.  The typical case numbers may seem small; however, trade secret cases are a small cohort of China’s IP litigation docket. Earlier data, reported by CIELA also showed a low volume of trade secret litigation. I have also noted elsewhere on this blog that trade secrets are a small part of the criminal IP docket and of the AUCL docket.  The Trade Secret Report does not compare the data on typical trade secret cases with prior years’ reporting on typical cases, which could be a further indication of the interest of China’s courts in establishing clear rules regarding adjudication of trade secret disputes.

The Trade Secret Report notes that the number of cases in which trade secrets where plaintiffs won was 113, or about 35 percent of all cases.  Relatively low win rates have also been reported previously on this blog.  The cases equally involved both business information or technical information.  Zhejiang Province (10), Guangdong Province (9) and Shandong Province (7) announced the most cases. Of the 47 typical cases, there were no cases involving foreign parties and only one case involving Taiwan.

The authors additionally searched the public database for cases involving trade secrets from 2016 to the present.  The number of reported cases involving foreign parties was rare.  Only nine cases were retrieved, involving parties such as the United States, Japan, Germany and Australia, four of which were foreign vs. local, three cases were local vs. foreign, and two were foreign vs. foreign.  The relatively high percentage of local vs foreign cases in a limited cohort may nonetheless be concerning, particularly in light of proposed judicial interpretations regarding enhanced punishment when trade secrets are misappropriated on behalf of foreign actors.   Of the six cases in which foreign entities were plaintiffs, two were dismissed, two were voluntarily withdrawn and the results of the remaining two were not made public. Of the five cases in which foreign entities were defendants, the plaintiffs’ claims were rejected in four cases, and the outcome of the other case was not made public.

Among the published cases in 2020, there were two cases of punitive damages involving trade secrets.   These two typical cases do not give any clear criteria for the determination of “malice”. However, in determining the base and multiples of punitive damages, one typical case provides some guidance:  In a criminal case, a lost licensing fee was used as a calculation for assessing the severity of the punishment.  This is consistent with the proposed judicial interpretation of Criminal Cases Involving Trade Secrets, noted above.  The Trade Report also notes that although a shifting of the burden of proof is contemplated by the revised AUCL, there was no typical case on point.  However, there are two cases on point that came into effect after the new AUCL came into force

These typical cases help the public to understand how the courts are handling trade secret matters.  The relatively large cohort of trade secret typical cases so soon after legislation has been revised may also be seen as a political statement regarding judicial determination to handle these trade secret cases in accordance with the law.   As Susan Finder has noted in her article China’s Evolving Case Law System in Practice, these cases along with SPC guiding cases and other published instructional cases, may be important guides to the courts in determining how to rule on newly emerging issues.  In addition, at least in the case of IP issues, they may also provide assurances to foreign partners of the willingness of Chinese courts to comprehensively implement legislative reforms.

Improving Approaches to Using the Right Data

These reports all offer strategic guidance for companies and rightsholders and are part of a growing trend to use empirical tools in evaluating China’s IP environment.  The reports also effectively leverage recent or proposed changes in Chinese IP laws and judicial interpretations to provide a useful window into developing judicial practices.  While their utility for business strategic and policy purposes is easily recognized, concerns over case publication practices by the Chinese courts do limit their comprehensiveness.  The Software Report notes that most major jurisdictions are now publishing all their cases and it also notes that “the sample size of CIELA data is sufficient to be able to draw statistically valid conclusions.”  However, a consistent issue in looking at Chinese IP empirical studies is in determining how many cases are not being published throughout the country, particularly in less frequently utilized jurisdictions.

When cases are not published, some instructive messages can also be derived from the types of cases that are being published or actively promoted, such as the cases discussed in the Trade Secret Report.   Data on what is missing can be highly valuable data unto itself. One approach that is used in these reports is to rely upon a plurality of data sources to ensure that key judicial databases are comprehensive.  The SEP Report, for example, is based on “official announcements by the involved parties, information disclosed by the courts, and relevant news reports.”  Using a plurality of data sources may be necessary in analyzing trends in SEP cases as these cases are often not publicly available due to confidentiality concerns.  A pluralistic approach is also taken in the Trade Secret Report, which compares data and cases other than these typical cases in order to better help the reader to understand the nature of trade secret litigation in China as well as the role of the small cohort of typical cases in analyzing China’s developing IP jurisprudence.

A useful benchmark on the adequacy of a database of published cases is the SPC annual report on IP litigation, which generally reports on overall numbers of cases accepted or decided, rather than numbers of published cases.   In recent years, however, data on foreign-related cases has sometimes been missing or less comprehensively reported on in recent years. This may have been due to the trade war.  In the criminal IP context, comparisons among administrative referrals to police prosecution, police investigation data, procuratorate prosecution data, SPC case and conviction data and case publications (when they are available) can provide useful comparisons to evaluate trends.  For  examples of  typical SPC/published case discrepancies, the CIELA database includes 54,000 infringement cases of all types over a relatively longer period of time than the SPC database and the Trademark Report relies upon 11,056 judgments in 2019.  By comparison, the Supreme People’s Court reported that there were 65,209 trademark cases alone in 2019.   These discrepancies may be attributable in some part to delays between case publication, case decisions and case acceptance, lack of finality about the nature of reported cases (infringement/ownership/royalty or other disputes), the impact of settlement or preliminary relief in case publication, the confidentiality of decisions that may block publication, collection methodology used in supporting the analyses, and other factors.  These discrepancies and factors often make a selection of earlier years for analysis more attractive to scholars in reaching fully-informed decisions about judicial behavior, even if they may have less value for immediate strategic business purposes.

While I agree that the IP litigation environment for foreigners has been improving, foreigners nonetheless continue to underutilize China’s litigation system.  The Reports help underscore the importance of carefully crafted strategies which might help improve overall utilization and success rate.  In the future, I hope that reports will include such factors as the quality of the underlying right and the quality of the law firm representing the rightsholder. The relatively low level of foreign utilization of the Chinese judicial IP systems suggests that foreigners may also be selecting their strongest cases to litigate, which makes it difficult to compare with the more active docket of Chinese domestic rightsholders.  My guess is that assessing the impact of the law firm upon success rates will also show that the authors of these reports have contributed to a higher success rate for their clients.  In any event, legal analytics are becoming increasingly important tools for law firm and client success.

Interested in hearing more about Chinese legal analytics? Join us on Wednesday, July 15 4:30 Pacific Time for the final Berkeley China IP webinar, where we bring together David Kappos, Don Rosenberg, Mark Wu, Alex Capri, and Dan Prud’homme to discuss the future development of  China’s IP regime and its interactions with the United States.  The topic is certain to come up!

Three New Draft JI’s

On June 10 (Beijing time), the Supreme People’s Court published three new draft judicial interpretations (JI’s) for public comment.   Comments are due by July 27, 2020.

The three draft judicial interpretations are: “Interpretation on Several Issues Concerning the Application of Law in the Trial of Civil Cases Infringing on Trade Secret Infringements (Draft for Comment)” (关于审理侵犯商业秘密纠纷民事案件应用法律若干问题的解释(征求意见稿), “Reply on Issues Concerning the Application of Laws Related to Infringement Disputes Concerning Internet Intellectual Property (Draft for Comment)” (关于涉网络知识产权侵权纠纷有关法律适用问题的批复(征求意见稿), and Guiding Opinions on Adjudication of IPR Disputes in Cases Involving E-Commerce Platforms  (Draft for Comment)” (关于审理涉电子商务平台知识产权纠纷案件的指导意见(征求意见稿)).

 This draft trade secret JI has been released in perfect time to be discussed at the webinar on June 10 (Pacific Standard Time)  hosted by Berkeley Law on trade secret protection in China.  I will be speaking along with James Pooley, Jack Chang (QBPC), and Jerry Xia (Anjie Law Firm).  Registration for this single event in the series is here.   Thanks to Jack Chang for pointing out these new draft JI’s to me!        

Here is a machine translation of the trade secret JI.

Update of July 6, 2020: here is an unofficial translation prepared by USPTO of the .trade secret JI.

Further Trade-Responsive IP Legislative Developments May Be In the Works…

“When a stranger lives with you in your land, do not mistreat him. The stranger living with you must be treated as one of your native-born. Love him as yourself, for you were strangers in Egypt.” (Leviticus, Vayikra וַיִּקְרָא) .

He Jing of the Anjie law firm brought to my attention today an article in the April 21 Legal Daily which identifies proposed amendments to the Trademark Law, Anti-Unfair Competition Law and Administrative Licensing law that appear to be responsive to United States concerns over unfair treatment of Americans, “forced technology transfer” and IP protection in the current trade war.   Here is a copy of the Legal Daily article.

While we wait for the actual draft, I will place these proposed changes in context.

In my posting on good faith in IP-related trade issues,  I identified several issues which this legislation attempts to address, including warehousing of bad faith trademark registrations without intent to use; and  the removal of “employee” as a covered party (经营者) in China’s revised trade secret law (Anti Unfair Competition Law) which facilitates bad-faith employee behavior.   Actually, I am relieved that China may now be understanding how tolerance of bad faith behavior has had a wide spread impact on foreign perceptions of China’s willingness to protect IP.  These are important new steps.

Other provisions this legislation attempts to address also appear to address long-standing US concerns, such as requiring the destruction of counterfeit goods or materials and tools used for their manufacture.  The destruction of semi-finished counterfeit goods and materials and tools was a subject of DS-362, the China IP enforcement case, particularly regarding Customs’ disposal of goods outside the channels of commerce and the role of semi-finished goods in calculating criminal thresholds.

Other concerns raised in the legislation have been raised bilaterally.  Bad faith trademark registrations had long been discussed bilaterallyProtecting confidential information submitted by foreigners in administrative licensing has also been a long-standing concern of the United States and has been the subject of several JCCT discussions.

Although these changes are positive, I am reluctant to enthusiastically endorse them in the absence of corresponding measures ensuring their implementation.  As previously noted, newly 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.

China’s existing trademark law shows the limitations of forcing changes in behavior through legislation.  The trademark law and civil law have had provisions requiring “good faith” behavior, yet there has been little demonstrable impact on the flood of bad faith applications, which had increased to 7.3 million applications in 2018.  Chinese-origin bad faith and fraudulent applications are also causing USPTO to revise its own rules regarding pro se trademark applications from overseas.

As other examples, providing for treble or quintuple damages in patent or trademark proceedings is only useful in those still rare proceedings where statutory damages are not being used to calculate damages.  Similarly, the burden of proof reversals in IP cases, such as trade secrets can be useful but only if they are appropriately and effectively utilized and if motion practice in the courts is observable through online publication. Increasing penalties in administrative trade secret cases sound good on paper, but foreigners little use administrative trade secret enforcement proceedings.  Such proceedings have traditionally been an IP enforcement backwater.  According to the 2011 SAIC Yearbook (p. 855), there were only 57 reported administrative trade secret cases in that year, with an average 77,543 RMB average value and only 1,430,000 RMB (less than five thousand dollars) in fines.  The greatest focus of these cases were individuals, as 26 cases involved natural persons.  The data suggests to me that these cases largely involve employer/employee disputes over trade secret misappropriation, which should be resolvable in the courts.  Perhaps even more striking was the 35% decline in criminal trade secret prosecutions in 2017 to only 26 cases, which was also accompanied by a significant decline in criminal IP cases generally since 2012.   To address tolerance of trade secret theft (and IP infringement) by Chinese society, the most effective approach will be a commitment to criminal trade secret enforcement and an even greater commitment to civil remedies.  The proposed legislation only addresses part of this need.

Substantive changes can only be as effective as they can be monitored.  With respect to changes in substantive trademark and trade secret law, it would be especially useful if the full court dockets and more final cases were published.  If the data cannot be observed, it cannot be monitored for compliance.

While these legislative developments are underway, there is also word that the State Council continues to solicit opinions from the foreign business community on how IP issues are handled on their behalf.  This may also lead to welcome news.

There have also been two separate, non-IPR developments, which may have some bearing on the negotiations over the resolution of the trade war.  According to Bloomberg, the European Union is said to have won a dispute brought by China at the WTO seeking recognition of China’s market economy status (“MES”).    A similar case is pending involving the United States.  The lessons from these cases for IP should be that both the US and the EU should encourage more comprehensive and systemic treatment by China of IP as a private right if China is ever to achieve full MES.

In another development, a WTO panel ruled in favor of Russia in a dispute brought by Ukraine that the “national security” exception afforded by the WTO was not completely self-judging. The case could be read as a warning that the United States does not have unbridled discretion in deciding what constitutes a threat to its national security.  Taken together both cases affirm the WTO’s desire to remain relevant to changing circumstances in China and a changed perspective on international trade of the United States.

I wish everyone a happy Passover, Easter or spring holiday.

Buddha