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

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

Trademark Litigation

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

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

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

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

SEP Litigation

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

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

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

 Software Copyright Litigation

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

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

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

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

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

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

Trade Secret Cases         

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

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

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

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

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

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

Improving Approaches to Using the Right Data

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

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

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

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

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

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.

 

 

 

Update on Research on Technology Protectionism and the Chinese Patent System

Prof. Gaétan de Rassenfosse and Dr. Emilio Raiteri (both at EPFL, the Swiss Federal Institute of Technology in Lausanne, Switzerland) have recently offered interesting statistical evidence for preferential treatment of domestic applicants and a potential issue with national treatment in patent applications in China. Their work shows that inventions by foreign firms were less likely to be granted patent protection, after adjusting for a range of other factors. However, their study of more than half a million patent applications reveals that only applications in “strategic” technology areas faced negative discrimination. More precisely, the probability that strategic patent applications by foreign firms will be granted is 5 to 15 percentage points lower than expected in the absence of discrimination.

Strategic technologies were identified using the ‘‘National Medium and Long-Term Program for Science and Technology Development 2006–2020’’ (“MLP”). The MLP, issued by the State Council, seeks to make China an innovation-driven nation by fostering indigenous innovation in selected technologies, including telecommunications, biotechnology, and energy. Regarding telecommunications, the authors (with the co-authorship of Rudi Bekker of the Netherlands) find in another article that discrimination against foreigners was particularly strong among standard-essential patents, an issue that was recently discussed by Professor de Rassenfosse in a recent webinar.

For background, one useful comparison of the MLP with other macro innovation/industrial policies has been prepared by Prof. Scott Kennedy.

There have been many complaints related to unfair treatment of foreign rights holders in the judicial system, and there has been some recent scholarship and support in analyses of newly launched databases, which suggests that China made significant progress in the area. Some of the sociological studies suggest that larger companies in China (as elsewhere), however, generally fare better in court.

The current paper focuses on the consideration of disparate treatment and its causes in the patent system. However, the reason(s) for the effect is unclear and the authors are cautious not to infer that discrimination is intentional. They have ruled out a large number of possible explanations (such as differences in patent quality or in the quality of the translation into Chinese), but they suggest more work is needed to fully understand the source of anti-foreign outcomes for applicants.

The authors are not alone in looking at differential treatment by national patent offices.  Using data on about 50,000 patent applications granted by the USPTO and filed in the years 1990–1995 at the EPO and the JPO, Prof. Elizabeth Webster and colleagues (then at the University of Melbourne, Australia) had found that domestic applicants were more likely than foreign applicants to be granted patent protection, after certain normalizing adjustments. The authors in another paper noted that despite the efforts then subsisting of the trilateral offices (and other supporting efforts under the umbrella of patent harmonization), there is significant disharmony in the patent application outcomes across the trilateral patent offices. For instance, the overall rejection rate for patent applications that have been granted by the USPTO was 25 percent for the JPO and 5 percent for the EPO.  Webster and her co-authors note that there are numerous reasons why patent application outcomes may vary with priority country status.  In light of recent changes in US practice due to Supreme Court decisions, one may also wonder whether differences in examination in certain areas, such as software-enabled inventions and biotechnology can also skew results in favor of local companies who have more up to the date information, are focused on the domestic market and may even have attracted capital upon the expectation of a local patent grant.

The papers on Chinese patent applications however are notable in that they (a) utilized a larger cohort of patent applications, (b) made comparisons in treatment by one office (SIPO) and (c) analyzed such treatment in light of articulated national industrial policies, and in comparison to treatment where no such national industrial policy is implicated.   The papers may suggest that political pressure, when it exists in China, may be more likely where there are clear national interests at stake rather in any matter in which a foreigner is involved.  Indeed, litigation data suggests that foreigners do well in Chinese courts; there is limited research on litigation outcomes when the subject is a matter of an articulated national industrial policy, such as these studies might suggest.

Written by Gaetan de Rasenfosse, edited by Mark Cohen.

The views expressed herein are the author’s own.