Essentially Derived Varieties and The Role of Leading Cases in Chinese Plant Variety Protection

huntingtongardens
Editor’s Note: Plant Variety Protection (PVP) is a little-discussed topic in China’s IP regime. Indeed, this blog has only reported on PVP-specific issues
once before, and once in the context of the China-Swiss Free Trade Agreement (FTA). This guest blog post explores the relationship among plant variety protection, China’s treaty obligations, and determination of the scope of infringement based on essentially derived varieties (EDVs).   The author, Liz Freeman Rosenzweig, is a J.D. candidate at Berkeley Law. She obtained her Ph.D. in plant biology from Stanford University.

As with other intellectual property (IP) rights, China receives more applications for intellectual property protection of new plant varieties (PVP) than any other country. China grants these rights pursuant to its “Regulations on the Protection of New Varieties of Plants” (“Regulations”) (2014) (中华人民共和国植物新品种保护条例). However, China’s PVP legislative regime lags behind many other countries, largely because of China’s failure to date to accede to the most recent international treaty for protection of plant varieties, the 1991 Act of the International Convention for the Protection of New Varieties of Plants (UPOV ’91). Conversely, Chinese jurisprudence on the topic is significantly more developed than that in, for example, the United States. 

China is now considering amending its Regulations to include the concept of essentially derived varieties (EDVs) (实质性派生品种) and molecular markers (分子检测). Broadly speaking, these proposed amendments are also examples of two broader aspects of Chinese IP legal development: (1) China enacting legislation in anticipation or in excess of current international demands, and (2) Chinese legislation riding momentum generated in advance by judicial decision making. If China adopts the proposed amendments to its Regulations, the level of plant IP protection available in China could become among the strongest in the world. Moreover, the legislative changes would be based on the concrete experience and guidance afforded by previous guiding cases from the Chinese Supreme People’s Court (SPC), which suggest how the new provisions might concretely be applied.

 Plant Variety Protection and UPOV

The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) requires WTO member economies, such as China, to provide IP protection for new plant varieties. Members may do so through a patent system, a sui generis system, or both. The United States takes the combined approach, offering plant IP via utility patents and plant patents under U.S. Code Title 35, and also via Plant Variety Protection (PVP) certificates under the Plant Variety Protection Act (PVPA). China does not provide patents for plants. Instead, plant protection in China is under an entirely sui generis approach.

Internationally, the most commonly adopted sui generis mechanism is the system of plant breeders’ rights (PBRs) promulgated by the International Union for the Protection of New Varieties of Plants (UPOV). The UPOV Convention was first finalized in 1961 and was revised in 1972, 1978, and 1991. As of February, 2020, 76 countries are UPOV members, 59 of which are members of the ’91 Act.

One key change between the ’78 and ’91 Acts is the extension of the scope of the breeder’s right to include EDVs. Per UPOV ’91, a new variety is considered “essentially derived” from an initial variety when it is both “clearly distinguishable from” and “predominantly derived from the initial variety, . . . while retaining the expression of the essential characteristics . . . of the initial variety.” A breeder may obtain a PBR for an EDV “in the same way as for any variety,” but if they wish to commercialize the EDV, they must obtain authorization from the initial variety’s titleholder. This is similar to the manner in which practicing a patent that improves upon a previously valid patent may require permission from the dominant patent’s owner. In contrast, under the ’78 scheme, rights to the initial variety are more limited, and no authorization from the initial variety’s titleholder is required to commercialize a variety that the ’91 Act would consider an EDV.

But defining precisely what constitutes an EDV is notoriously difficult. The ’91 Act provides examples of how an EDV may be created, such as by finding or creating a mutation in an initial variety. However, the list is not exhaustive. Furthermore, the text of the Act seems to contradict itself, leaving significant ambiguity as to the required level of physical resemblance between an EDV and its initial variety. That is, Art. 14(5)(b)(i) of the ’91 Act states that EDVs must “retain[] the expression of the essential characteristics that result from the genotype or combination of genotypes of the initial variety.” But then subsection (b)(iii) excepts “differences which result from the act of derivation” from the required level of conformity. It is not clear precisely how those two instructions are meant to be integrated. For example, a slide deck from UPOV itself presents a hypothetical derived variety that is closely genetically related to its initial variety, but in which “more than one or a few characteristics were affected,” and labels it, ambiguously, “EDV yes/no??” Thus, the ’91 Act does not provide a clear boundary line for when a variety is or is not essentially derived.

Many UPOV member countries prefer the definition of EDV to be broad in order to leave the determination of whether a variety is an EDV up to the rights holders. Conversely, UPOV’s guidance, though nonbinding, is narrower. UPOV is, however, currently revising its guidance on the topic to address these current ambiguities.

One method for defining an EDV is through genetic and biochemical techniques such as molecular markers (“markers”). UPOV does not require the use of markers, but it does provide guidance on their use. That guidance cautions against overreliance on molecular techniques, noting that their usefulness is subject to significant variability, and expressing concern that markers could be abused to make closely-related varieties seem more different than they actually are.

The US ratified UPOV ’91 in 1999. But China has only acceded to ’78. According to Dan Prud’homme and Taolue Zhang, one reason that China has not acceded to the ’91 Act is UPOV’s “lack of clarity in the definition of [EDVs] . . . , which makes it difficult to institutionalize in China.” However, China’s Ministry of Agriculture and Rural Affairs (MoARA) and State Administration of Forestry and Grasslands (SAFG), which govern the granting of plant variety rights in China, recently “expressed an intention to formulate a long-term plan to gradually satisfy key requirements of UPOV ’91,” including “adopting UPOV ’78 plus-style provisions/piloting important aspects of UPOV ’91 (e.g., instituting EDV for certain types of plant varieties) in order to see how the system works in practice.” China’s recently-released draft amendments to its Regulations do just that. Moreover, China’s Supreme People’s Court has also announced on March 19, 2020, its own plans to draft a new Judicial Interpretation regarding plant variety infringement determinations which will likely implement China’s emerging practices in this area.

Comparing Plant Variety Protection Definitions in China and the U.S.

China’s Regulations were promulgated and implemented by the State Council in 1997, two years before China acceded to UPOV ’78. China then revised its Regulations in 2013 and 2014. PBRs under the Regulations are issued in parallel by SAFG (for vines, forest trees, fruit trees, and ornamentals, with rights lasting 20 years) and MoARA (for all other plants, with rights lasting 15 years). China has faced both internal and external pressure to update the Regulations: National entities have pushed for a clearer and more streamlined application process, and many countries—members of the European Union in particular—have been pressuring China to adopt UPOV ’91-style provisions such as by providing for EDVs.

To that end, China began the process of revising its Regulations in 2016—a year before ChemChina, a state-owned entity, purchased Syngenta, a major beneficiary and user of the UPOV system, with hundreds of plant registrations internationally. The proposed draft amendments to the Regulations were released for comment in February 2019. These proposed amendments would essentially move China towards UPOV ’91. This is not an unusual move for China; the country has often enacted legislation in anticipation of meeting—or even in excess of—international requirements. For example, China provided copyright protection for the “right of making available” (right of communication to the public) in the 2002 amendments to China’s Copyright Law, well in advance of China acceding to the WIPO Internet Treaties in 2007. As another example, China also recently amended its Anti-Unfair Competition Law to be the most progressive trade secret law (at least on paper) by reversing the burden of proof, which is in excess of international requirements.

These draft amendments to the plant IP Regulations make several important changes. Crucially among those, the proposed amendments introduce the concepts of EDVs and molecular markers into the Regulations for the first time.

The proposed amendments define EDV as “a variety that is distinct from the original variety, but retains the basic characteristics or characteristics of the original variety, except for the differences caused by the derivation.” This proposed definition of EDV appears to be broader than the UPOV definition. Significantly, it also lacks contradictory language, discussed above, embedded in the UPOV definition and copied nearly verbatim into the U.S. definition.

The US recently also overhauled its PVP system, extending PVP eligibility to asexually propagated plants for the first time. The PVPA has included EDVs since 1994, the definition of which was taken almost verbatim from UPOV ’91—meaning it includes the apparently contradictory language that China’s draft avoids. Also unlike China’s draft amendments, the PVPA makes no mention of molecular markers or other genetic techniques. But the Plant Variety Protection Office, which oversees the PVPA, is moving towards incorporating such methods in the future.

China Leads the World in PBRs by Volume

One reason that China may wish to have an advanced PBR regime could be the growth of its own domestic research capacity in this important area. In 2018, China was “the top destination for plant variety applications,” receiving over a quarter of filings worldwide. Not only did China receive the most applications, but Chinese nationals also filed the most applications worldwide. A record high of >20,000 plant variety applications were filed worldwide that year, driven primarily by China. Applications in China grew by an astounding 29% in 2018, driven almost exclusively by domestic filings (this mirrors the Chinese patent system, which is also primarily used by domestic applicants). In contrast, applications in the US and EU grew by only ~3-4% in 2018, and the worldwide growth rate was ~9%. That being said, this surge is fairly recent, and the US and EU still outrank China in terms of number of active titles. But note that this source includes both PVPs and plant patents in the U.S. tallies. It is unclear why the US numbers do not include utility patents on plants (though it may be due to difficulty in data collection; unlike PVPs and plant patents, not all utility patents are directed to plants), but the US total would be even higher if it did. Considering just PVP rights, in 2018 there were 7,521 active titles in the US.

If China adopts its proposed amendments, then filings in China may also increase due to increased foreign applications, as well as stimulating foreign investment in China in this sector. Thus, activity in the Chinese plant variety protection offices will likely continue to dwarf that in the US. 

More Thorough Plant Variety Protection Guidance from Chinese Litigation than U.S. Litigation

There is significantly more PBR litigation in China than in the US. As of November, 2019, there have been at least 338 Chinese cases referencing the Regulations (华人民共和国植物新品种保护条例). At least 18 of these cases discuss molecular markers (分子检测). Although China is a civil law system where cases do not create binding precedent, for the past decade the Chinese Supreme People’s Court (SPC) has issued “guiding cases” that are “intended to be de facto binding decisions” to guide lower courts’ decisions in similar cases. The SPC has issued several guiding cases on PBRs. Stanford University Law School has also initiated a “China Guiding Cases Project” which provides a platform for research on these judicial developments.

Two guiding cases have discussed molecular markers specifically. These cases, discussed below, reveal that the SPC embraces the use of molecular markers—but is wary of overreliance thereon, and is careful to balance genetic results with observations from field trials.

In Guiding Case No. 2633, the SPC denied retrial after a lower court found non-infringement when there were no genetic differences between the varieties at issue, but there were phenotypic differences during field trials. In reaching this decision, the SPC noted that the genetic testing only assessed 40 locations in the genome, which does “not necessarily correspond to the traits” observed in phenotypic field tests.

Guiding Case No. 92 was essentially the reverse situation: the SPC found infringement when markers revealed a single genetic difference but field tests showed no phenotypic differences. In doing so, the SPC formulated a technical balancing test for reconciling field and genetic tests that tempers over-reliance on molecular markers.

By late 2019 there were no reported Chinese cases that specifically referenced EDVs. But the molecular marker cases likely hint at how courts will address them. Intriguingly, the facts of Guiding Case No. 92 seem remarkably similar to an EDV situation, in that the accused variety retained the characteristics of the first variety while displaying minor genetic differences. If Chinese PBR agencies or the Courts formally adopt EDVs, they may determine essential derivation with a test much like the one set out in Guiding Case No. 92, as the Chinese concept of EDV would likely cover most types of genetic changes.

Neither of those two guiding cases have been cited by name, however, in published subsequent cases according to a March 23, 2020 search on Caipanwenshu 裁判文书 (the official SPC database). This is not unusual, as most guiding cases are not widely cited by lower courts, who, along with practicing lawyers, still remain unfamiliar with citing and distinguishing cases in rendering decisions. Rather than being “precedential,” guiding cases such as these may also be issued primarily to illustrate examples of good reasoning for judges, or to provide political coverage for consistent decision making.

Ironically, although China is a civil law country, its case law fills the statutory gaps for plant variety protection far more comprehensively that in the U.S. In contrast to the robust Chinese case law, there have been only 19 reported (and 28 unreported) U.S. cases referencing 7 USCS § 2541 (PVP infringement) as of March, 2020. These include 4 Supreme Court cases and 5 at the Federal Circuit. The Supreme Court cases either reference the PVPA only in passing or are outdated.

A handful of U.S. cases reference genetic testing, but do not address the concept in much detail (See Ark. Seed Co., Inc. v. Williams, No. 10-1231, 2011 U.S. Dist. LEXIS 100224, at *3 (C.D. Ill. Sep. 6, 2011)). Despite the presence of EDVs in the PVPA, there has not been reported EDV litigation in the U.S. as of March, 2020. The closest case was the denial of a motion to stay litigation pending the PVPO’s assessment of an application for an allegedly infringing variety of lettuce, but the court did not decide whether the variety was an EDV, and the case has no subsequent appellate history. (See Genecorp, Inc. v. Progeny Advanced Genetics, Inc., No. C 97-20706 RMW, 1998 U.S. Dist. LEXIS 21910, at *7 (N.D. Cal. Apr. 9, 1998)).

Conclusion

If China adopts its current proposed amendments, it would offer protection to plant breeders in line with “or even above” UPOV ’91. Given that Chinese PBRs represent the lion’s share of all such rights worldwide, this would be a significant change. It seems likely that legislators will approve a version of these Regulations in the next few years, though it is unclear when. Notably, the “Opinions on Strengthening the Protection of Intellectual Property Rights” recently released by the Chinese Communist Party and State Council (November 27, 2019), also explicitly calls for encouraging Chinese innovation by improving the protection, examination, and international sharing of examination results for new plant varieties. If China does adopt the proposed amendments, China would likely become a de facto member of at least part of UPOV ’91, as Chinese officials reportedly “want legislation in line with the 1991 UPOV convention but do not want to actually accede to the 1991 UPOV convention.” This pattern of gradual and partial adherence to international treaties has also manifested itself elsewhere in China’s legal regime, including in the gradual piloting of civil or economic legal reforms before wider introduction into the Chinese legal system or economy.

The nuanced treatment of molecular markers in the proposed amendments and in Chinese guiding cases is ahead of that in the US, and the US may very well follow China’s lead in adopting a more systematic use of molecular markers in the application process. The proposed amendments’ concept of EDV strengthens the incentive for innovation by expanding the scope of the breeder’s right.

Moreover, the definition of EDV put forth in the proposed amendments is arguably broader and clearer than that under UPOV ‘91 and in the US, which may give holders of Chinese rights a competitive advantage and increase the incentive to protect new plant varieties in China. But the extent of foreign investment these amendments would engender is unclear, given that China requires that Chinese parties be controlling shareholders for “selection and cultivation of new varieties of crops.” 

ACKNOWLEDGEMENTS: Many thanks to Mark Cohen, Elaine Wu, David Kappos, Edgar Krieger, Cynthia Mathiesen, Alanna Rennie, Xiaofan Xu, and Alexandra Draggeim for valuable discussion, comments, feedback, editorial help, and research and translation assistance.  Photos (c) by Mark Cohen of Huntington Gardens and US Plant Patent.

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The Trump Administration and China IP Diplomacy: Old Wine In a New Bottle?

Two major China IP events occurred in late November and December. One of them was the long-awaited first phase of a settlement of the US-China trade war.  The second was the nomination of Wang Binying to replace Francis Gurry as Director-General of the World Intellectual Property Organization, a United Nations body and US reaction.  A common thread of concern over “IP Theft” unites the US perspective on these issues.  This is the first of a two-part blog, focusing first on the Phase One effort.

The First Phase Agreement

Although a final text of the 86 page agreement is reportedly being “scrubbed” by both sides to the negotiations, and will not be available until January, the Office of the US Trade Representative has called Phase One

an historic and enforceable agreement on a Phase One trade deal that requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, … The Phase One agreement also…establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement.

USTR’s fact sheet outlines these accomplishments in IP:

Intellectual Property: The Intellectual Property (IP) chapter addresses numerous longstanding concerns in the areas of trade secrets, pharmaceutical-related intellectual property, geographical indications, trademarks, and enforcement against pirated and counterfeit goods.

Technology Transfer: The Technology Transfer chapter sets out binding and enforceable obligations to address several of the unfair technology transfer practices of China that were identified in USTR’s Section 301 investigation. For the first time in any trade agreement, China has agreed to end its long-standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a condition for obtaining market access, administrative approvals, or receiving advantages from the government. China also commits to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms. Separately, China further commits to refrain from directing or supporting outbound investments aimed at acquiring foreign technology pursuant to industrial plans that create distortion.

In light of prior bilateral commitments and accomplishments by the Trump Administration to date, the fact sheet adds little that is new.

Let’s pull the IP paragraph apart:

China has already amended its laws regarding trade secrets and trademarks.  The reference to pharmaceutical-related intellectual property is, however, one welcome encouragement of efforts that were recently proposed in the CCP/State Council Opinionsgulation of November 2019.  These changes were in play before the trade war was launched, but had since been delayed.  This welcome recommitment is well supported by a new national appellate IP court, as well as by a recent decision by the new appellate IP Court combining civil and administrative adjudication in a patent dispute, which may also be a harbinger of a possible combined civil/administrative adjudication with third parties in other areas, such as for patent linkage such as with the China’s food and drug authorities or patent authorities.

USTR refers to the Phase One agreement as addressing “long-standing concerns” about trade secrets and “enforcement against pirated and counterfeit goods.”  One of the “long-standing concerns” in trade secrets involved enhancing administrative enforcement of trade secrets.  This commitment was expressed in the 2012 US-China Strategic and Economic Dialogue and incorporated into plans of the National Leading Group.  Efforts to enhance “enforcement” against pirated and counterfeit goods appear is also redolent of increased administrative enforcement more generally – which downplays the significant changes underway in China’s judicial system, and have been the subject of numerous bilateral commitments under the former Joint Commission on Commerce and Trade.  For unknown reasons, many of the earlier JCCT commitments are no longer easily retrievable online, however, a list of commitments was prepared by GAO for the years 2004-2012, which demonstrates their long history.

Several factors combine to suggest that the US and China may be committing to a renewed focus on administrative enforcement: the role that administrative enforcement has played in the recent CPC-State Council Opinions on IP and other regulations, proposed legislation, and recent campaigns, and the problem of a long trade war without any acknowledged results which is affecting the markets and may drag into a presidential election cycle.  Late-term administrations may also be tempted to condone campaign-style IP enforcement, which can generate impressive enforcement statistics but have limited deterrence or long-term sustainability.    As Prof. Dimitrov has noted, IP campaigns are typically a “rapid resolution of a major problem,” done in response to a crisis or political pressure.  Prof. Mertha, another political scientist, described prior commitments to enforcement campaigns as part of the  “red face test: could the USTR state at a press conference, with a straight face, that the [trade] agreement was a good one.”  After much pain and drama, the Administration may yet be placing old wine in a new bottle, “rounding up the usual” enforcement outcomes —  as it ignores the scholarly literature surrounding campaign-driven outcomes of twenty to thirty years ago.  If these observations on Phase One are correct, then the goal of “structural change” in IP enforcement is illusive.

An administrative campaign focus would also ignore the low hanging fruit of China’s recent improvements and experiments in civil enforcement as well as pushing for further reform in administrative enforcement.  The Phase One Fact Sheet omits such pressing matters as continuing improvements in civil enforcement, long-standing problems with administrative enforcement transparency, promising developments in development of judicial precedent, the experiment of a new national appellate IP court similar to the CAFC,  the recent decline in foreign-related civil enforcement transparency, the dramatic decline in criminal IP enforcement including trade secret enforcement in the last several years, the need for rightsholders to have observable means of monitoring a trade agreement outcome in such areas as forced technology transfer or IP enforcement, or the impact of China’s aggressive antitrust regime on IP protection and commercialization, among other issues.   Enhanced punitive enforcement in enforcement, which both the US and China have also been calling for, may similarly be inconsistent with the primary goal of adequate compensation to victims of infringement. Furthermore, absent adequate procedural and substantive safeguards, this could also result in punishments being handed out to foreigners, as they have in the past.

The focus of an IP regime should instead be on transparency, fairness and adequate compensatory civil damages. Due to the many perceived weaknesses of China’s IP enforcement regime, the 2019 US-China Business Council, for example,  has noted in its 2019 survey that IPR enforcement was rated number 6 among the top 10 business challenges faced by the survey respondents.

The technology transfer language also contains much of the same old wine.  China committed to not conditioning foreign investment on technology transfer long before this trade war when it joined the WTO (2001).  It agreed at that time to provide for the “elimination and cessation of … technology transfer requirements” and that “the terms and conditions of technology transfer, production processes or other proprietary knowledge, particularly in the context of an investment, would only require agreement between the parties to the investment.“  Based on the Phase One fact sheet, it is also hard to see how Phase One agreement will add to the important additional legislative changes on this issue that China enacted earlier this year.

Rather than focus on legislative changes, the nature of the continued subsistence of forced technology transfer (FTT) is probably the more important trade issue at this time.  The 2019 Business Climate Survey of the American Chamber of Commerce in China characterized FTT as an “operational”, rather than a “legal” challenge, and placed technology transfer issues fifth in priority among IP-related concerns, well behind IP enforcement, with only 8 percent of respondents reporting it as the most significant IP issue their company faces.  This also appears to be the perspective of Prof. Prud’homme in his December 2019 presentation to the OECD, which outlines how FTT manifests itself.  Depending on the industrial sector, the Business Climate Survey notes that 41-58% of companies reported no difference in the amount of technology they shared with Chinese companies compared to other markets.  The US-China Business Council survey reached similar conclusions: technology transfer concerns ranked 24 out of 27 top concerns in the market. The Business Council further noted that only 5 percent of survey respondents report being asked to transfer technology in the past three years, yet the issue is an acute concern of affected companies in key sectors.

Has FTT declined as an issue of concern?  Earlier surveys by business chambers, before the trade war, suggested a higher incidence of FTT than is currently being reported.   Scholars and practitioners have also estimated that this issue has been exaggerated by the administration.  US data on sales of technology to China show a continued increase in technology licenses, as well as increases in licenses to unrelated parties, which may suggest greater confidence in the market and legal system.  One may argue about the sufficiency of the data, although the legal reforms and recent changes confirm to me that the principle strategic issue is how to ensure that technology is not lost through extra-legal /“operational” measures.

Another concern is that remedies for FTT  may end up again being another opaque process that may not bring the necessary relief.  As with the continuing emphasis on administrative enforcement of IP, China’s legislative efforts to date suggest that a principal remedy would be administrative remedies, as proposed implementing regulations to China’s Foreign Investment Law already suggest.

Conclusion: Is IP Any Different?

One of the better general overviews of the Phase One agreement had been written by Scott Kennedy for the Center for Strategic and International Studies.  Scott’s article “A Fragile and Costly US-China Trade Peace” notes that  “ [I]n the short-term China and Xi Jinping are the clear winners. With only limited concessions, China has been able to preserve its mercantilist economic system and continue its discriminatory industrial policies at the expense of China’s trading partners and the global economy. “

The fact sheet for Phase One suggests that further dramatic improvements since the notable accomplishments of earlier this year may not be in the offing.  Perhaps these will be negotiated as part of any “Phase Two” deal.  For the moment, there is certainly nothing in these outcomes which sets forth a “structural change” such as might include a shift to a private property oriented approach to IP, including support of a civil system, a more limited role for the administrative system and less state intervention into IP protection, enforcement, and commercialization.  There is also no reference to the greater transparency necessary to enable rightsholders and governments to understand how China’s enforcement mechanisms operate to protect private rights in China’s socialist market economy.

Now, let’s see what the scrubbed text brings…

Upcoming blog: on the nomination of Wang Binying to WIPO Director-General.

Foreign Investment Law Implementing Regs Open For Public Comment: Administrative and Punitive Enforcement Ascends Again

The Ministry of Justice had published a draft of the Foreign Investment Law Implementing Regulations for public comment.  Chinalawtranslate has prepared an English translation of the proposed regulations and of the law itself.   The due date for submitting comments is December 1.  The US-China Business Council has graciously already made its comments available in English and Chinese to the public.  The Foreign Investment Law was one of several laws enacted earlier in 2019 that appear to be responsive to US concerns and pressure.

The primary provisions addressing IP are Articles 24 and 25, which state:

Article 24: The state is to establish a punitive compensation system for violations of intellectual property rights, promote the establishment of rapid collaborative protection mechanisms for intellectual property rights, complete diversified dispute resolution mechanisms for intellectual property rights disputes and mechanisms for assistance in protecting intellectual property rights, to increase the force of protections for foreign investors’ and foreign-invested enterprises’ intellectual property rights.

The intellectual property rights of foreign investors and foreign-invested enterprises shall be equally protected in the drafting of standards in accordance with law, and where foreign investors’ or foreign-invested enterprises’ patents are involved, it shall be handled in accordance with the relevant management provisions of state standards involving patents.

Article 25: Administrative organs and their staffs must not use the performance of administrative management duties such as handling registration, approvals or filings for investment projects, and administrative permits, as well as implementing oversight inspections, administrative punishments, or administrative compulsion, to compel or covertly compel foreign investors or foreign-invested enterprises to transfer technology.

(chinalawtranslate translation).

The language in the first paragraph of Article 24 appears to track trade war pressures, including demands for punitive compensation.   As I have argued repeatedly, a better focus might be on deterrent civil damages, and/or the basic structure set forth in the WTO of having adequate and effective civil remedies with criminal remedies as an adjunct for willful, commercial-scale harm.  In this scheme, there is little place for administrative remedies, as was noted in DS362 (the IP enforcement case at the WTO).  The WTO panel, in that case, noted that “neither party [the US nor China] to the dispute argues that administrative enforcement may fulfil the obligations on criminal procedures and remedies set out in Article 61 of the TRIPS Agreement. Therefore, the Panel does not consider this issue.”  There have also been numerous academic studies on the challenges of creating a sui generis administrative IP enforcement system in China.  The language in Article 24 is also highly repetitive of the November 21, 2018 special Memorandum of Understanding/campaign mechanisms involving 38 government agencies to address six types of faithless IP conduct, about which I previously blogged.

What is notably absent from these commitments is an obligation to increase transparency, which is especially concerning due to an apparent slowdown in the publication of foreign IP-related court cases since the trade war began.   I will be blogging more about this soon, but here is what the decline in published US cases looks like based on IPHouse data, with a flatlining since January 1, 2018:

iphouse

See also my slides from the recent Berkeley transnational IP litigation conference available here.

The language regarding standards in the second paragraph repeats long-standing concerns about foreigners being excluded from standards-setting processes, as was addressed in the 2015 JCCT.  It does not set forth commitments about fairness or equal treatment which have been raised before in industrial policy drafting (as was addressed in the 26th JCCT on semiconductor policy), antitrust investigations, patent prosecution or litigation (for which there is a wealth of empirical data).

Article 25 also appears trade responsive.  It would be useful at this time to determine the current magnitude of forced technology transfer in foreign direct investment, and to determine how it subsists and whether it has measurably decreased since the trade war began, including whether legitimate licensing transactions have stepped in to provide increased revenue for technology licensors as a result of these and other reforms, including revision of the Administration of Technology Import/Export Regulations.

 

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

The 600 Billion Dollar China IP Echo Chamber

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Corrections to the above are welcomed.