The IP Theft Nexus in the Houston Consulate Closing

Among the purported reasons for closing the Houston Consulate of the PRC were violations of the Vienna Convention regarding consular affairs and  IP theft. According to various press reports, the spokesperson for the State Department, Morgan Ortagus, stated that “We have directed the closure of PRC Consulate General Houston in order to protect American intellectual property and American’s [sic] private information.” This blog looks at the possibility that the consulate was involved in state-sponsored economic espionage.

This Administration (like Obama’s) has been very frustrated by the degree of state involvement in economic espionage matters coming from China and the lack of any effective traditional tools. For example, neither Obama nor Trump (nor any predecessors) took a WTO case pursuant to Article 39 of the TRIPS Agreement which obligates states to protect trade secrets, perhaps because the WTO is perceived as too weak, or that “everyone does it.”  Still, if the extent of state-sponsored trade secret misappropriation was as great as the Administration alleges, a WTO case may have helped gather multilateral support and air US concerns multilaterally.  In other displays of frustration, both Trump and Obama have pursued with some fanfare cases against state actors in absentia.  This has  led to good media coverage against actors such as the People’s Liberation Army, and pyrrhic ex parte convictions.

The Administration also faces another dilemma: criminal economic espionage cases have proven quite difficult since there needs to be a demonstrated state nexus. DOJ has increasingly appeared to be filing or plea bargaining to settle on  “easier” cases – such as traditional trade secret cases which do not require a state nexus or has filed cases involving government grant conflict of interests, fraud, money laundering, etc.   The Administration has also sought to address this through other means such as the Section 301 investigation and tariffs, trade negotiations, strengthening US export controls and CFIUS regulation, and even placing companies on the Commerce entity list where there have been allegations of overseas trade secret theft benefiting China (Fujian Jinhua/theft of Micron technology).

If an economic espionage matter were really the motivation for this sudden evacuation of the consulate and not election-year politics, a good place to look would be for a contemporaneous motivating event.  The closing of the consulate announcement may be timed with an indictment in Washington State 22 hours earlier – which did have one Texas victim nexus and does allege a comprehensive international state-supported economic espionage and personal data theft scheme, including vaccine-related espionage. Two Chinese hackers who are alleged to have had support from the Ministry of State Security in Guangdong were indicted. The hackers were indicted in absentia, once again leaving the US with very limited recourse except pyrrhic ex part convictions. However, no one individual in the Houston Consulate is mentioned – and I imagine that in the usual course of things if a consular official were identified he would have been “PNG’d”, that is, made persona non grata and asked to leave.

Another, more intriguing alternative is that it could also be related to two cases recently discussed by FBI Director Wray, which do have a clear Texas consulate nexus. As Wray mentioned in his July 7 speech before the Hudson Institute:

“Hongjin Tan, for example, [is] a Chinese national and American lawful permanent resident. He applied to China’s Thousand Talents Program and stole more than $1 billion—that’s with a “b”—worth of trade secrets from his former employer, an Oklahoma-based petroleum company, and got caught. A few months ago, he was convicted and sent to prison.

“Or there’s the case of Shan Shi, a Texas-based scientist, also sentenced to prison earlier this year. Shi stole trade secrets regarding syntactic foam, an important naval technology used in submarines. Shi, too, had applied to China’s Thousand Talents Program, and specifically pledged to “digest” and “absorb” the relevant technology in the United States. He did this on behalf of Chinese state-owned enterprises, which ultimately planned to put the American company out of business and take over the market.

“In one of the more galling and egregious aspects of the scheme, the conspirators actually patented in China the very manufacturing process they’d stolen, and then offered their victim American company a joint venture using its own stolen technology. We’re talking about an American company that spent years and millions of dollars developing that technology, and China couldn’t replicate it—so, instead, it paid to have it stolen.”

Notwithstanding these cases theere may be other factors at play, notably:, election-year politics, a general decline in bilateral relations, and national security issues.  The Administration may also have decided on an aggressive escalation at this time to show support for countries like the UK and India as these countries have become more hawkish towards China, such as by not procuring Huawei equipment (the UK), or limiting the use of Chinese social media platforms (India), or opposition to the National Security Law in Hong Kong (UK and many others), and/or by opposing Chinese maneuvers in the South China Sea (UK and many others).

We have limited information to guess at the involvement of the Houston Consulate in any economic espionage activities, nor do we have any sense of the role of various Chinese intelligence agencies in this recent development, or what are the specific kinds of malfeasance that trigged this reaction by the Administration.  According to the New York Times, David Stilwell at the State Department has called the Houston consulate the “epicenter” of research theft.

In terms of Chinese ministry involvement, the US indictment in Washington State points to a key role of the Ministry of State Security in technology misappropriation.   If scientific research is the key focus, China’s  Ministry of Science and Technology is another important agency, which has knowledgeable officials overseas and is engaged in a range of open, legitimate, and highly important collaborative activities.  MoST is probably the diplomatic presence with the greatest depth in any of these accused technologies.  However,  MoST is rarely mentioned as an espionage actor by the Administration and is not even indexed as an espionage actor in recent books by Roger Faligot and Mattis/Brazil on “Chinese Spies” and “Chinese Communist Espionage”, respectively.  According to the Ministry of Science and Technology, there are 75 such MoST offices overseas, including one in Houston.

It is conceivable that some of MoST’s work may not be consistent with US ethics, expectations or laws despite its overall positive role and could have been some part of the decision to retaliate.  As one intriguing example of a role that could lead to conflict, by operation of Chinese law, Chinese science and technology departments in Chinese missions overseas are also in charge of vetting proposed patent prosecutions of Chinese students and patents derived from Chinese technology projects overseas, potentially placing the confidentiality of the patent disclosure at risk.  Moreover, the vague rule requires in certain circumstances that the Chinese inventor (or, presumably, co-inventor) own or apply for the patent if it is not a “service invention” thereby placing these inventors in potential conflict with their host institutions overseas. See the 1986 rule “Concerning Completion of Invention Patents Overseas by Chinese Students Studying Abroad”  关于我国学者在国外完成的发明创造申请专利的规定, promulgated by the Chinese Patent Office, the Ministry of Foreign Affairs and the State Science and Technology Commission (the predecessor of MoST). This 1986 rule outlines a scenario not altogether different from the facts involved in the Shan Shi conviction – applying for a patent in China for an invention made in the United States – notwithstanding the contribution or expectation of others.  Interestingly, Shan Shi was also convicted of trade secret theft by a Houston, Texas federal court.

Another reason to retalitate may have simply been that since US consulates have been thinly staffed and the Wuhan consulate had been closed, there may be an element of consular placement politics which has occurred in the past with regard to China.  The United States has also been complaining about lack of reciprocity with China in access by our diplomats.  The State Department may have also calculated that even if China retaliates this was a lose-lose scenario, where China will lose more than the United States.  A similar calculation may have occurred with respect to these efforts regarding reciprocity or asking Chinese journalists to leave.

Election-year politics may have been an important part of the choice of how to retaliate, even if these political motivations were not the original factor in deciding that retaliation was necessary. Closing a US consulate in retaliation for IP theft should also lead observers to question whether the Phase 1 Trade Agreement, which was intended to address “IP theft” and lead to “structural changes” had achieved its core, motivating goals.  The Houston consulate closing could thus be seen as a crude acknowledgment that the Administration had failed in the primary motivations for its trade war with China.  The prospects for a Phase 2 Agreement are growing darker by the day.

We may never know all the motivations for the Houston closing.  Two things are clear: closing consulates can greatly damage bilateral relations, and we cannot anticipate when this cycle of accusations and reactions will de-escalate.

Update of July 24, 2020:  Matt Peterson in a July 24 article in Barron’s quotes a former USTR official, Clete Willems, who took issue with this blog:

The administration cited intellectual-property theft in its decision to close the consulate in Houston. Mark Cohen, a law professor who worked for the U.S. Patent and Trademark office in Beijing, wrote about that: “Closing a U.S. consulate in retaliation for IP theft should also lead observers to question whether the phase-one agreement, which was intended to address ‘IP theft’ and lead to ‘structural changes’ had achieved its core, motivating goals. The Houston consulate closing could thus be seen as a crude acknowledgment that the administration had failed in the primary motivations for its trade war with China.” What do you make of that?

My quick reply: Indeed, most of the accomplishments on IP in Phase 1 were in domestic Chinese reform and there was nothing as I recall on diplomats. That would have been highly unusual.  However, most of the significant IP reforms in fact occured before the Phase 1 Agreement, in the spring of 2019 or even in 2017 (on pharma).  One could argue there isn’t that much new IP in the Phase 1 Agreement.  As I have explained elsewhere, it “adds much less than its appearance would suggest.”  The focus of the Phase 1 Agreement had already migrated to other issues, such as market access. 

This does not mean that economic espionage or international issues were not at the core of the stated reasons for the trade war and to suggest otherwise is an exercise in historical revisionism.  The predecessor  301 investigation conducted by USTR and the subsequent Phase 1 Agreement explicitly sought to resolve “cyber-enabled theft” and “global espionage” in USTR’s own words.  See predecessor 301 Report Update at pp. 10-21. The incentives to steal trade secrets – whether due to Made in China 2025 or an array of other industrial policies and subsidies  – were not however discussed in the Phase 1 Agreement. Despite the imposition of punitive tariffs, these programs were not dismantled.  The “groundbreaking provisions in an area of critical importance to the United States: protecting intellectual property” that the President trumpeted in announcing the agreement, hardly addressed these core concerns.   There was also no improvement in transparency or other rule of law imperatives, no demends for cooperation between law enforcement authorities on criminal trade secret matters, etc.  that could have affected China’s handling of state-sponsored trade secret theft.  Some important laws were amended, but no sweeping “structural change” to back the state out of the extensive incentives that exist for IP misappropriation was accomplished. 

The Phase 1 Agreement wasalso not an agreement focused purely on domestic Chinese law.  For example, cross-border counterfeiting and Customs measures were part of the package, not simply “counterfeiting in China.” A perverse example of how much international IP theft, including state sponsored esiponage, was of core importance to the agreement and the messages we imparted to China:  Americans are being sued in China for trade secret infringement pursuant to the harsher laws that the US has encouraged China to implement, and Chinese criminal law is being amended to specifically impose harsher penalties when trade secrets are stolen on behalf of foreign parties, based on provisions that mimic our Economic Espionage Act. 

It is unclear to me if the Houston consulate closing was truly about these same issues or if the closing will have any impact on them.  The stated reason for closing was, indeed, trade secret theft and economic espionage.  This does suggest that the US might have felt that it had exhausted other remedies, and is a further indication of a failure to address key motivating reasons for the trade war in the Phase 1 Agreement.   Why else would we have discussed these IP theft issues at such great length, with such economic pain, and with such high expectations?  I agree that hopefully discussions will continue between our countries on trade – considering the volume of trade and investment, it is harder to dismantle those relationships than packing up a consulate.  Discussions should be conducted, however, via a plurality of engagements – not simply USTR – to ensure resiliency.

Further update of July 24, 2020: Here is an interview with me on KHOU on July 24, 2020 on the Houston consulate closing.


 

Wang Binying and the Opportunity within the WIPO Crisis

The vote for WIPO Director General will be made in early March.  The Chinese candidate, Madame Wang Binying, is known to many in the foreign IP community in China, IP diplomats, and others.  She is currently a Deputy Director General at WIPO and is consider a front-runner for the position. Ms. Wang’s candidacy has elicited considerable opposition from many in the United States,  much of it ill-informed, but some of it raising legitimate concerns.  The Chinese media has responded in kind and accused the US of “bullying.”

Over a month ago, a bipartisan group of four U.S. senators had written to President Trump to request that the United States oppose Ms. Wang’s candidacy.  Wang’s name was put forth by China’s Ministry of Foreign Affairs in November.  These senators have noted that “ Given China’s persistent violations of intellectual property protections, including through trade secret theft, corporate espionage, and forced transfer of technology, the United States and its allies must stand firmly against such a move.”

Other commentators have joined in the criticism, including Daniel Runde at the Center for Strategic and International Studies, who recently co-authored an article, “Why the United States Should Care about the WIPO Election,” and  James Pooley, a former U.S. Deputy Director General at WIPO, is quoted in Foreign Policy as asking with regard to Ms. Wang, “[w]hy would you put the fox in charge of the [IP] hen house?”   I was also misquoted in the South China Morning Post as opposing Wang Binying on similar grounds.  For me, Ms. Wang’s candidacy is clouded – but not precluded – by the long shadow cast by Francis Gurry on WIPO’s relationship with China, not by any necessary risk of “IP theft”, which is a term I abjure.  I will discuss that issue later in this blog.

One concern is easily dismissed: Ms. Wang is eminently technically qualified to lead WIPO, as even some of her harshest critics note.  DDG Wang has excellent credentials. She has an LLM from the institution, where I teach (UC Berkeley, (1985-86), and  also obtained a certificate in commercial law from my own alma mater, Columbia Law School.  She also worked at the former State Administration for Industry and Commerce.  She has had a long-term tenure in senior positions at WIPO.  She even spent some time training at USPTO early in her career, upon the recommendation of a U.S. Foreign Commercial Service Officer, Clark T. Randt, III, who later served as U.S. Ambassador to China and who has known her for years.  In fact, my introduction to Ms. Wang occurred through Ambassador Randt when I served as IP Attaché to the U.S. Embassy in Beijing (2004-2008).

Another matter that should be cleared up is that she was somehow appointed by the Communist Party, as suggested by one journal.  The recommendation for Ms. Wang comes, appropriately, from China’s Ministry of Foreign Affairs.  It is  true, however, as the Washington Post has reported, that Ms. Wang’s appointment is part of a larger effort by China to assume leadership roles in a number of UN organizations and that most of these officials are likely Party members.  Moreover, U.S. diplomacy in this area is also hampered, as the Post has noted, “by the administration’s public contempt for the multilateralism and its damaged relationships with allies.”

As in every critique of things Chinese, there are also some ardent U.S. defenders.  Some U.S. patent lawyers have suggested to me that the U.S. doesn’t have a basis to criticize Wang or China because China has been strengthening  China’s patent system at the same time as the U.S. has been weakening its own IP regime.  While I am supportive of this observation, I believe it is irrelevant to Ms. Wang’s candidacy.  Different countries necessarily have different strengths and weaknesses in their IP regimes.  The WIPO position does not mandate international conformity with the nationality of its DG, even if that might be welcomed in some circumstances.  More importantly,  US patent practitioners should instead be primarily concerned whether WIPO will be handling international (PCT) patent applications in an expeditious and professional manner.  A second concern may be whether WIPO will embrace intellectual property norms consistent with U.S. policy in its role as the administrator of 26 separate treaties on intellectual property and as an organizer of conferences and training programs on intellectual property issues.

In contrast to the above, the serious  opposition to Ms. Wang generally breaks down into three related areas: (a)  Ms. Wang is a China-promoted official at a time of heightened U.S. concern over China’s support for “IP Theft”; (b) a China DG may be inclined to mishandle PCT applications or mismanage WIPO utilizing the extensive discretion afforded to her; and (c) WIPO’s policies in China are in need of  a change.  I discuss these below:

IP Theft

The United States government has long conflated a range of issues into “IP theft”, including cybersecurity, trade secret infringement, forced technology transfer, and restrictive market access policies.  Many of these policy issues are not within the domain of WIPO and therefore have a limited role in the discussion around Wang Binying.  Some of them are the subject of an ongoing WTO dispute involving forced technology transfer.  WIPO is primarily concerned with the more mundane tasks of filing international applications for patents, trademarks and designs, arbitrating IP disputes, and training on IP issues, and negotiation of new IP treaties.  Although IP enforcement and trade secrets are part of WIPO’s mandate, they occupy a very small policy-oriented role.

The reason there is a WTO case dealing with IP theft and none at WIPO is simply that WIPO doesn’t have a broad IP dispute mandate.  WIPO, unlike the WTO,  is relatively toothless.  It cannot impose compensatory sanctions.  There is also no WIPO-administered treaty devoted to trade secret matters.  The U.S., which has been aggressively advocating for better international protection of trade secrets for several years, has successfully raised standards for trade secret protections outside of the WIPO treaty process, through free trade agreements and bilateral agreements, including the recent Phase 1 Agreement with China.  The major international agreement with the most teeth is the TRIPS Agreement (Article 39), which is administered by the WTO.  It obligates “Members” to “protect undisclosed information.” This affirmative obligation might, for example, support a WTO complaint against state-sponsored economic espionage or cyber-intrusions, among other acts.  Concerns about Ms. Wang aggressively pushing back on the U.S. IP theft policy agenda therefor seem badly misplaced.

A more significant concern than WIPO’s policy function is WIPO management.  The lion’s share of WIPO’s budget is derived from international IP filings, with Patent Cooperation Treaty Fees accounting for 75% of these receipts, followed by trademark fees, contributions, and design fees.  However, WIPO does not appear to have the same level of user accountability that other IP offices have.  For this reason, patent practitioners who actively used the WIPO system should be most concerned about how that system will be managed by a new DG, then with WIPO’s approach to “IP theft.”

PCT Applications and the Extensive Discretion Afforded by the WIPO DG

The record of the incumbent Director General, Francis Gurry, may serve as a useful guide to how much risk Wang Binying might present to US interests in WIPO’s administration of international patent applications through the Patent Cooperation Treaty.   James Pooley, a former WIPO Deputy Director General in charge of the Patent Cooperation Treaty (PCT) process,  testified before the House Foreign Relations Committee in 2016, where he outlined these risks:

The agency, in my opinion, is run by a single person who is not accountable for his behavior. He is able to rule as he does only with the tacit cooperation of member countries who are supposed to act as WIPO’s board of directors. And he is ultimately protected by an anachronistic shield of diplomatic immunity…

During my tenure I witnessed how a lack of any effective oversight frequently led to reckless decisions, often reflecting a disregard for the legitimate interests of the U.S. There are many examples I could provide, but here I will focus on three: his gift of high-end computer equipment to North Korea, his secret agreements with Russia and China to open satellite WIPO offices, and his relentless retaliation against whistleblowers who dared to come forward with the truth.”

Mr. Pooley’s concerns about the integrity of WIPO internal controls should be treated seriously, as the PCT system, which Mr. Pooley managed, contains a wealth of technical information that is confidential.  China or another malevolent actor, through a compliant DG, might access the secure WIPO computer systems for inappropriate purposes.   The  PCT, which is administered by WIPO, allows inventors to file one application and then wait 30 months before choosing the countries where they need a patent. It is particularly vulnerable during the time frame before the patent is published (18 months after the application date_  During this period before publication, the application is a secret and should not be disclosed to the public and is therefore vulnerable to misappropriation.

The risk of misappropriation of patented information by China under a Wang Binying leadership is hard to quantify; however, it remains incumbent upon WIPO to insure the integrity of its systems in order for the PCT system to remain viable.   These risks have historically been especially acute with respect to China.  China has a weak record of addressing bad faith use of its patent and trademark systems.  There is no concept of “fraud before the patent office,” or a sanctionable “duty of candor.”  China’s past record of legalizing the use of overseas patent materials to support domestic patent applications provides scant comfort.  As late as 2008, China permitted the filing of applications on patents based on disclosures by others in overseas markets, provided they had not been published anywhere in the world, or made known or marketed in China. Design patents merely required that the patented design is not marketed in China  (2000 Patent Law, Arts. 22, 23).   This loophole led to a phenomenon known as “patent hijacking” and would typically occur at an overseas trade show where a new product was displayed before its public disclosure or marketing to China.  A Chinese visitor might photograph a new product at an overseas trade show, email a photograph to his home office, and the home office would then rush to the Chinese patent office to file a design patent application, lawfully claiming it as his or her invention.  The Chinese patent system provided incentives to “steal” others’ proprietary information.  In addition to this form of legalized technology misappropriation, the U.S. government has accused Chinese agencies of covertly compelling the transfer of technology from foreign investors, an issue that has recently been addressed by the enactment of China’s Foreign Investment Law.

China also permits the anonymous filing of patent applications, which can further obscure whether an applicant obtained technical information from an illegitimate source (Examination Guidelines 4.1.2). In fact, one U.S. professor, Percival Zhang, was identified as possibly usurping such information and filing a patent application in China anonymously.  Mr. Zhang’s activities are discussed in a federal civil court case brought by the alleged actual inventor.  He was later convicted in a federal court, apparently on other charges.

The civil court case also involved a PCT application, where a Chinese entity was accused of misappropriating confidential information in advance and applying for a patent in its own name.  As the court noted:

“In September 2016, …  Bonumose filed an international patent application regarding tagatose, listing China as a covered country. The application remained confidential until April 2017. But Bonumose learned soon thereafter that the Tianjin Institute had filed its own patent application in November 2016. Tianjin’s application listed several inventors, two of whom asked to have an “unlisted name,” which is an unusual practice. Bonumose believes that the unnamed inventors are Zhang and a former Cell-Free employee. It further believes that there was no way the Tianjin application—which substantially mirrored Bonumose’s confidential application—could have been developed without knowledge and use of the tagatose trade secrets.

The theory of Bonumose’s case is therefore that Zhang,…  shared the tagatose trade secrets with the Tianjin Institute prior to the Tianjin application’s publication in November 2016. Indeed, Bonumose alleges that the Tianjin Institute paid Zhang and Cell-Free in exchange for the trade secrets. Bonumose is litigating five claims against Zhang and Cell-Free: two breach of contract claims; two trade secret claims (one federal and one state); and a declaratory judgment claim to ascertain the parties’ rights …”

These past activities do not mean that Ms. Wang would necessarily condone such activities nor that prior activities continue at the same level as they have in the past.  However, it does suggest that these concerns should be addressed by WIPO or any new DG in his or her interactions with China.

Continuation of WIPO’s policies in China and the need for change

U.S. concerns about WIPO’s potential misuse of confidential information are further magnified by accusations regarding the relationship that the current DG, Francis Gurry, has enjoyed with China. I quote Mr. Pooley again:

“Mr. Gurry had negotiated secret agreements with both China and Russia, which were first announced not by WIPO but by the China Daily News and The Voice of Russia, respectively. I remember very well going to lunch with one of my senior colleagues, when he surprised me with the news of the Moscow office, while I was the one to first inform him about the Beijing office. These secretive deals provoked a storm of controversy among the member states of WIPO, and as a result at their annual meeting in October 2013 they could not agree on a budget for the organization.”

U.S. suspicions regarding Gurry’s relationship with China are magnified by his frequent travels to China and his high-level meetings with the Chinese government. Of course, there is nothing wrong with high-level Chinese government meetings, as China is an active user of the PCT and other WIPO facilities.  Of concern to me is that Gurry underscores in almost all his China interviews the importance of strong government management of IP, via, inter alia,  “repeated messaging from the leadership of the importance of intellectual property.”  In one interview Gurry noted that China’s IP system has evolved so quickly due to the central direction given to China’s IP system, and praised China’s successful “planned, systemic and leadership-driven system.”  Similarly, in a November 2019 interview, Gurry noted that  China’s development in intellectual property has been “outstanding” and underscored the “focus and support of the leadership.”  The interviewer, Tian Wei, by contrast, noted that “the top-down approach is of course sometimes something quite unique to China.”  Gurry’s support of top-down approaches to IP also extended to his Global Innovation Index, which accords considerable weight to raw numbers invention and utility model patent filings as an indicator of innovative capacity.  This approach tends to naturally favor metric-driven IP regimes.

My interview with the South China Morning Post, noted above, was in fact directed to this embrace of state-driven innovation by Gurry.  As I noted in the interview “If Wang steps into those [Gurry’s] shoes, 10 years from now we will no longer have an IP system based on markets.”   This blog has consistently advocated that, despite the many strengths of China’s IP regime, the main defect of China’s IP regime is the inadequate focus afforded to IP as a private property right and that an overemphasis on the “socialist” aspects of China’s developing market economy could be antithetical to such a private property rights orientation.  I have not only criticized Chinese efforts which might weaken a private property rights orientation, but also the efforts of other authorities, including the US and  WIPO, which support greater Chinese intervention in its markets.  Gurry has consistently ignored that a “planned, systemic and leadership-driven system” can easily deviate from the commitment China made at WTO accession in acceding to the TRIPS Agreement that “intellectual property is a private right”  [emphasis supplied] (TRIPS Preamble).

Would a DG Wang be different from DG Gurry? I have known DDG Wang Binying since my tenure at IP Attaché at the US Embassy in Beijing (2004-2008). She also enjoys cordial relations with many prominent and active U.S. IP lawyers and officials.  Indeed, several foreigners I spoke with thought that she should be given a chance to break out from the legacy of Francis Gurry and, given her expertise, could do an excellent job.  Much as Tian Wei noted in her interview that Gurry’s perspective on China’s IP regime is not consistent with some of China’s own criticisms of its regime, it would not be unusual to expect that Wang Binying may have a better understanding of the needs of her country than Francis Gurry.  In this respect, Francis Gurry may have done a disservice to China, the US and Ms. Wang.

I note with regret that Francis Gurry’s legacy also goes deeper than perspectives on the role of the state in China’s IP regime.  During my tenure at the U.S. Embassy in Beijing and later at the USPTO on its China team (from 2004-2008, and 2012-2017), I was never invited to a WIPO-sponsored symposium in China.  In fact, I  was disinvited to one symposium when a Chinese sponsor affiliated with a WIPO program noted with surprise that an American was being invited to speak at a WIPO event in China.

The data on WIPO’s website further confirms the strongly China-oriented focus of the China office’s activities in China.  The online listing of programs of WIPO’s Beijing office fails to list any multinational program or a program with a foreign government. By contrast, the Singapore office holds regional and national programs, and Brazil’s office is engaged in South-South cooperation as well as hosting international events.  WIPO’s HQ has hosted multinational events in China as well, such as a recent judicial program, often with US participation.  I polled several diplomats who have resided in China prior to writing this blog.  Although there appear to have been some positive recent developments, their past experience of being denied opportunities to participate in WIPO programs was consistent with mine.   Would a DG Wang carry forward this nationalist orientation of China’s WIPO activities?

Conclusion

I believe that active management controls, oversight and perhaps structural reform can help address the risk of trade secret leakage and other management risks from WIPO.  I also believe that, if elected, Wang Binying might be able to leave the unhealthy legacy of Francis Gurry in China behind, and indeed could help improve relations with the United States by adopting a more collaborative and balanced approach.  Although she had been closely associated with DG Gurry, I know of no direct accusation against her with regard to any of the risks noted above.  However, the lack of any such accusation is not proof that the risks aren’t real, nor does it mean that U.S. concerns need not be addressed.  For the United States, these concerns generally also do not exist with respect to candidates from outside of China.   Indeed, whatever the success of her candidacy, it would be helpful for WIPO, its member states, and Ms. Wang herself to step out of the shadows and address those legitimate concerns raised by the United States and others.

If these concerns are properly addressed, both WIPO and U.S.-China IP relations can only be strengthened, and a DG Wang, if elected, would be off to a very good start.  As any student of modern Chinese knows, the Chinese term for crisis 危机 contains the character for opportunity 机会.  Wang Binying’s candidacy can present such an opportunity.

Trade and Peace on Earth: Part 2

pendency

In the first part of this blog, I talked about unilateral steps that the United States and China have been taking during the ‘trade war’ to address concerns regarding forced tech transfer.  In this section I look at bilateral steps that can be taken.   I begin by looking at what the US and China should not do (“Do No Harm”), and then I focus on 5 areas for legislative reform:  trade secrets, licensing, good faith, patents and litigation. I conclude with confidence building steps.

Do No Harm:

There are some bilateral steps taken from playbooks of the past that China and the US should not do:

  1. Political campaigns, particularly to address patent or trade secret infringement. These actions are great for politicians, but they offer no prospect of durable relief.
  2. Accepting Chinese political statements or enactment of normative documents (inferior to State Council “regulations” 法规) that have no binding effect.
  3. Permitting two different fact sheets in Chinese and English to emerge from discussions – Diplomatic discussions should not be a “Rashomon” (羅生門) (see picture below) –  subjective explanations of a common experience.  We have already  differing interpretations of recent negotiations.  For a formal document, that generally means that an agreement needs to be reached several days before a due date in order to ensure there is a harmonized text.
  4. Entering into an agreement that is not verifiable or that the US government doesn’t have the resources to verify.

In his June 9, 2010 testimony  before the Congressional Security Commission, USTR’s Lighthizer, then a private attorney, noted that “China’s commitment to the rule of law is very much in doubt, and the U.S. government continues to express major concerns about China’s failure to respect  U.S. IPR.”  Given the investments to date in effecting change in China, I hope that USTR seeks durable legal changes that have too often been atypical.

The prognosis, however, is not positive.  Willingness to “horse trade” ZTE sanctions and Huawei extradition for trade concessions is one indication of US willingness to bend its rules.  Similarly, Xi Jinping apparently suggested at Buenos Aires that he would approve the NXP merger with Qualcomm at this time.  Many countries, including the US have extended  bilateral science and technology cooperation agreements with China without necessary legal changes to China’s licensing regime in place that would definitively facilitate sharing of improvements between the countries.  The administration’s reluctance to bring trade cases involving IP against China is another sign that negotiation, rather than durable legal changes, may become the dominant means of resolving the current impasse.  However, if we accept extra-legal commitments from China, how can we expect China to make structural changes in accordance with rule of law?

Nonetheless, it isn’t too hard to develop a range of possible legal outcomes that would help address US concerns over the IP issues identified in the Section 301 Report, provided they are carefully monitored.  Here is my initial positive list:

Trade Secrets:

China adopts a unified, stand-alone trade secret law.  This law would address the problem of scattered trade secret laws, insure that criminal trade secret cases are prosecuted, and that employees are treated as subject of trade secret protection and as actors in trade secret infringement, provide appropriate burden of proof reversals (e.g., for “inevitable disclosure” or in proving aspects of misappropriation), establish punitive damages, provide for referral mechanisms from administrative or civil proceedings to the courts, etc.  China previously rejected the idea of a stand-alone law in revising its current Anti-Unfair Competition Law, yet many leading Chinese IP authorities still consider it to be a useful concept.

China might also follow recent Korean legislative practice criminalizing overseas trade secret misappropriation with the intention to benefit a  domestic entity, and imposing aggravated penalties in such circumstances.  Such a provision, if enforced and monitored, could help address US concerns about Chinese indifference to overseas trade secret thefts, as well as set the stage for greater cooperation in transborder trade secret theft.

Technology import/Export Regulations and Licensing:

The Chinese government is already seeking to revise the Catalogue of Foreign Investment in China,  and is considering a Foreign Investment Law to provide greater protections against forced technology transfer, including, hopefully, provisions regarding Joint Venture ownership of foreign licensed technologies.  These positive steps are still not enough, due to pervasive national and local incentives in China at this time to acquire new technologies and the difficulties in tracking forced technology transfer.  As one additional step, China should vest jurisdiction in disputes over such forced technology transfer in the newly established circuit IP tribunal of the Supreme Peoples Court, in order to insure a consistent, high-level focus and opportunity for redress, including expanding its jurisdiction over decisions to approve or deny joint venture registrations.

China has also shown no interest to date in revising the Administration of Technology Import/Export Regulations (TIER).  Chinese intransigence in this area is harmful to China.  Until China amends its law, I suggest that the US consider enacting legislation imposing reciprocal treatment on Chinese licensors of technology to the United States, as ITIF has also suggested.

I also encourage formation of a bilateral non-governmental commission (“Bilateral Commission”) to review progress in forced technology transfers.  If necessary, the US could reimpose sanctions if sufficient progress is not made.  This Commission should also require that China regularly publish reliable licensing data on the quantity of legitimate technology transfer occurring between China and other countries, including technology transferred as part of a joint venture formation.  This information could support better data-driven discussions on technology flows between China and other countries.

Patents:

China’s patent law reform offers the possibility for concrete changes that should not be missed.  Of particular concern, is the absence of a patent linkage regime in the current draft.  USTR might consider requiring China to make necessary changes in its patent and food and drug laws to fully implement a modern pharmaceutical patent linkage regime, including data exclusivity and patent term restoration.

The Section 301 report also hardly addressed potential issues involving discriminatory treatment in patent prosecution, such as has been alleged from time to time in China.  As examples, low rate of patent grants in pharmaceuticals, and disparate treatment in granting of SEPS have been the subject of academic and industry concern.  Consideration of discriminatory treatment, or lack thereof, should be the focus of any future collaboration between the US and China (such as my proposed Bilateral Commission).

This issue of bias need not be “tip-toed” around.  China fired what was likely the first salvo when it alleged unfair treatment by USPTO regarding an IWNCOMM patent application at the USPTO during a JCCT meeting (a “Rashomon” meeting, where there was a  different U.S. outcome sheet).  USPTO data, however, generally shows that Chinese patent applications in the US are treated as well if not better than US applications, according to my former colleague Larry Lian (see, e.g.,  slide 14 above and the accompanying deck).  China has not produced similar data on American applications in China or refuted the research to date in this area.

The United States and other countries might also look at temporal studies to see if there is any link between changing industrial policies and behavior of China’s patent office towards foreigners.  One promising area of research that one of my students undertook in my Chinese IP class this year suggests that there could be temporal differences in patenting behavior over a multi-year period: as China increasingly focuses on national policies to stimulate indigenous innovation, bias rates may be affected.

The US should also push China to reform its metrics driven approach to patent filings, which wastes resources and distorts markets.

Good Faith/Bad Faith:

One of the discrete trends in China’s domestic IP environment is an increasing focus on the role of good faith / bad faith in a range of IP-related activities.  Elevating the legal consequences of bad faith actions could lead to structural changes in China’s IP regime.  Good faith has been an increasing factor in dealing with bad faith trademark registrations, in Guangdong IP court guidance on SEP negotiations, as well as in trust-losing patent behavior in the recent NDRC MOU providing for coordinated interagency action involving patenting behaviors, and will likely play a part in consideration of punitive damages for patent infringement in the proposed patent law reforms.  It could be extended further to impose a duty of candor on patent and trademark applications, provide for deterrent penalties against frivolous IP litigation, address contempt of court, etc.  Despite my concerns regarding the social credit system, it can also be tasked to monitor bad faith behavior in IP and non-IP related areas, to support claims for enhanced damages or referrals to criminal prosecution.  The courts can take an initial look at this area across a range of judicial sectors.

Litigation:

China’s efforts to publish cases and increase transparency over the past several years are laudable, but the work is not complete and confidence in the judicial system thereby suffers.  The courts should insure that, wherever possible, all cases are published.  Cases involving national or trade secrets could be expunged of confidential information but otherwise be made public.  The current data on trade secret theft is especially incomplete.  Complaints and other motion papers, including dismissals due to settlements, should be made available to the public, along with preliminary and interim injunctions.   Generally speaking,  China’s transparency efforts are vulnerable to claims of selection bias, which undercut the utility of these efforts for comprehensive trade negotiation purposes.  Transparency has the potential to create and support structural change, and it should be exploited for that purpose.

Confidence Rebuilding:

Assuming that the US and China can get past this 90 day milestone, efforts to improve the environment for high tech also need to be established  There were some efforts underway in the Obama administration that can create incentives for improvement in China’s IP regime (e.g., accession to the TPP), and positive environments for technology collaboration (e.g., the US-Clean Energy Research Center).  There is a tremendous upward potential for collaboration between the US and China if the right frameworks can be developed.

One thing is clear: real accomplishments, not conferences and dialogues, are needed.  As I often reminded my Chinese colleagues over the years, reform in China should not be an entirely self-serving process. The world needs better scientific collaboration to address many of the looming global challenges we face.  If China plays its cards correctly it can emerge as a balanced global stakeholder and welcome partner in innovation.  Otherwise, I fear that the trend could be ever downward.

January 2, 2019 Update:  A translation of the draft Foreign Investment Law, which is now open for public comment is available at the NPCObserver website.

(Note: Please feel free to add your suggestions!  Also, I am indebted in this blog to the work of my students in my Chinese IP class at Berkeley this year, many of whom prepared papers on some of the suggestions in this blog).

Movie poster for Rashomon, below:

rashomon