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:


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.