IPO Comments on the Trade Secret Rules

The Intellectual Property Owners Association (IPO)  has submitted bilingual comments to SAMR on the draft Trade Secret Rules 《商业秘密保护规定(征求意见稿) 》.   The comments are found here and at the IPO website   I blogged about these rules previously here

IPO’s substantive trade secret comments on a range of issues governed by both the Phase 1 Trade Agreement and emerging best practices are especially welcome. In my view, IPO also correctly notes that “[t]he Draft Rules contemplate an expansive role for administrative authorities in connection with trade secret enforcement.” It properly advocates for harmonization with the people’s courts in such matters as “uniformity, predictability, transparency, oversight, and procedural protections that are provided to the affected parties through judicial review.”   IPO also notes that rule making like this would be better if accomplished through than State Council Regulations to ensure that they are sufficiently authoritative.  I also agree. 

Thank you IPO for making these publicly available!

The Cart Before the Horse in China’s Patent Linkage Regime

Since China’s legislature amended the patent law on October 17, 2020 and China’s National Medical Products Administration (NMPA) and  its National IP Administration (CNIPA) published the Implementation Measures for the Early Resolution Procedures for Drug Patent Disputes (Trial) (Draft for Comment) ( 国家药监局综合司 国家知识产权局办公室公开征求《药品专利纠纷早期解决机制实施办法(试行)(征求意见稿)》意见) (the “Rule”) on September 11, 2020, several people have written to me who are bewildered about the sequence of rules being proposed on patent linkage in advance of the enactment of patent linkage into law.  This post analyzes whether this “cart before the horse” scenario should be a concern for US pharmaceutical companies, and what this counter-intuitive sequencing may suggest for China’s new patent linkage regime.  

This is indeed an unexpected circumstance.  There was no advance word that the Rule was being prepared for public release. CNIPA and NMPA’s parent agency, the State Administration for Market Regulation (SAMR), did not include a patent linkage rule in its 2020 legislative work plan.  CNIPA also had not included a patent linkage rule among its top 100 IP projects for 2020.  However both SAMR and CNIPA did include the more general Implementing Regulations for a revised patent law in their anticipated legislative work for 2020.   By contrast, the Beijing IP Court issued a research report on Patent Linkage (中国药品专利链接制度研究) in late September, which advocated judicial reforms to support a linkage regime.  In addition, the Supreme People’s Court in its 2020 annual plan announced its intention to draft a judicial interpretation (JI) for patent linkage cases.  They have not yet released their draft JI.

This “cart before the horse” Rule may trace part of its origins to the Phase 1 Trade Agreement (January 15, 2020) (the “Agreement”).  The Agreement did not explicitly require that the civil courts play the leading role for patent linkage disputes. The Agreement also failed to establish an “artificial infringement” regime for the Courts to rule that an application for marketing approval of a patent drug constitutes infringement. Instead, it required that China adopt “procedures for judicial or administrative proceedings and expeditious remedies”, and that China “may … provide” administrative remedies for resolution of linkage disputes (Art. 1.11).   In so doing, the Agreement left open the possibility that the administrative agencies would play the dominant role in a patent linkage regime.

More generally, the Agreement also authorized a leading role for administrative IP enforcement in a range of areas with its repeated references to campaign-style administrative enforcement.  The Agreement also did not acknowledge or seek improvements to China’s notable IP-related judicial reforms.   The Agreement was also immediately preceded by an important State Council/Party Central Committee plan that called for strengthening of administrative enforcement (Nov. 24, 2019), and that was considered in its time to be a high-level policy precursor to the Agreement. This policy evolution has also been accompanied by changes to all of China’s major IP laws including the Trademark law, the Patent Law, the Anti-Unfair Competition Law, as well as proposed Copyright Law Amendments, that all further commit China to strengthened administrative enforcement of IP.

CNIPA and NMPA took the next step of securing a key role for their agencies in patent linkage when they drafted and published the Rule.  I use the term “Rule” (規章) or “Departmental Rule” (部門規章) in this blog as a term of art, consistent with China’s Law on Legislation 立法法.  The nomenclature is also consistent with China’s own descriptions of its legal system  upon acceding to the WTO.  A Rule is a legislative document enacted by a departmental agency that is inferior to a Law (法律)that has been passed by the National People’s Congress or  a State Council-enacted Regulation (法規).  As set forth in the hierarchy of the Law on Legislation, it is also inferior to many types of local legislation.  As with other Rules, NMPA/CNIPA does not use the word “rule” in its September 11 pronouncement.  It instead calls its legislation “procedures” (办法). However, do not be misled! The Law on Legislation does not use “Procedures”  as a term to categorize legislation, even if regulatory agencies use this term in their own enactments.  When a Departmental Agency enacts a legislative document it is typically a “Rule” under the Law on Legislation based on the enacting agency and the legislative process. The categorization of legislation is often not immediately clear from its own wording.  Moreover, the legal status can also become murkier if sui generis or inter-agency procedures not otherwise in the Law on Legislation are involved.

In amending the Patent Law, the NPC cemented the leading role of NMPA and CNIPA by declining to legislate on linkage in detail and delegating rule-making authority to these agencies. According to Article 76,  “procedures” (or a “Rule”) will be drafted by NMPA and CNIPA to govern “pharmaceutical approvals and applications for marketing approvals.” Article 76 further requires the “procedures” to be delivered to the State Council for its approval before implementation (国务院药品监督管理部门会同国务院专利行政部门制定药品上市许可审批与药品上市许可申请阶段专利权纠纷解决 接办法,报国务院同意后实施).  By delegating drafting authority to NMPA and CNIPA and legislating that the State Council will be the final arbiter of its contents, the Patent Law has likely placed the NMPA and CNIPA Rule within that murky class of sui generis enactments.   

In its final form the State-Council approved patent linkage Rule is unlikely to be in conflict with any explicit Patent Law Amendment provisions. The State Council approval mechanism also still leaves open the possibility for additional policy interventions that are consistent with the Patent Law.  One important modification that might be considered would be to authorize the Ministry of Justice (MOJ) take a more active role in the drafting of the Rule or craft the Rule as a Regulation promulgated by the State Council itself. Pursuant to the administrative restructuring of March 13, 2018, MOJ is required to perform the legislative functions formerly performed by the Legislative Affairs Office of the State Council  (《第十三届全国人民代表大会第一次会议 关于国务院机构改革方案的决定》,批准《国务院机构改革方案》, which previously prepared Regulations.   

If the State Council were to take a leading role in drafting on patent linkage, past practice would suggest it will ensure that all agencies concerned would have an opportunity to comment.  The agencies would not only include NMPA and CNIPA but could also include the courts, trade, health, science or industrial planning and development agencies, as well as authorities responsible for personnel and budgeting.   A Regulation or sui generis Rule which involves all relevant agencies might also obviate the  failures of a prior linkage rule in 2002 which relied exclusively on administrative rule making.  As the late Prof. Benjamin Liu wryly observed at that time: “the SFDA  [predecessor agency to NMPA] does not always succeed with its gate-keeping function.”  Deputy Director Ding Jianhua of SFDA also succinctly stated the problem:   “SFDA is not responsible for IPR.” [1]

Judicial involvement in this legislation is needed to harmonize the legal complexities of patent linkage which complex issues of patent law, civil law, administrative law, and pharmaceutical regulation.  A lack of judicial involvement confounded the implementation of the 2002 rule.  This 2002 Rule (and subsequent amendments) was further stymied by later legislative changes in the patent law when China added a “Bolar exemption” to exempt pre-marketing approval efforts by generic companies from claims of infringement.  In Prof. Liu’s words, this exemption  “swallowed the rule of patent linkage.”  Bolar exemptions are well-known in international practice, being an exemption from civil infringement claims and are within the purview of the courts.  Overly-broad Bolar exemptions can raise concerns over compliance with TRIPS and other international IP obligations.

China’s vast administrative system must surmount other challenges to lead a patent linkage regime. These challenges include: a lack of administrative enforcement transparency; uncertainty regarding coordination between judicial and administrative enforcement; differing legal appeal routes and standards for litigating infringement which may lead to undermining of one system over another; concern for the systemic impacts on China’s IP regime by relying on administrative interventions rather than the civil system; limited foreign utilization of the patent administrative enforcement system particularly for high value pharmaceutical rights; and the inherent “fox guarding the hen house” fear when the administrative agencies that grant patent rights and marketing authorizations are also tasked with enforcing these important rights. 

Long-term observers may also fret that CNIPA and NMPA are an “odd couple” to administer a linkage regime  Although they are housed in the same mega-agency, SAMR, NMPA in recent years has been a leading advocate for  patent linkage, while  CNIPA had been viewed as less supportive. There are also continuing concerns over CNIPA’s excessive invalidation of pharma patents.

At this stage, the most appropriate corrective to these various challenges would be to leverage the State Council’s authority to take a leadership role in implementing Article 76 of the Patent Law, as well insure that there is conforming language in the Patent Law Implementing Regulations which MOJ will likely be coordinating in the near future.  An effective linkage regime for China will not only need to balance the interests of generics and innovators in China’s linkage regime, but also between the courts and the range of concerned administrative agencies.

Where will China go next at this important juncture on patent linkage?  Berkeley Law will be convening a webinar on China’s patent linkage regime as part of a multi-part series on food and drug law.  I will be joined by He Jing from the GEN law firm, Cui Can from Morrison and Forster, Dr. Karen Guo from Novo Nordisk and Xuejiao Hu from Beigene.  The event will take place on November 17.  Registration information is available here


[1] Benjamin Liu, ”Fighting Poison with Poison? The Chinese Experience with Pharmaceutical Patent Linkage,” 11 J. Marshall Rev. Intell. Prop. L. 623 (2012).

Note: The Photo above by Unknown Author is licensed under CC BY-SA

SAMR’s Draft Trade Secret Rule: An Unchartered Step Forward?

As previously discussed, SAMR released a draft trade secret protection rule for public comments on September 4 (the “Rule”).  Comments are due October 18, 2020.  I have attached here a draft translation of the Rule. 

The Rule supersedes prior SAIC rules on trade secrets enacted in 1995 and amended in 1998. Like the earlier rules, this Rule is primarily directed towards administrative enforcement of trade secrets.   The Rule does drift into the jurisdiction of many other agencies and laws, many of which are not within the jurisdiction of SAMR.

A noticeable element of the Phase 1 Trade Agreement with China of January 15, 2020 is that it failed to require China to take any administrative measures or campaigns against trade secret infringement, although it did request administrative measures in other areas.  This omission may not have been an oversight.  My hope is that the negotiators may have recognized that a JCCT commitment made between the US and China in 2013 which obligated China to take administrative enforcement measures including “adopt[ing] and publish[ing] an Action Program on trade secrets protection and enforcement” accomplished little due to the inherent weaknesses at that time in trade secret administrative enforcement and the unwillingness of foreign companies to come forward with administrative trade secret complaints. It is unclear to me whether SAMR can address these institutional challenges due to the inherent sensitivity of most trade secret cases.

Broadly speaking, the Rule seeks to further expand and legitimize administrative enforcement as a viable vehicle for trade secret enforcement.  However, ambiguities in the Rule, uncertainties over jurisdictional issues, as well as uncertainty around SAMR’s available resources may limit its effectiveness.  The ambiguities begin with the title to this document: it is nominally a “rule” (gui’ding) rather than a State Council enacted regulation (fagui). Under the Law on Legislation, this will limit the effectiveness of the Rule in governing other agencies’ actions or directing judicial actions.  Another overarching concern is how the Rule aligns with judicial interpretations and other guidance from the courts on trade secret infringement.  These documents were previously discussed here.

The earlier rules overtly discriminated against foreign natural persons by only providing protection for Chinese citizens.  This draft Rule does not significantly improve on that discriminatory provision.  It only offers protection for Chinese trade secrets (Art. 3).    

Foreign companies who have generally preferred civil or criminal remedies for trade secret infringement may consider initiating administrative cases as an alternative or precursor to such lawsuits owing to such factors as their greater speed, their ability to gather and preserve evidence, available of administrative injunctions and the support that may be given by local authorities.  However, I believe that China’s IP courts have the greater capacity to handle technologically complex issues, have not been burdened by a record of statutory discrimination against foreigners, and may continue to be the preferred destination for resolution of most cases. 

Here are some other concerns:

Art. 5: The rule encompasses technical information, business information and other commercial information.  This may reflect a commitment made by China in the Phase 1, footnote 1 defining trade secrets.  The Phase 1 Agreement also includes “electronic intrusions” within the scope of trade secrets.  To me, an electronic intrusion is an act, not a type of information.  See Article 9 of the Anti-Unfair Competition Law revisions (AUCL), which defines electronic intrusion as an infringing act.

Art. 7: Defines “commercial value” as arising when an intruder tries to obtain a trade secret by “improper means.”  To me this is a method of conduct, not something that defines a value.  Perhaps this language is intended to address a situation where a “luckless infringer” mistakenly believes a trade secret has significant value, as was the case in T-Mobile v. Huawei dispute over the “Tappy” robot, where no damages had been found by the jury.  As in the criminal investigation of Huawei in the United States, the impact of this provision may be to permit a public remedy (administrative enforcement) where a private civil remedy was lacking due to no damages.

Article 8: Lists confidentiality measures, any of which may be held to be sufficient to protect confidential information.  This seems too lax to me: the adequacy of the protective measures should be based on the type of information and how it is used, not on whether there is one adequate measure in a range of possible measures to address some of the risks of misappropriation.

Article 10: Sets the criteria for determining ownership of a trade secret.  Trade secrets are a subject of the civil law (Article 123 of the General Provisions of the Civil Law, 中华人民共和国民法总则).  Questions about employee ownership of IP rights have been hotly debated in China  I believe it is inappropriate to try and resolve such questions in a administrative rule making.  SIPO had previously attempted such an effort involving all IP rights, which involved extensive interagency coordination.  Given the complexity of the issue, and the close relationship between trade secrets and other IP rights,  a high level agency or party effort, or a coordinated inter-agency process involving the courts is the appropriate way to address these issues. 

The Rule also does not fully contemplate the impact of other statutes and regulations on determining what constitutes reasonable efforts to protect a trade secret, including cybersecurity laws, company laws, labor laws, contract law, technology licensing regulations and other national interests.  See also Article 14(3), Article 18 (regarding privacy laws) and Article 32 (regarding compulsory licensing of trade secrets) and Article 37 (state secrets).

Article 12: Refers to business “operators” rather than rightsholders.  This addresses Phase 1 Agreement concerns (Art. 1.3) that all natural and legal persons should be considered business operators.  The change first appeared in Article 2 of the AUCL.  It would ultimately be simpler if references to “business operators” were eliminated entirely, as it leaves open the question of under what circumstances an individual is a business operator and unnecessarily underscores the lineage of the AUCL as an unfair competition law rather than an IP law.

Article.13: The definition of what constitutes “disclosure” of a trade secret leaves open a catch-all “etc.”  The draft would benefit by specifically enumerating the unauthorized publication of a patent as constituting an unauthorized use of a trade secret.  Allegations that individuals have misappropriated trade secrets from the United States and used the underlying information to file patents have been made in US litigation.

Articles 18:  Trade secret complaints are lodged with the county government.  There are over 2,800 county level administrations in China. This process was dictated by the AUCL revisions (Art. 4) and may ultimately represent a huge expansion in administrative enforcement of trade secrets, similar to the expansion of administrative patent enforcement and the contemplated expansion in administrative copyright enforcement in proposed copyright law revisions. The expansion could pose risks of abuse by well connected local companies suing their competitors for trade secret theft.

An exception regarding filing of trade secret complains exists if the complaint involves a foreigner.  The complaint must then be filed at the provincial government level (Art. 38). 

Article 19: Potentially broad exceptions to trade secret protection are established by the Rule, including for reverse engineering, shareholders accessing company information, and disclosing information in the public interest.  The Rule does not limit these exemptions by requiring that any confidential information that is obtained is appropriately protected or limited.

Art. 24: The Phase 1 Trade Agreement requires a burden of proof reversal in civil trade secret proceedings (Art. 1.5) as does the AUCL (Art. 32).  This Article contemplates a similar mechanism for administrative enforcement proceedings.   

Art. 29: SAMR may mediate trade secret disputes and arrange for compensation.  This provision, along with other provisions on referring matters to civil or criminal litigation, raises issues about the type of coordination that will be instituted among civil, criminal and administrative enforcement.  As SAMR fines are a means of punishing infringement, a better approach might be to let judicial institutions mediate disputes, as they are often engaged in mediation in the context of on-going litigation.    

Art. 31: Another issue of enforcement coordination involves high civil fines.  Such fines may be used to substitute for criminal enforcement or could reduce the availability of civil compensation, and should be avoided in such circumstances.

Art. 33: A good faith infringement defense is provided where the infringer can show that it has paid reasonable compensation. This may open up a window for fictitious or under-valued contracts to minimize trade secret litigation exposure.

Article 36: This Article requires that state organs not reveal trade secrets.  This is also required by Article 1.9 of the Phase 1 Agreement.  However, it is questionable whether SAMR has jurisdiction over the behavior of other agencies. This provision is welcome, but may also be another legislative overreach.

Please send your comments or corrections on this blog and my draft translation