Phase 1 and CAI: A Tale of Two Agreements

The European Union has recently released a draft text of its Comprehensive Agreement on Investment with China (CAI).  Compared to the other two major agreements signed by China since the beginning of 2020, the Phase 1 Trade Agreement (the Phase 1 Agreement) and the Regional Comprehensive Economic Partnership Agreement (RCEP), this is the least IP-focused.  The CAI is limited to bilateral investment and skirts IP  concerns. It could have done more.

 A report prepared by the Swiss National Center on Competence in Research in Trade Regulation  succinctly defined the differences between a Bilateral Investment Treaty (BIT) such as CAI and a broader trade agreement, by noting that “the role BITs can play in protecting the investors’ investments internationally against IPR piracy seems systemically limited. Investment law protects investors against undue interference by the state (and its various authorities) but not against violations by private parties.”  These broad considerations make sense in a traditional market economy, where investors may not face undue interference in their IP rates at the hands of the state.  They are less convincing in markets, such as China, where the state plays an active role. 

The distinction is also artificial for all BITs as IP is an asset that is often contributed to an investment.  In some instances, it can constitute the whole investment.  Licensing revenues are also considered service income and may be considered as a service industry investment.  The use of IP in an investment is also contemplated by the TRIPS agreement which requires national treatment in the “use” of IP rights overseas.  While IP issues may complicate negotiation of a BIT, excluding them can undercut the credibility of the BIT.  The United States Model BIT (2012) (Model BIT) recognizes IP rights as investments and is accordingly somewhat more comprehensive than the CAI. 

The CAI – along with many other BITs – grandfathers compulsory licensing, which restricts and can devalue IP rights.  It exempts compulsory licensing imposed by competition and public health authorities from its scope (Sec.  II.3.5(ii)).    While TRIPS standards regarding national treatment and most favored national treatment are also specifically grandfathered (Sec. II.7.5), a more balanced approach to BIT drafting would be to specifically identify IP-related investment risks. These risks might include: restrictions on licensing; excessive requirements for recordals of patent or trademark assignments; preferential taxes on locally created IP; subsidies and other preferences for IP creation given to local entities; discrimination against patenting in technological fields dominated by foreign investors; or other efforts that minimize the value of foreign innovations or discriminate against their use.    

Based on an initial read of this draft text, here are the CAI provisions that relate to IP and how they compare to the Model BIT and other legislative changes undertaken by China.

Section I fails to enumerate intellectual property as a covered “investment.”  The Model BIT recognizes IP as an “investment” (Art. 1, Definitions).

Section II.3 prohibits performance requirements in an investment that require the transfer of technology to the recipient country, or that a percentage of R&D is conducted in that country, or the use or favoring of a technology of the host country.  It also prohibits an advantage to an investment based on the use or favoring of a technology.  The United States has negotiated similar restrictions in the Phase 1 Agreement, Chapter 2.   The Chinese government had made similar commitments in its accession to the WTO, and has sought to address US concerns in the  Foreign investment Law , the Administrative Licensing Law, and other measures.  These concerns are also likely addressed in the context of the WTO disputes filed by the United States and the European Union regarding forced technology transfer.  The Model BIT also requires national treatment in technology transfer in terms of domestic performance requirements (Art. 1(h)). 

Section II.3bis.2.3 exempts national security entities from the scope of regulation. There is no reference to  security or competition regulations being exempted from the CAI.  The Model BIT exempts national security type regulation, as may be applied by the Committee on Foreign Investment in the United States (Art. 18).  It also excludes competition and other “laws of general application” from the scope of “investment authorizations” regulated by the BIT (fn. 6).  To the extent that national security laws are intended to protect the state, they should normally be exempted from national treatment obligations.  Competition laws present a different challenge which may depend upon whether they are indeed of general application, transparently and uniformly applied, and not intended to advance national economic security.

Section II.3.5 exempts compulsory licenses of competition authorities from the scope of the CAI.  A similar provision is found in the Model BIT (fn. 6, Art. 3(b)).

Section II.5 requires that the Parties protect the confidentiality of information in regulatory proceedings and that they do not impose unnecessary disclosure requirements.  Confidential business information is to be protected “in accordance with domestic law, including with respect to the protection of confidential business information or other information treated as confidential under the Party’s laws that is obtained during administrative proceeding.” 

As the above quote suggests,  each party should apply its own law.  If this is the correct interpretation, the CAI does nothing to further improve  protection of confidential information in a regulatory proceeding affecting foreign investments  Thankfully, China’s Administrative Licensing Law, Foreign Investment Law and the Phase 1 Trade Agreement  already have extensive provisions in this area. 

Section III.1.7 permits “covered enterprises” of the CAI to participate in the development of standards by the central government bodies, including “related standardization working groups and technical committees” on  a national treatment basis. The CAI also requires the Parties “to recommend that local and non-governmental standardizing bodies in its territory allow enterprises that are covered enterprises of the other Party to participate” in standardization activities.    A similar issue was addressed in the 26th JCCT  which provides that “China welcomes U.S.-invested firms in China to participate in the development of national recommendatory and social organization standards in China on a non-discriminatory basis.”  The CAI goes further than the JCCT commitment by requiring equal participation in national standards including, presumably including  mandatory standards (“GB” standards), and recommended standards (GB/T standards).   It does not go as far as the JCCT commitment by failing to address social organization standards.  Social organization standards tend to be more market-driven and ‘bottom-up.”  The CAI language might suggest that China is out of compliance with the 26th JCCT requirement since it does not mandate foreign participation in social organization standards setting.

 Section III.2.5 provides for a minimum of due process in competition investigations.  It requires the competition authority to “notify, in writing if so provided by domestic law, the addressee of its competition concerns or objections, including the facts and legal basis on which the proposed decision will be based. The address of the decision shall, prior to its adoption, be informed, to the extent provided for in the domestic law, of the evidence on which the decision will be based.  Prior to the adoption of the final written decision, the addressee of the decision shall have the right to submit written comments to the competition authority in relation to the competition authority’s competition concerns or objections. During such proceedings, the addressee of the decision shall have the right to a legal representative of its choice. The addressees shall have the right to appeal the final decisions of the competition authorities to a competent court of law.” 

The United States negotiated similar due process type requirements in the JCCT of 2014.  The summary of those negotiations provided that “the United States was able to address a significant concern for many foreign companies, which have expressed serious concern about insufficient predictability, fairness and transparency in the investigative processes of China’s Anti-Monopoly Law enforcement. The Chinese side agreed that, under normal circumstances, a foreign company in an Anti-Monopoly Law investigation would be permitted to have counsel present and to consult with them during proceedings. China also made several additional commitments, including to treat domestic and foreign companies equally and to provide increased transparency for investigated companies.” 

A weakness in both the CAI and the JCCT of 2014 is the failure to reference the TRIPS Agreement, which has long provided “guard rails” for IP-related competition investigations, including a substantive obligation on competition authorities to demonstrate an “adverse effect on competition” where there is an “abuse” of IP rights. In addition, TRIPS enforcement provisions require “fair and equitable proceedings”, based on “evidence” where the parties had an “opportunity to be heard”,  the right to “independent counsel”:  “judicial review”; no “overly burdensome requirements” for “personal appearances” ; and “safeguards against abuse”  (TRIPS Arts. 40-43, 49).  A more pro-IP approach would have been to recognize these commitments and elaborate on due process requirements in antitrust proceedings regardless of their IP-related elements.

Another  general “due process”  weakness in the CAI’s approach is its failure to deal with “commercial hostages”, including detention of foreigners by purported creditors or adverse parties in IP matters.   Entry and exist of temporary visitors for business purposes is addresses in Section II.6bis, with no mention of foreign detentions.

The final text of the CAI is not scheduled for completion for another two years.  In addition, the annexes to the CAI are not yet publicly available.  In the final text, there are likely to be numerous provisions which will have an indirect effect on the commercialization of IP rights, including  provisions requiring SOE’s to not discriminate in their purchase of goods or services (including  technology licensing?), the lifting of an investment ban for cloud services (subject to a 50% equity cap),  and not imposing new restrictions on investment in R&D in biological resources.

CAI, RCEP and the Phase 1 Trade Agreement all responded to different economic, trade demands and political urgencies.   The CAI has been understood as a sign by the Biden administration that the European Union will pursue its own trade relationship with China based on its own interests.  While the IP and forced technology transfer provisions of the Phase 1 Agreement helped establish new standards in China that are applicable to all countries, the non-IP provisions of the Phase 1 Agreement were not kind to Europeans and other allies in their preferential buying requirements.   Overall, the CAI may not undersell MFN treatment as much as the Phase 1 Agreement did.  On the other hand, the EU did not significantly advance IP protections in the CAI text, nor did it take an expansive view of the role of IP in BITs.  The bright side of this picture is that the CAI leaves space for  the United States and the European Union to further coordinate strategies on IP protection in China.  

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

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

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

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

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

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

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

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

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

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

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

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


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

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

How effective are such procedures likely to be?

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

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

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

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

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

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

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

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.