Draft Civil Code Technology Contract Law Available for Comment

The NPC has released a draft of the contract chapter of the draft civil code for public comment.  According to the NPC Observer, this is the second draft with the final round scheduled for consideration as early as March 2020.  Comments are being accepted by the NPC through January 26, 2020.

Chapter 20 of the contract chapter deals with technology contracts.    Based on a quick read, several provisions are directed to long-standing concerns, such as ownership of service invention compensation, ownership of improvements (grant backs), indemnities from infringement, and the relationship of contract regulation to China’s Antimonopoly Law and the recently amended Technology Import Export Regulations.

Some Key Substantive Provisions

Articles 632 and 633 address  service invention (employee inventor) compensation, noting that  employers “shall extract a certain percentage [emphasis supplied] from the proceeds obtained from the use and transfer of the service technical achievements  and award or reward individuals who have completed the service technical achievements.”  The draft law thereby appears to carry forward the ambiguity and debate regarding what amount of compensation is required, if any, in addition to salary and other benefits.  This had also been a focus of previous bilateral discussions.

第六百三十二条 职务技术成果的使用权、转让权属于法人 或者非法人组织的,法人或者非法人组织可以就该项职务技术成 果订立技术合同。法人或者非法人组织应当从使用和转让该项职 务技术成果所取得的收益中提取一定比例,对完成该项职务技术 成果的个人给予奖励或者报酬。法人或者非法人组织订立技术合 同转让职务技术成果时,职务技术成果的完成人享有以同等条件 优先受让的权利。 职务技术成果是执行法人或者非法人组织的工作任务,或者 主要是利用法人或者非法人组织的物质技术条件所完成的技术成 果。

第六百三十三条 非职务技术成果的使用权、转让权属于完 成技术成果的个人,完成技术成果的个人可以就该项非职务技术 成果订立技术合同。 第六百三十四条 完成技术成果的个人有在有关技术成果文 件上写明自己是技术成果完成者的权利和取得荣誉证书、奖励的 权利。

Article 632 Where the right to use or transfer a service technical achievement belongs to a legal person or an unincorporated organization, the legal person or unincorporated organization may conclude a technical contract for the service technical achievement. A legal person or an unincorporated organization shall extract a certain percentage from the proceeds obtained from the use and transfer of the service technical achievements and award or reward individuals who have completed the service technical achievements. When a legal person or an unincorporated organization concludes a technology contract to transfer service technology achievements, the person who completed the service technology achievements has the right to receive priority transfer on equal terms. The service technical results are the technical results of performing the work tasks of a legal person or an unincorporated organization or mainly using the material and technical conditions of a legal person or an unincorporated organization.

Article 633 The right to use or transfer a non-service technical achievement belongs to the individual who completed the technology achievement, and the individual who completed the technology achievement may conclude a technology contract for the non-service technological achievement. 

Article 659 addresses ownership of improvements, providing further detail on the implications of the removal of Article 27  in the recently revised Administration of Technology Import Export Regulations (TIER). This provision also supports freedom of contract, by providing that the improving party owns the improvements unless the parties stipulate otherwise.

第六百五十九条 当事人可以按照互利的原则,在合同中约 定实施专利、使用技术秘密后续改进的技术成果的分享办法。没 有约定或者约定不明确,依照本法第三百零一条的规定仍不能确 定的,一方后续改进的技术成果,其他各方无权分享。

Article 659 The parties may agree in the contract in accordance with the principle of mutual benefit and determine how to share the technical results of implementing patents and using technological secrets for subsequent improvements. If there is no agreement or the agreement is not clear, and it is still uncertain according to the provisions of Article 301 of this Law 【regarding  supplemental contractual language】 then the technical results of subsequent improvement by one party shall not be shared by the other parties.

Article 658 also supports freedom of contract by providing for a default but negotiable indemnity against third party infringements or torts.   This language is consistent with the revised Art. 24 of the TIER

第六百五十八条 受让人或者被许可人按照约定实施专利、 使用技术秘密侵害他人合法权益的,由让与人或者许可人承担责 任,但是当事人另有约定的除外。

Article 658 Where the assignee or the licensee implements a patent or uses proprietary technology  to infringe upon the legal rights and interests of others, the assignor or the licensor shall be held liable unless the parties agree otherwise.

Relationship with Other Laws

As indicated, the draft law must also be read in conjunction with the revisions of the Technology Import/Export Regulations and other laws and regulations.  As a higher level, more recent legislation, the Civil Code language would ultimately be more authoritative than the TIER in the event of any conflict.  Among the provisions that reference other laws and regulations is Article 660 which provides that these other laws shall normally govern.  However, Article 660 does not expressly restrict the Civil Code from  “gap-filling” these other laws and regulations.  It may thereby perpetuate the possibility of government intervention through vague language such as “mutual benefit”,  “hindering technological progress”, “certain percentage”  and default provisions that govern if another language is unclear.  If this provision is enacted as drafted, the immediate solution to this problem will be clear contractual drafting and/or revisions of prior license agreements.

第六百六十条 法律、行政法规对技术进出口合同或者专 利、专利申请合同另有规定的,依照其规

Article 660 If there are laws and administrative regulations on technology import and export contracts or contracts for patents or patent applications, such provisions shall be followed.

The draft law also contains vague references to competition and antimonopoly law.  Article 635 contains identical language to Article 329 of the Contract Law, and Article 648 is nearly identical to Article 343 of the Contract Law:

第六百三十五条 非法垄断技术、妨碍技术进步或者侵害他 人技术成果的技术合同无效

Article 635 A technology contract that illegally monopolizes technology, hinders technological progress, or infringes on the technological achievements of others is invalid.

第六百四十八条 技术转让合同和技术许可合同可以约定实 施专利或者使用技术秘密的范围,但是不得限制技术竞争和技术 发展。

Article 648 A technology transfer contract and a technology license contract may stipulate the scope of patent implementation or use of technology secrets, but they shall not restrict technology competition and technology development.

As with the prior Contract Law and TIER, the law does not clarify the difference between a covenant not to sue or a settlement of an infringement lawsuit on the one hand, and a patent license agreement.  Lawyers drafting such settlement agreements may wish to ensure that default provisions of the Civil Law, such as those regarding indemnities and ownership of improvements do not come into play.

These provisions also further underscore the importance of thorough monitoring of legislative changes on technology transfer from earlier in 2019 to ensure that they had the intended effect, particularly as operational implementation may now be more significant than legislative changes.

In addition to these revisions to China’s contract law in the proposed Civil Code, an Export Control Law has also been released for public comment by the NPC.  The draft law sets up a general export control system and specifically regulates both technologies and services (Art. 2).  Comments are also due January 26, 2020.

Happy New Year to all!

Note: all translations are based on machine translations with minor editing and are not intended to be authoritative.  Please provide any corrections or suggestions on these translations or any additional commentary to the author.

E-Commerce Law Up for Public Comment

The National People’s Congress announced this week that it has released a draft of the E-Commerce Law for public comment.  The public comment period began December 27, 2016 with comments due by January 26, 2016.  Although focused on the overall development and regulation of e-commerce, the draft also contains provisions regarding IP protection by platforms and their responsibilities, in order to preserve market order and fair competition 市场秩序与公平竞争.  The draft in Chinese is attached here, with relevant provisions and machine translations below.  I hope to provide more detailed comments later – I am particularly interested in how this draft relates to provisions in the tort law, IP laws and civil laws regarding online liability, as well as how enforcement authority over infringements for online operators will be amended and divided up amongst the various IP agencies if this draft is implemented into law.

Article 53 provides:

第五十三条   电子商务经营主体应当依法保护知识产权,建立知识产权保护规则。电子商务第三方平台明知平台内电子商务经营者侵犯知识产权的,应当依法采取删除、屏蔽、断开链接、终止交易和服务等必要措施。         

Article 53 The electronic commerce business principal operator shall protect intellectual property rights in accordance with the law and establish rules for the protection of intellectual property rights. If the e-commerce operator infringes the intellectual property rights within the platform, it shall take the necessary measures such as deleting, shielding, breaking the link, terminating the transaction and service according to law.

Article 54 provides:

第五十四条   电子商务第三方平台接到知识产权权利人发出的平台内经营者实施知识产权侵权行为通知的,应当及时将该通知转送平台内经营者,并依法采取必要措施。知识产权权利人因通知错误给平台内经营者造成损失的,依法承担民事责任。   

平台内经营者接到转送的通知后,向电子商务第三方平台提交声明保证不存在侵权行为的,电子商务第三方平台应当及时终止所采取的措施,将该经营者的声明转送发出通知的知识产权权利人,并告知该权利人可以向有关行政部门投诉或者向人民法院起诉。   

电子商务第三方平台应当及时公示收到的通知、声明及处理结果.

Article 54 Where a third-party platform for e-commerce receives a notice from a platform operator of intellectual property rights issued by the owner of the platform for intellectual property infringement, it shall promptly transmit the notice to the operators within the platform and take the necessary measures according to law. If the intellectual property right owner causes any loss to the operator of the platform due to the wrong notification, he shall bear civil liability according to law.
If the platform operator submits a declaration to the e-commerce third-party platform to ensure that there is no infringement, the third-party platform shall promptly terminate the measures taken and forward the statement of the operator to the notification Property rights, and inform the right person to the relevant administrative departments of complaints or to the people ‘s court.
E-commerce third-party platform shall promptly publicize the received notice, statement and processing results.

Article 88 provides:

第八十八条   电子商务第三方平台违反本法第五十三条的规定,明知平台内经营者实施侵犯知识产权行为未采取必要措施的,由各级人民政府有关部门责令限期改正;逾期不改正的,责令停业整顿,并处以三万元以上十万元以下的罚款;情节严重的,吊销营业执照,并处以十万元以上五十万元以下的罚款。         

Article 88 If a third-party platform for e-commerce violates the provisions of Article 53 of this Law and knows that the operator of the platform does not take the necessary measures for infringement of intellectual property rights, the relevant departments of the people’s governments at various levels shall order it to make corrections within a prescribed time limit; If the circumstances are serious, the business license shall be revoked and a fine of not less than 100,000 yuan but not more than 500,000 yuan shall be imposed.

 

 

Book Review on Report on Development of Intellectual Property Development in China (2015)

The Report on Development of Intellectual Property Development in China 2015 中国知识产权发展报告 (IP Teaching and Research Center of Renmin University of China / IP Academy of Renmin University) (Tsinghua University Press, 2016) (320 pp., 98 RMB) (http://tup.com.cn/booksCenter/book_06886601.html) (the “Report”), is a bilingual Chinese-English report prepared by Renmin University and commissioned by the Ministry of Education.   The book presents a comprehensive summary of developments and challenges in IP protection and enforcement in China, with a particularly strong focus on legislative developments, the role of national plans, the history of IP in China, government funded R&D, education and training-related issues, and the pressing needs of market and legal reforms.

After a general overview (Part I), where the authors discuss various national plans, and general legislation, such as the Civil Law and the Law to Counter Unfair Competition, the authors discuss patents and innovation (Part II).  The Report notes that quality needs to be improved in life science patents, most of which come from small inventors (such as in TCM).  The report also candidly references critiques of SIPO’s performance (p. 150), as well as the low quality of university patent applications and suggests that there should be additional attention paid to university IP commercialization, including the many restrictions that apply to state-owned assets, a matter that was litigated in the Infineon case here in the United States many years ago.  The report also criticizes unrestricted subsidies and other incentives for patent applications, which has led to “the amount of patent applications to be falsely huge” and has given rise the problem of “rubbish patents.” (p. 163).  Regarding China’s extraordinary growth in patent filings, the authors conclude, as I have often in this blog, that “the motivational role of the market should be strengthened” in lieu of such incentives.

Regarding the proposed Patent Law amendments, the authors also argue that judicial decisions on patent validity should be final and not be subject to a final decision by an administrative agency, and that there should be appropriate limitations on administrative enforcement involving patent infringements (pp. 166-167).  The authors also seek to limit the abusive assertion of unexamined utility models and designs, including by authorizing the courts to consider the abusive assertion of patent rights a matter of unfair competition (p. 173).

In discussing trademarks, the authors similarly note that despite the huge numbers of trademark filings, Chinese companies play an undersized role in lists of global brands.  The authors identify problems in “rush registration of trademarks” involving grabbing a trademark previously used by others, particularly where a mark has international popularity, where there are fictional figures and titles of movies and television hits, and in the case of celebrity names (p. 183).   The authors suggest that where a trademark is not being used, there should be no compensation given to the infringer, as one step to address rush registrations – a practice that apparently is already being used in Shanghai and perhaps other courts.  The authors also suggest that in the case of foreign rights owners, the courts should take into account the popularity of the brand enjoyed outside of China and the subjective malice on the person conducting the registration.   As with low quality patents, the author see a useful role for courts in adjudicating these rush registrations as acts of unfair competition (pp. 186-187).

These themes of addressing proposed legislation, adopting new legislation to new circumstances, more effectively insuring that markets rather than government fiat direct IP commercialization and protection,  and using unfair competition law to address abuse of IP rights play an important role in other chapters of the book, including the chapters on Copyright Law (Part IV), Competition law (Part V), IP protection by the Judiciary (Part VI), IP Education (Part VII), developments in Shenzhen City and Jiangsu Province (Part VIII), and other issues, such as free trade agreements (Part IX).

Overall the authors support the role of the courts as the principle vehicle for adjudicating IP disputes in a market-oriented economy, and that the IP laws should be revised to “attach importance to enhancing the leading and final role of the judicial protection of the intellectual property rights, limit and regulate intellectual property-related administrative enforcement …” (p. 240).  The authors also support the tendency to increase damages on IP disputes (P. 282), the role of specialized IP courts and the case law system, and deficiencies in administrative enforcement reform including problems of coordination among agencies.

In their summary, the authors note that “the sound operation of the IP system is not merely an issue of the IP law; it relies on an improved legal system and environment of the rule of law.  Only with innovation based on the market economy and driven by market interest is it possible to be the lasting, stable fore to drive the socio-economic development.” (pp. 315-316).  The book is a very useful summary of some of the hot issues now facing the Chinese IP system, with a focus on rule of law and market orientation.

I look forward to the 2016 edition.

Beginning the Journey for Trade Secret Reform: the Recent AUCL Draft

A much awaited, proposed public draft revision to the Antiunfair Competition Law was released by the State Council Legislative Affairs Office on February 25, 2016. Comments are due by March 25, 2016.  An open source translation is available here.

This is not an easy law to comment on, as the law combines a range of various issues to varying degrees: competition and fair trade law, trade secrets law, trade dress law, cybersquatting and enterprise name infringements, advertising regulation, bidding law, compliance/anti-bribery, network management and other areas.  Strictly speaking it is not an IP law which focuses on giving individuals private rights.  Rather, it is geared towards ensuring that there is fair competition in the market, as its title suggests.

A key focus for me has been on the trade secret provisions of the draft.  Pertinent provisions are discussed and copied below:

“Article 9: A business operator must not carry out the following acts infringing on trade secrets:

(1) Obtaining rights holders’ trade secrets by theft, enticement, intimidation, fraud, or other improper tactics;

(2) Disclosing, using, or allowing others to use a rights holders’ trade secrets acquired by tactics provided for in the previous item;

(3) Disclosing, using, or allow others to use trade secrets in their possession, in violation of agreements or the rights holders’ demands for preserving trade secrets.

Where a third party clearly knows or should know of unlawful acts listed in the preceding paragraph, but obtains, discloses, uses or allows others to use a rights holders trade secrets, it is viewed as infringements of trade secrets.

(一)以盗窃、利诱、胁迫、欺诈或者其他不正当手段获取权利人的商业秘密;

(二)披露、使用或者允许他人使用以前项手段获取的权利人的商业秘密;

(三)违反约定或者违反权利人有关保守商业秘密的要求,披露、使用或者允许他人使用其所掌握的商业秘密。

“Trade secrets” as used in this Law refers to technological information and business information that are not publicly known, have commercial value, and are subject to corresponding secrecy measures taken by the rights holder.”

Importantly, the draft drops the earlier statutory requirement that trade secrets had to have practical applicability, a “TRIPS-minus” provision which may have had the effect of denying trade secret protection to experimental failures.  The distinction between technical information and business information in this draft may also reflect other laws and government agencies some of which, like the Ministry of Science and Technology and SIPO have expressed interest in “technical trade secrets” or “service invention” compensation for trade secrets. Chinas IP courts similarly have jurisdiction over technical trade secrets, but not business confidential information.

The law also expands the scope of a covered business operator, to include natural persons, which is a positive step:

“‘Business operators’ as used in this Law refers to natural persons, legal persons or other organizations engaged in the production or trade of goods, or the provision of services. (“goods” hereinafter includes services). “(Art. 2)

The draft offers very little in the way of improving procedures for trade secret litigation.  There are improvements to trade secret administrative enforcement.

“Chapter III: Supervision and Inspection

Article 15: When supervision and inspection departments investigate acts of unfair competition, they have the right to exercise the following powers of office:

(1) Enter business premises or other venues related to the conduct under investigation to conduct inspections;

(2) Question business operators under investigation, interested parties, or other entities or individuals, and request supporting materials, data, technical support or other materials relating to the acts of unfair competition;

(3) Make inquiries about, or reproduce, agreements, account books, invoices, documents, records, business correspondence, audio-visual materials or other materials relating to the acts of unfair competition;

(4) Order business operators under investigation to suspend suspected unlawful acts, to explain the source and quantity of property related to the conduct under investigation, and to not transfer, conceal or destroy that property;

(5) Carry out the sealing or seizing of property suspected to be involved with acts of unfair competition;

(6) Make inquiries into the bank accounts of business operators suspected of acts of unfair competition as well as accounting vouchers, books, statements and so forth relating to deposits;

(7) Where there is evidence of the transfer or concealment of unlawful funds, an application may be made to the judicial organs to have them frozen.

Article 16: When supervision and inspection departments are investigating acts of unfair competition, business operators under inspection, interested parties or other relevant units or individuals shall truthfully provide relevant materials or circumstances, shall cooperate with supervision and inspection departments performing duties according to law, and must not refuse or obstruct supervision and inspection.”

Although I believe most right holders seek improvements in trade secret enforcement, including more deterrent remedies, I am uncertain how much those desires extend to administrative enforcement.  Transferring of relevant confidential material to an SAIC official tasked with trade secret enforcement will raise concerns of further trade secret leakage, which are probably not of equal concern in the case of administrative enforcement of, for example, trade dress infringements covered under this draft law.    Moreover, the State Council has elsewhere stated that all administrative cases should be conducted ex-officio.  To me administrative ex-officio enforcement of trade secrets, with authority to enter business premises to inspect and conduct investigations, is problematic.

The draft law also seeks to increase administrative fines for trade secret theft, and improve burden of proof issues:

“Article 22: Where business operators violate the provisions of Article 9 of this law, the supervision and inspection departments shall order them to cease the unlawful acts, and shall impose a fine between 100,000 and 3,000,000 RMB depending on the circumstances; where the act constitutes a crime, criminal responsibility is pursued in accordance with law.

Where the rights holders of trade secrets can prove that information used by others is substantially the same as their trade secrets and that those others had the capacity to obtain their trade secrets, those others shall bear the burden of proof to show that the information they used came from lawful sources.”

It is unclear to me from Article 22, that this “burden of proof” reversal in the second paragraph above applies to administrative enforcement or civil enforcement, or even criminal process.  Moreover, the requirement of substantial similarity of the technology for the shifting to take effect, is probably too high a threshold, having been an impediment for plaintiffs in trade secret litigation in China to date.

Does this law go far enough in addressing trade secret issues in China?

Although SAIC has historically conducted many administrative trademark cases on behalf of foreigners, historically trade secret administrative enforcement has not significantly benefitted foreign companies or small enterprises.  As I previously blogged:

That there were 174 trade secret cases [for 2008-2010] out of 110,896 cases involving the Law to Counter Unfair Competition, or about 0.2% of the total. In addition, the data shows that average fines were 11,624 Yuan, and only 7 cases or about 4 % of the trade secret case were referred to criminal enforcement.  Like the civil system, the administrative system also appears to be frequently used to address employee theft of confidential information.  Precisely one third, or 58 of these 174 cases involved individual respondents; 24 involved private companies  (14%) and 23 cases involved individual businesses (13%).   There were no cases where a state owned enterprise or publicly held company was named as a defendant in an administrative action.  

One may question, therefore, whether this draft revision of the AUCL addresses the full range of substantive and procedural improvements that need to be made to improve trade secret enforcement in China, much of which may be more uniquely linked to trade secret protection compared to other IP rights.  Moreover, many of the problems are amplified by comparison with trade dress or other provisions of this draft law.

Much of the problem with trade secret protection has been in the lack of discovery in the civil system.  One significant advantage of improved trade secret administrative enforcement however could be in facilitating the transfer of information obtained in administrative investigations to civil courts or law enforcement authorities, consistent with State Council guidance on facilitating case transfers.  Improving civil procedures for trade secret cases could also greatly help in civil prosecution of trade secret cases, including by making necessary changes in evidence collection, burden of proof reversals, and other areas.

The current draft appears unduly oriented to instances where trade secret theft has actually occurred.  One critical area concerns the availability of relief for threatened misappropriation of trade secrets including preliminary injunctions, adoption of “inevitable disclosure” type doctrines, and evidence or asset preservation measures.  Such measures can be especially important as the harm that may be caused by a misappropriation may be incapable of being compensated for by the misappropriator or beneficiary of the theft. Although revisions to China’s Civil Procedure Law now permit preliminary injunctions for trade secret theft (Eli Lilly vs. Huang Mengwei),  China may wish to consider specific provisions in this law to facilitate more liberal dispensation of provisional remedies.  China had specifically provided for preliminary injunctive relief in other IP laws, before the most recent Civil Procedure law amendments, and may want to consider appropriate provisions for trade secrets.

Regarding threat of trade secret law, the current law also only addresses “disclosing, using, or allowing others” to use the secret information.   This deficiency could easily be remedies by including language on threat or imminent trade secret theft.    The Uniform Trade Secrets Act in the United States, by comparison, specifically addresses “actual or threatened misappropriation” which may be enjoined, and also provides a remedy for trade secret inducement.  The TRIPS Agreement itself clarifies that a key focus of WTO member trade secret obligations is “preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices.” (emphasis added).  The need for preventative measures is also reflected in TRIPS Article 41, which requires WTO members to have “expeditious remedies to prevent infringements.”  In addition, inducement liability is being considered in other China IP laws (patent/copyright) and does not appear to be part of this draft.  A clear definition of inducement liability may be helpful in limiting losses due to third party misappropriation of trade secrets.

China’s trade secret regime also has several other challenges, including difficult criminal thresholds; unclear relationships with labor law, labor mobility regulations, and employee non-competes; difficulties in gathering evidence; unclear divisions among the appropriate role of civil, criminal and administrative remedies;  and even an emphasis on trade secret protection as an aspect of market regulation, rather than as a civil IP right, as is under consideration.    Some of these deficiencies may be cured by judicial interpretation and guidance, as was previously addressed by the Supreme Peoples Court in an earlier Judicial Interpretation.

The focus on market regulation denies trade secret holders in China the ability to address infringement based on where a product that benefits from a trade secret misappropriation is sold, but instead may require litigation where the misappropriation occurred.  See Siwei v. Avery Dennison (Min San Zhong Zi No. 10/2007) (Sup. People’s Ct. 2009) (China).   This may also encourage foreign litigants, concerned about  local protectionism or undue influence of local companies on local courts, to seek remedies elsewhere (such as through Section 337 remedies in the United States).  In addition, the lack of discovery can also lead to the “exporting” of such litigation.  Making these necessary procedural improvements, including improving “success rates” for domestic trade secret cases and improving procedures for gathering evidence, may also enhance China’s position that Chinese judgements in trade secret cases are entitled to res judicata effect in other jurisdictions.

Former SPC Vice President, now Chief Procurator  Cao Jianming 曹建明, noted in 2005,  trade secret enforcement was the area with the “greatest difficulties” for the courts Industry has also raised concerns about many of these deficiencies.  While many of the changes in the AUCL on trade secret protection are positive, a more comprehensive approach could require reforms in other areas, including the practices of law enforcement and the courts, administrative law reform, civil law reform, and/or a stand-alone trade secret law.

My personal estimation: the AUCL draft is a beginning and not an end in the trade secret reform process.