MofCOM’s New Blocking Rule: A Dangerous Weapon or a Necessary Remedy?

On January 9, 2021, MofCOM released the Measures to Block the Improper Extraterritorial Application of Foreign Laws and Measures, (Docket Number 1)(中华人民共和国商务部令 二〇二一年 第1号)(the “Rule”).  The Rule was promulgated with “approval from the State Council.”  The Rule may be used to support litigation in Chinese courts against foreign extraterritorial measures, including court cases and perhaps USITC Sec. 337 cases. It might also be used to retaliate against export controls    Being the first MofCOM rule in the new year, during a period of transition in the United States, with immediate application, circumventing usual legislative procedures for 30 days notice and comment and delayed implementation, with an English translation simultaneously released by MofCOM, I assume that it is  intended to be understood by Americans, and to send a political signal to the President-elect’s trade team.  It is also the first significant step taken to address trade sanctions and other measures imposed by the United States since Wang Wentao, a “defense technocrat”, became the new MofCOM Minister (Dec. 26, 2020).  Its legal basis, however, is less clear.

The Rule is a ministerial measure promulgated by a State Council agency, or  “banfa” (办法).  It is cloaked in language of representing the central government in its enactment, beginning with the unusual introduction that it was promulgated with State Council approval.   I anticipate that the State Council may yet publish an approval document on its website.  References to national authorities are found throughout the text.  For example, the operative legislation the Rule is implementing is the National Security Law (Art. 1).  Interagency mechanisms for implementing the law are also contemplated (Art. 4). 

MofCOM  did not tarry with the usual legislative procedure in preparing this Rule.  For example, a relevant SPC rule (2009) requires that rules need to be promulgated under delegated authority of the State Council to be a basis for judicial decision making.   (最高人民法院关于裁判文书引用法律、法规等规范性法律文件的规定 (Art. 5).  Although the State Council apparently “approved” the Rule, it is unclear if an explicit delegation of “authority” was obtained that should otherwise be necessary for the judicial procedures contemplated by the Rule to be effective .  The National Security Law similarly simply authorizes the State Council and its constituent agencies to issue regulations (fagui) and rules (guizhang) (Art. 37), and does not explicitly provide for circumvention of the Law on Legislation.  The State Council Regulation on Procedures for Enacting Rules 规章制定程序条例 requires 30 days advance notice of proposed rules and a 30 day delayed implementation period, neither of which appears to be the case here.  This State Council Regulation also requires that a joint rule making which requires other agencies’ involvement is invalid if it is not drafted together with these agencies (Secs. 3,4, 9, 15).   In light of the shortcuts taken, I assume that the Minister deemed it highly important to pass this Rule early in his tenure and quickly.

Although overseas court cases are not mentioned as a target, the Rule applies to “foreign laws and other measures being applied extraterritorially contrary to international law”. It specifically authorizes court cases to obtain compensation (“Where a judgment or ruling made on the basis of foreign laws within the scope of a prohibition order causes losses to Chinese citizens, legal persons, or other organizations, the citizens, legal persons, or other organizations may initiate litigation in the people’s courts in accordance with law, requesting compensation for losses from the parties benefiting from that judgment or ruling”).   One “hot” target could be the extra-territorial jurisdiction of foreign courts in the recent spate of standards essential patent cases – at least to the extent they have not already been addressed by anti-suit injunctions or other measures.  Doug Clark has written an excellent article on some of these developments,  I also blogged about more recent anti-suit injunctions.  Former Federal Circuit Paul Michel’s amicus brief also pointed out due process concerns in China in Ericsson v. Samsung here.

Another target of the Rule may be USITC Section 337 litigation.  Cases involving trade secrets where the US has imposed US law and exercised jurisdiction over misappropriation of trade secrets that occurred within the territory of China have aroused the ire of MofCOM in recent years.  In its amicus brief in support of the petition for Cert in the Sino Legend case, MofCOM argued “The ITC’s disregard for the sovereignty of China risks the very international discord underlying the presumption against extraterritorial application of U.S. law.” 

One consideration is that the Rule is by its own terms limited to harm caused to “third country” markets (Arts. 2 and 5). However, at a press conference of January 10, 2021, “third country” harm was only discussed once. The dominant theme was “extraterritoriality” 域外, which is mentioned 19 times.

Blocking measures against the extraterritorial exercise of export controls also have a long history.  Canada’s Foreign Extraterritorial Measures Act is one such example of such blocking legislation, which was applied to the US embargo against Cuba.  China has stated in the press conference of January 10, 2021 that it looked at blocking measures of other countries. A blocking measure by China would likely pose a different degree of risk to US exporters than a Canadian blocking measure. The United States and Canada closely cooperate on export control matters. If US export control laws for dual use technology, including those that prohibit re-export to third countries, are threatened to be blocked by China, it could further reduce confidence in China as an end destination for licensed exports. This could provoke another downward spiral in sales of controlled goods or technology to China.

This blog was updated January 10, 2021 to include reference to the news conference of even date, and to address the possibility that the Rule by its explicit terms is focused on third country impacts.

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).

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