SPC’s 2020 IP-Related Judicial Interpretation Agenda

On March 19, 2020, the Supreme People’s Court’s Judicial Interpretation Agenda for 2020 (“2020 Judicial Interpretation Agenda”) 最高人民法院2020年度司法解释立项计划 was discussed and adopted by the SPC Trial Committee at its 1795th meeting on March 9, 2020. In 2020, there are 49 judicial interpretation (JI) projects, divided into two categories: 38 in the Class I Projects, which are required to be completed by the end of 2020; 11 in the Class II Projects, which are required to be completed in the first half of 2021. Generally speaking, the complete catalogue covers various fields such as the enforcement, security, pre-litigation property preservation, civil code, criminal cases, administrative cases and judicial appraisal. There are a number of  IP-related projects, all of which involve the recently established national Intellectual Property Court as a drafting and research partner with other SPC divisions or tribunals, and suggest an increasingly important role for this specialized court in IP policy making:   

Class I Projects (to be completed before the end of 2020) 

  1. Several Provisions on Evidence in Civil Procedures of Intellectual Property 关于知识产权民事诉讼证据的若干规定 [ As previously noted, this draft was discussed at a conference hosted by the SPC in Hangzhou in 2018. As Chinese courts experiment with more expanded discovery, evidence preservation and burden of proof reversals, clearer rules regarding the obligations of parties to produce evidence are becoming more critical. ]

 Organizers: Civil Adjudication Tribunal No.3, Civil Adjudication Tribunal No.1, Research Office, Intellectual Property Court 

  1. Interpretation of Several Issues concerning the Application of Law in the Trial of Administrative Cases for Patent Validity 关于审理专利授权确权行政案件适用法律若干问题的解释 [Note: A draft was issued for public comment in the summer of 2018; see the earlier blog].

 Organizers: Civil Adjudication Tribunal No.3, Intellectual Property Court 

  1. Interpretations of Several Issues concerning the Application of Law in the Trial of Trade Secret Secret Infringement Cases 关于审理侵犯商业秘密纠纷案件适用法律若干问题的解释 [Note: Regarding the Interpretations of Several Issues concerning the Application of Law in the Trial of Trade Secret Infringement Cases, it was also on SPC’s 2019 JI Agenda. As mentioned in Susan Finder’s November 26, 2019, blogpost, this judicial interpretation is flagged in the Party/State Council document (November, 2019) on improving intellectual property rights protection with a goal to “explore and strengthen effective protection of trade secrets, confidential business information and its source code etc. Strengthen criminal justice protection and promote the revision and the amendment and improvement of criminal law and judicial interpretations 探索加强对商业秘密、保密商务信息及其源代码等的有效保护。加强刑事司法保护,推进刑事法律和司法解释的修订完善.”]

Organizers: Civil Adjudication Tribunal No.3, Criminal Adjudication Tribunal No.1, Intellectual Property Court [Note the involvement of the Criminal Adjudication Tribunal is a positive sign for seeking an integrated civil/criminal/administrative enforcement approach] 

  1. Provisions on Several Issues concerning the Application of Law in the Trial of Pharmaceutical Patent Linkage Dispute Cases 关于审理药品专利链接纠纷案件适用法律若干问题的规定 [Note: this appears consistent with the requirement for adopting a patent linkage system in the Phase 1 IP AgreementAs we have discussed in a previous blog, the Pharmaceutical-Related Intellectual Property section of the Phase 1 IP Agreement requires China to adopt a patent linkage system, much as was originally contemplated in the CFDA Bulletin 55, but subsequently did not appear in the proposed patent law revisions of late 2018]

(New Project)

Organizers: Civil Adjudication Tribunal No.3, Case Filing Tribunal, Intellectual Property Court  

  1. Provisions on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct () 关于审理因垄断行为引发的民事纠纷案件应用法律若干问题的规定() (New Project)

 Organizers: Intellectual Property Court, Civil Adjudication Tribunal No.3

 Class II Projects (to be completed in the first half of 2021)

  1. Provisions on Several Issues concerning the Specific Application of Law in the Trial of National Defense Patent Disputes 关于审理国防专利纠纷案件具体应用法律若干问题的规定 (New Project)

Organizers: Civil Adjudication Tribunal No.3, Intellectual Property Court 

  1. Interpretation of Several Issues concerning the Application of Punitive Compensation for Intellectual Property Infringement 关于知识产权侵权惩罚性赔偿适用法律若干问题的解释

Organizers: Civil Adjudication Tribunal No.3, Intellectual Property Court  

  1. Interpretation of Several Issues concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition 关于审理不正当竞争民事案件适用法律若干问题的解释 (New Project)

Organizers: Civil Adjudication Tribunal No.3, Intellectual Property Court 

  1. Provisions on Legal Issues concerning the Specific Application of Law in the Trial of New Plant Variety Right Infringement Cases 关于审理植物新品种权纠纷案件具体适用法律问题的规定 (New Project)

Organizers: Intellectual Property Court, Civil Adjudication Tribunal No.3

 Judicial interpretations that are not marked as the “New Projects” have already been on the SPC’s Judicial Interpretation Agenda for 2019 or 2018. Several of them, including Several Provisions on Evidence in Civil Procedures of Intellectual Property (2019) and Interpretation of Several Issues concerning the Application of Law in the Trial of Administrative Cases for Patent Authorization and Confirmation (2018 and 2019), were to have been completed by the end of 2019 or 2018. 

Class I Projects JI No. 37 and Class II Projects  Nos. 3 and 11 all have prior effective versions that were issued in 2012 or earlier.  It is likely that these “New Projects” will be in the form of amendments, perhaps significant, to the previous JI’s.

 

MofCOM Releases Draft Foreign Investment Complaint Rules: How Good Will It Be For Forced Tech Transfer?

On March 23, 2019 the Ministry of Commerce released its  Rules for Foreign Investment Complaints (Draft for Public Comment (外商投资企业投诉工作办法[征求意见稿]) (the “Rules”).  Comments are due by April 22.  This is one of several recent Phase 1 / trade responsive initiatives that have been announced or are expected in the near term from China.  This blog will focus on the IP aspects of the Rules, notably those provisions that can be used to address forced technology transfer and protecting trade secrets.

The Rules seek to implement Article 26 of the Foreign Investment Law, which provides as follows:

The State establishes working mechanisms for complaints by foreign-invested enterprises, promptly handles the issues raised by foreign-invested enterprises or their investors, and coordinates and improves the relevant policy measures.

Where foreign-invested enterprises and their investors consider the administrative acts of administrative organs and their employees to have infringed upon their lawful rights and interests, they may petition for a resolution through the working mechanisms for complaints by foreign-invested enterprises.

Where foreign-invested enterprises and their investors consider the administrative acts of administrative organs and their employees to have infringed upon their lawful rights and interests, in addition to petitioning for a resolution through the working mechanisms for complaints by foreign-invested enterprises in accordance with the provisions of the previous paragraph, they may also petition for administrative reconsideration or initiate administrative litigation in accordance with law.

A major concern by the Trump Administration had been to prohibit forced technology transfer by China, through making tech transfer a condition of foreign investment approval or other means.   Article 2.1 of the Phase 1 Agreement addresses this concern:

  1. Natural or legal persons (“persons”) of a Party shall have effective access to and be able to operate openly and freely in the jurisdiction of the other Party without any force or pressure from the other Party to transfer their technology to persons of the other Party.
  2. Any transfer or licensing of technology between persons of a Party and those of the other Party must be based on market terms that are voluntary and reflect mutual agreement.

Article 23 of  The Foreign Investment Law, which predates the Phase 1 Agreement addressed this concern as well:

Administrative organs and their employees shall, in accordance with law, maintain the confidentiality of the trade secrets of foreign investors or foreign-invested enterprises that they learn in the course of performing their duties, and must not disclose or unlawfully provide them to others.

The proposed Rules set up a working group (工作机构), coordinated by MofCOM with counterpart agencies down to county levels (Art. 2) to handle foreign investment complaints.  This complaint process is not exclusive of other legal remedies, such as administrative reconsideration or litigation, “letters and visits” (petitioning), etc. (Art. 8).  The Rules afford the possibility of initiating parallel track procedures, provided applicable legal limitations periods are adhered to for legal actions.  However, if these alternative legal procedures are accepted, the MofCOM process will be terminated:

Art. 19.3 During the handling of a complaint, if the complainant initiates administrative reconsideration, administrative litigation and other procedures on the same complaint, or an application is filed with a higher level complaint agency or disciplinary inspection, supervision, letters and visits and has been accepted, the complainant shall be deemed to apply for withdrawal of the complaint.

投诉处理期间,投诉人就同一投诉事项提起行政复议、行政诉讼等程序的,或者向上级投诉工作机构或者纪检、监察、信访等部门提出申请并已被受理的,视同投诉人申请撤回投诉。

The Rules also set up the basic procedural requirements for making a complaint, including types of documentation, representation, response time, and potential remedies (Chapter 2).   Once a completed complaint is filed, the Working Group will have seven days to advise the complainant that the complaint has been accepted. Trade secrets and private information are to be protected in the process (Art. 21).  Final decisions are required within sixty days of acceptance (Art. 18).  The complaint acceptance process does afford MofCOM the possibility of delaying due to incomplete complaints (Art. 14).

The principal remedy of this process appears to be a mediated response with the offending agency (依法公正进行协调处理,推动投诉事项的妥善解决) (Arts. 15, also Arts. 17, 19). Other possible outcomes procedures include recommending that local governments change their procedures or rules (Art. 17).

How effective are such procedures likely to be?

Although this process may afford some individuals a useful alternative channel to resolve forced technology transfer and effect policy changes, I am doubtful it will afford much relief in most licensing/trade secret cases.  An earlier administrative effort to protect trade secrets through the National IPR Leading Group also didn’t deliver much relief as far as I know.   Trade secret matters are very difficult to handle in China’s administrative processes due to concerns about local economic influences, uncertain procedures to maintain confidential information, fears of retaliation, etc.  In general, foreign companies have been reluctant to sue national and local Chinese government agencies, with the significant exception of patent and trademark validity challenges.  Of particular concern is that possibility of retaliation against those who file complaints.  As USTR noted in the Section 301 Report:

As U.S. companies have stated for more than a decade, they fear that they will face retaliation or the loss of business opportunities if they come forward to complain about China’s unfair trade practices. Concerns about Chinese retaliation arose in this investigation as well. Multiple submissions noted the great reluctance of U.S. companies to share information on China’s technology transfer regime, given the importance of the China market to their businesses and the fact that Chinese government officials are “not shy about retaliating against critics.”

Moreover, there are competing channels to trade secrets that are improving. China has made significant advances in civil judicial protection of trade secrets, which should be utilized where appropriate.  Technical trade secrets appeals are now being heard by a new national appellate IP court.   SAMR also has plans to draft an administrative rule on stopping trade secret infringement(禁止侵犯商业秘密若干规定).

Finally, it is difficult for me to conceive of a complaint mechanism that essentially is being made to the same agency or group of agencies that approve the actual investment, rather than the agenc(ies) in charge of protecting trade secrets.  Should complaints fail to materialize, it  may also be interpreted by China as a lack of concern about the issue, rather than concerns about the effectiveness and risks of the process.

My perspectives on this process have been clear.  As I stated in an earlier blog:

[N]ewly amended provisions in the new Foreign Investment Law prohibiting forced technology transfer are likely to have little impact absent effective complaint and legal challenge procedures, such as the creation of a foreign investment ombudsman and/or appeals to the newly established IP court.  The inclusion of a non-discrimination position in administrative licensing procedures is also welcome news, although it may be similarly difficult to monitor and enforce.

While there is nothing harmful in the Rules, I continue to believe that appeals to a competent, specialized court or creation of an independent ombudsman would likely best serve foreign interests.

IMPACT OF RECENT AML LEGISLATION ON THE IPR/ANTITRUST INTERFACE

This blog provides an update on recent legislative developments involving the interface between IP and China’s Anti-Monopoly law. On November 28, 2019, SAMR published the Anti-Monopoly Compliance Guidelines for Undertakings (Draft for Public Comment) (“Draft Compliance Guidelines”) 经营者反垄断合规指南(公开征求意见稿), which according to SAMR is specifically intended to “encourage undertakings’ compliance with China’s Anti-Monopoly Law” 鼓励经营者合规经营. Comments were due on February 12, 2019.  On January 2, 2020, SAMR issued the Draft Amendments to China’s AML (Draft for Public Comment)反垄断法”修订草案 (公开征求意见稿) (“Draft AML Amendments”). Comments were due on January 31, 2020. These documents, along with the changes from the government reorganization coming China’s three antitrust agencies into one, may suggest new approaches to antitrust regulation and enforcement in the future in China. 

The ABA’s Antitrust Law and International Law Sections submitted comments to SAMR on the Draft Compliance Guidelines as well as the Draft AML Amendments. We welcome receiving comments that other organizations submitted on these proposed laws to publish or link on this blog.

According to the NPC Observer, the Draft AML Amendments are on the State Council’s calendar for the 13th NPC Standing Committee Legislative Plan. It is a priority Class II Project. According to the recent government reorganization, it would otherwise be expected that Ministry of Justice would prepare a draft of the AML revisions for consideration by the State Council which would then forward on to the NPC for three readings. This Draft AML Amendments appear to be an effort to ‘test the water’ or perhaps ‘jump start’ the revision process, as it is drafted at an earlier stage than the NPC calendar might otherwise require. China’s National Copyright Administration undertook a similar effort with the long-stalled copyright law amendments, by publishing its own draft for public comment, which eventually became a State Council draft for public comment in June of 2014.

From an IP perspective, there are several items that are worth noting: 

The first one is that Article 55 of AML (Article 62 of the Draft) stayed unchanged and there is no new IP-related content added to this draft amendment. This article provides:

“This Law does not govern the conduct of undertakings to exercise their intellectual property rights under laws and relevant administrative regulations on intellectual property rights; however, undertakings’ conduct to eliminate or restrict market competition by abusing (or misusing) their intellectual property rights are governed by this Law.”

Article 55 has been the subject of considerable discussion among academics and practitioners and is ambiguous in its scope, including the relationship between the legitimate exercise of an IP right and an anticompetitive act, the relationship with Contract Law and proposed Civil Code provisions on monopolization of technology, the difference between “IP abuse” and “misuse”, the impact of administrative rules 行政法规 and AML guidelines on Article 55, and ultimately whether the AML creates some kind of safe harbor against charges of monopolization.   

An example of the unsure relationship between the legitimate exercise of IP rights and competition law might be price-based claims for securing a license to a patent, which arguably restricts certain competition in the market but would otherwise constrain a patentee’s rights to license or charge prices as it sees fit (see, e.g., Art. 28 of the TRIPS Agreement, Arts. 65, 68 of Chinese Patent Law). Most high pricing cases to date in China have involved standards essential patents, where a FRAND commitment may be involved that arguably mitigates against letting market prices fully determine patent values. However, these cases may not take into account the lawful rights authorized by Chinese IP law including the right to charge market prices and to seek an injunction when a right is infringed, which is also arguably within the scope of AML Article 55/revision Article 62.

In a similar vein, the notion of essential facilities is not mentioned in both drafts, which means China may not be ready to fully support an essential facility doctrine in national legislation at this time. However, companies that manage IP assets, particularly in the standardization context, may still need to pay attention to this issue to minimize their IP risk related essential facilities claims/abuse of market dominance, particularly as the essential facilities doctrine continues to have an active influence in administrative enforcement and policy making, as well as in policy decisions involving SEP’s.

Article 20(6) of the Draft AML Amendments lists several types of abusive acts, including “discriminating among transacting parties on transaction conditions without justified reasons” (没有正当理由,对交易相对人在交易价格等交易条件上实行差别待遇).  The current AML additionally required that the discrimination arise from “identical circumstances” (or “an equal footing” in the MofCOM translation) as a condition to a claim of discriminatory pricing (Art. 17(6)). This may create additional uncertainty in IP licensing due to potential AML risks, because the reasons for removal of “identical circumstances” are unclear, the scope of what is a “justified reason” in a licensing transaction is also unclear, and IP licenses are typically not commodity or mass produced agreements but are custom-negotiated based on a range of factors including the role of any actual or threatened litigation, markets and market penetration, tax planning, any cross-licensing, etc. 

Article 14 of the Draft AML Amendments prohibits both horizontal and vertical agreements that “exclude or restrict competition” offers another possible distinction from the current AML.  Article 13 of the current AML requires a finding of “excluding or restricting competition” only with respect to horizontal monopoly agreements. While the courts have generally adopted a fact-based, rule of reason type approach to this issue, administrative agencies were more inclined to find such agreements vertical agreements illegal per se, subject to a few exceptions. This Draft AML Amendments clarify this issue, which could have an important impact on licensing transactions by requiring an analysis of competitive impact and would be more consistent with TRIPS Article 40, which regulates “licensing practices or conditions that … constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market.” (emphasis supplied).

Two other provisions worth noting are Articles 18 and 21 of the AML Draft Amendments. Article 18 would tighten the requirements for receiving an exemption from an otherwise offending monopolistic agreement by requiring that it gives rise to efficiencies such as improving technology or improving research and development, that are “necessary” for the claimed efficiencies to be realized. The ABA has suggested that this language would require a “hindsight” type of analysis and that Article 18 be revised to soften this condition by requiring only that the agreement be “reasonably necessary” to achieve the claimed efficiencies.  

Article 21 lists factors that may be used to determine whether an undertaking has a dominant market position, and adds new additional factors for the Internet sector including network effects, economies of scale, lock-in effects, and data control and handling capabilities. The ABA has suggested that it is inappropriate to have industry specific legislation for the Internet sector, that these factors may equally apply to other industrial sectors, and that requirements of this type are best reserved for “implementing regulations or guidelines.” 

The Draft Compliance Guidelines, like other administrative rule makings are not mandatory and have no binding legal force. The Guidelines provide general guidance on anti-monopoly compliance of business operators. Most of its contents have already been stipulated in the previous Anti-Monopoly Law and related guidelines.   

Neither the AML Draft or Draft Compliance guidelines offer any specific guidance regarding management of patent pools, obtaining clearance from SAMR for a pool, or operation of a licensing regime.

The absence of more detailed consideration of IP issues in these two documents is rather surprising considering discussion in other venues. Although the US government complained about antitrust enforcement in China in the Section 301 investigation, noting that “several submissions asserted that Chinese AML authorities use the AML as a tool to advance industrial policy rather than to protect competition”, there were also no references to the AML in the Phase 1 Trade Agreement. Chinese courts have also been addressing issues regarding abuse of dominance and standardization through documents such as the Trial Adjudication Guidance for Standard Essential Patent Dispute Cases promulgated by Guangdong High People’s Court, and the Beijing High Court’s Guidance for Patent Infringement Determination. In addition, IAM has also recently reported that there is a significant increase in SEP-related litigation in China, including foreign vs. foreign and foreign vs. Chinese cases. China has also recently become an important venue for resolution of international SEP licensing disputes. Perhaps the wiser approach is to let these contentious cases be resolved one by one, rather than risk over-legislating in an evolving area where there has been considerable political attention.

Prepared by Mark Cohen and Xu Xiaofan

 

Draft Civil Code Technology Contract Law Available for Comment

The NPC has released a draft of the contract chapter of the draft civil code for public comment. According to the NPC Observer, this is the first draft of the entire Civil Code with the final round scheduled for consideration as early as March 2020.  Comments are being accepted by the NPC through January 26, 2020.  According to the NPC Observer the contracts section of the draft had previously been separately published in December 2018.  This blog considers the differences between the contract law provisions and the current draft, as well as the relationship of the draft entire civil code with other legislative changes involving technology contracts.

Chapter 20 of the contract chapter deals with technology contracts. Based on a quick read, several provisions are directed to long-standing concerns, such as ownership of service invention compensation, ownership of improvements (grant backs), indemnities from infringement, and the relationship of contract regulation to China’s Antimonopoly Law and the recently amended Technology Import Export Regulations (TIER).

Some Key Substantive Provisions

Articles 847 and 848 deleted from the prior draft the part  (Arts. 622, 633) that addressed mandatory service invention (employee inventor) compensation, which proposed that “[a] legal person or an unincorporated organization shall extract a certain percentage [emphasis supplied] from the proceeds obtained from the use and transfer of the service technical achievements and award or reward individuals who have completed the service technical achievements.” The draft law thereby appears to carry forward the ambiguity and debate regarding what amount of compensation is required, if any, in addition to salary and other benefits.  This had also been a focus of previous bilateral discussions.

第八百四十七条 职务技术成果的使用权、转让权属于法人或者非法人组织的,法人或者非法人组织可以就该项职务技术成果订立技术合同。法人或者非法人组织订立技术合同转让职务技术成果时,职务技术成果的完成人享有以同等条件优先受让的权利。职务技术成果是执行法人或者非法人组织的工作任务,或者主要是利用法人或者非法人组织的物质技术条件所完成的技术成果。

第八百四十八条 非职务技术成果的使用权、转让权属于完成技术成果的个人,完成技术成果的个人可以就该项非职务技术成果订立技术合同。

Article 847 Where the right to use or transfer a service technical achievement belongs to a legal person or an unincorporated organization, the legal person or unincorporated organization may conclude a technical contract for the service technical achievement. When a legal person or an unincorporated organization concludes a technology contract to transfer service technology achievements, the person who completed the service technology achievements has the right to receive priority transfer on equal terms. The service technical results are the technical results of performing the work tasks of a legal person or an unincorporated organization or mainly using the material and technical conditions of a legal person or an unincorporated organization.

Article 848 The right to use or transfer a non-service technical achievement belongs to the individual who completed the technology achievement, and the individual who completed the technology achievement may conclude a technology contract for the non-service technological achievement.

Articles 849 and 875 addresses ownership of improvements, providing further detail on the implications of the removal of Article 27 in the recently revised Administration of Technology Import Export Regulations (TIER). This provision also supports freedom of contract, by providing that the improving party owns the improvements unless the parties stipulate otherwise.  Article

第八百七十五条 当事人可以按照互利的原则,在合同中约定实施专利、使用技术秘密后续改进的技术成果的分享办法;没有约定或者约定不明确,依照本法第五百一十条的规定仍不能确定的,一方后续改进的技术成果,其他各方无权分享。

Article 875 The parties may agree in the contract in accordance with the principle of mutual benefit and determine how to share the technical results of implementing patents and using technological secrets for subsequent improvements; if there is no agreement or the agreement is not clear, and it is still uncertain according to the provisions of Article 510 of this Law 【regarding  supplemental contractual language】 then the technical results of subsequent improvement by one party shall not be shared by the other parties.

Article 874 also supports freedom of contract by providing for a default but negotiable indemnity against third party infringements or torts.   This language is consistent with the revised Art. 24 of the TIER

第八百七十四条 受让人或者被许可人按照约定实施专利、使用技术秘密侵害他人合法权益的,由让与人或者许可人承担责任,但是当事人另有约定的除外。

Article 874 Where the assignee or the licensee implements a patent or uses proprietary technology to infringe upon the legal rights and interests of others, the assignor or the licensor shall be held liable unless the parties agree otherwise.

Relationship with Other Laws

As indicated, the draft law must also be read in conjunction with the revised TIER and other laws and regulations.  As a higher level, more recent legislation, the Civil Code language would generally be more authoritative than the TIER in the event of any conflict.  Among the provisions that reference other laws and regulations is Article 877 which provides that these other laws and regulations shall normally govern.  Moreover, Article 877 does not expressly restrict the Civil Code from “gap-filling” these other laws and regulations.  It may thereby perpetuate the possibility of government intervention through its vague language such as “mutual benefit”, “monopolize technology”,  “hindering technological development”, ‘infringing technological achievements”, etc.

第八百七十七条 法律、行政法规对技术进出口合同或者专利、专利申请合同另有规定的,依照其规定。

Article 877 If there are laws and administrative regulations on technology import and export contracts or contracts for patents or patent applications, such provisions shall be followed.

The draft law also contains vague references to competition and antimonopoly law.  Article 850 contains identical language to Article 329 of the Contract Law, and Article 864 is nearly identical to Article 343 of the Contract Law:

第八百五十条 非法垄断技术、妨碍技术进步或者侵害他人技术成果的技术合同无效。

Article 850 A technology contract that illegally monopolizes technology, hinders technological progress, or infringes on the technological achievements of others is invalid.

第八百六十四条 技术转让合同和技术许可合同可以约定实施专利或者使用技术秘密的范围,但是不得限制技术竞争和技术发展。

Article 864 A technology transfer contract and a technology license contract may stipulate the scope of patent implementation or use of technology secrets, but they shall not restrict technology competition and technology development.

As with the prior Contract Law and TIER, the law does not clarify the difference between a covenant not to sue or a settlement of an infringement lawsuit on the one hand, and a patent license agreement.  Lawyers drafting such settlement agreements may wish to ensure that default provisions of the Civil Law, such as those regarding indemnities and ownership of improvements do not come into play.

These provisions also further underscore the importance of thorough monitoring of changes on technology transfer, including the TIER, particularly as operational implementation by the courts and administrative agencies, through cases, judicial interpretations, and rule making,  may now be more significant than legislative changes.

In addition to these revisions to China’s contract law in the proposed Civil Code, an Export Control Law has also been released for public comment by the NPC.  The draft law sets up a general export control system and specifically regulates both technologies and services (Art. 2).  Comments are also due January 26, 2020.

Happy New Year to all!

Note: all translations are based on machine translations with minor editing and are not intended to be authoritative.  Please provide any corrections or suggestions on these translations or any additional commentary to the author.  This blog was revised on March 23, 2020 with the assistance of Dr. Xu Xiaofan.

New CPC and State Council Opinions on Improving IP Protection

wordcloud

On November 24,  2019, the General Office of Communist Party of China and the State Council jointly released the Opinions Concerning Enhancing Intellectual Property Rights Protection (关于强化知识产权保护的意见).

It is often too easy to dismiss documents like these, that have typically delivered an ephemeral higher state of vigilance by the Chinese government.  Nonetheless, there are some useful statements in this document that may be an indicator of future durable improvements, including:

  1. It is jointly published by the CPC and the State Council and thus has high level political and executive branch support.
  2. It does address some long-standing concerns raised by industry, such as development of a patent linkage system, patent term extension and copyright protection for sports broadcasts.
  3. There continues to be a focus on punitive damages in litigation. However, this document does appropriately point out the need to increase actual damages.
  4. Improving criminal enforcement, including revising criminal judicial interpretations – is also addressed.  Along with revising the criminal code, revising criminal JI’s and their high criminal thresholds was a goal of the WTO case that the US filed against China over 10 years ago (DS362).  This task is long overdue.
  5. Improving coordination between administrative and criminal enforcement is once again highlighted. This is also a long-standing issue.  In light of numerous prior efforts and experiments, a more concrete explanation of how this might be accomplished to better enable prosecution of major criminal actors would be helpful in the future.
  6. Case guidance and public trial systems are highlighted. Hopefully, the case guidance system will add further momentum to successful case law experiments in IP at the Beijing IP Court.
  7. The introduction of technical assessors into administrative enforcement could suggest a continued enhanced role for patent administrative enforcement, which has been increasing even as trademark administrative enforcement has been declining. If so, it may not augur well for foreigners who have traditionally been heavy “consumers” of the administrative trademark system, but not the administrative patent system.
  8. Improvements in the “examination” of utility models and designs are noted as a goal. However, these rights are generally not examined for substance except in the case of “abnormal” applications.
  9. Continuing attention is paid to challenging markets, such as e-commerce platforms and trade fairs, as well as establishing faster protection mechanisms.
  10. There is a continuing focus on supporting Chinese rightsholders overseas.

This document arguably goes part-way in establishing an outline for addressing US concerns about IP theft.  However, it offers little to address such concerns as ensuring greater transparency in the courts, publishing foreign-related cases, or addressing certain trade-sensitive topics outlined in USTR’s Section 301 report, such as cyber intrusions or criminal trade secret misappropriation.

The word cloud, above, is drawn from a machine translation of this document.  The original Chinese language and my redlining of a machine translation are found here.

Addendum of November 26, 2019:

Susan Finder in her Supreme People’s Court Monitor blog, reported on Judicial Interpretation drafting by the SPC for next year, some of which are referenced in the recently released Opinions.  According to that blog, on 29 April 2019, the SPC’s General Office issued a document setting out a list of 47 judicial interpretation projects, 36  with an end of 2019 deadline.  Several of these involve IP-related issues, including issues addressed in the joint CPC and State Council Opinions, including:

  1. Interpretation Concerning the Application of Law in Cases of Disputes over the Infringement of Trade Secrets (关于审理侵犯商业秘密纠纷案件应用法律若干问题的解释). Responsibility of the #3 Civil (IP) Division.
  2. Interpretation on Several Issues Concerning Punitive Damages for Intellectual Property Infringement (关于知识产权侵权惩罚性赔偿适用法律若干问题的解释). Responsibility of the #3 Civil (IP) Division.
  3. Provisions on Issues Concerning the Application of the Foreign Investment Law of the People’s Republic of China (I) (关于适用《中华人民共和国外商投资法》若干问题的规定(一)). Responsibility of the #4 Civil Division. The Foreign Investment Law and the recently released draft implementing regulations contain provisions protecting the intellectual property of foreign investors, including prohibiting forced technology transfers and enhancing the availability of punitive damages.

These draft JI’s have a due date of the first half of 2020.  Susan Finder notes in her blog that given the worldwide attention on the issues set forth in these three judicial interpretations, she expects that they will be released for public comment.  I hasten to add that the IP Division of the Court has generally taken a positive attitude towards soliciting public comment on its draft judicial interpretations, and I hope that they maintain this tradition.

It was also noted by Susan Finder that certain JI’s were due by year-end 2019, including:

  1. Intellectual Property Rights Evidence Rules (关于知识产权民事诉讼证据的若干规定).  Responsibility of the #3 Civil (IPR) Division. This draft was discussed at a conference hosted by the SPC in Hangzhou in 2018.  As Chinese courts experiment with more expanded discovery, evidence preservation and burden of proof reversals, clearer rules regarding the obligations of parties to produce evidence are becoming more critical.  A particular notable example of such a reversal is found in the recent amendments to the trade secret law (Article 32), whereby  a rights holder that has preliminarily proven that it  has taken reasonable confidentiality measures on the claimed trade secrets and has preliminary evidence reasonably demonstrating that its trade secrets have been infringed upon, can shift the burden of proof (BOP) to the infringer to prove that the trade secrets claimed by the right holder do not belong to those as prescribed in this law.
  2. Judicial interpretation on administrative cases involving patent authorization and confirmation (关于审理专利授权确权行政案件若干问题的解释). Responsibility of the #3 Civil IPR) Division. Another interpretation that previously had a 2018 year-end deadline.  A draft was issued for public comment in the summer of 2018; see my earlier blog.

Addendum of November 27, 2019:

Another China law blog, the NPC Observer also expects that some of the IP legislation flagged in the Opinions for revision may be considered as early as late December of 2019t.  According to the NPC Observer:

We expect the session to review a … draft amendment to the Patent Law [专利法] …The session may additionally consider the following bills: …

I have previously blogged about proposed revisions to the Patent and Copyright Law.

Addendum of January 9, 2020: Here is a translation of the Opinions from China Law translate.

Foreign Investment Law Implementing Regs Open For Public Comment: Administrative and Punitive Enforcement Ascends Again

The Ministry of Justice had published a draft of the Foreign Investment Law Implementing Regulations for public comment.  Chinalawtranslate has prepared an English translation of the proposed regulations and of the law itself.   The due date for submitting comments is December 1.  The US-China Business Council has graciously already made its comments available in English and Chinese to the public.  The Foreign Investment Law was one of several laws enacted earlier in 2019 that appear to be responsive to US concerns and pressure.

The primary provisions addressing IP are Articles 24 and 25, which state:

Article 24: The state is to establish a punitive compensation system for violations of intellectual property rights, promote the establishment of rapid collaborative protection mechanisms for intellectual property rights, complete diversified dispute resolution mechanisms for intellectual property rights disputes and mechanisms for assistance in protecting intellectual property rights, to increase the force of protections for foreign investors’ and foreign-invested enterprises’ intellectual property rights.

The intellectual property rights of foreign investors and foreign-invested enterprises shall be equally protected in the drafting of standards in accordance with law, and where foreign investors’ or foreign-invested enterprises’ patents are involved, it shall be handled in accordance with the relevant management provisions of state standards involving patents.

Article 25: Administrative organs and their staffs must not use the performance of administrative management duties such as handling registration, approvals or filings for investment projects, and administrative permits, as well as implementing oversight inspections, administrative punishments, or administrative compulsion, to compel or covertly compel foreign investors or foreign-invested enterprises to transfer technology.

(chinalawtranslate translation).

The language in the first paragraph of Article 24 appears to track trade war pressures, including demands for punitive compensation.   As I have argued repeatedly, a better focus might be on deterrent civil damages, and/or the basic structure set forth in the WTO of having adequate and effective civil remedies with criminal remedies as an adjunct for willful, commercial-scale harm.  In this scheme, there is little place for administrative remedies, as was noted in DS362 (the IP enforcement case at the WTO).  The WTO panel, in that case, noted that “neither party [the US nor China] to the dispute argues that administrative enforcement may fulfil the obligations on criminal procedures and remedies set out in Article 61 of the TRIPS Agreement. Therefore, the Panel does not consider this issue.”  There have also been numerous academic studies on the challenges of creating a sui generis administrative IP enforcement system in China.  The language in Article 24 is also highly repetitive of the November 21, 2018 special Memorandum of Understanding/campaign mechanisms involving 38 government agencies to address six types of faithless IP conduct, about which I previously blogged.

What is notably absent from these commitments is an obligation to increase transparency, which is especially concerning due to an apparent slowdown in the publication of foreign IP-related court cases since the trade war began.   I will be blogging more about this soon, but here is what the decline in published US cases looks like based on IPHouse data, with a flatlining since January 1, 2018:

iphouse

See also my slides from the recent Berkeley transnational IP litigation conference available here.

The language regarding standards in the second paragraph repeats long-standing concerns about foreigners being excluded from standards-setting processes, as was addressed in the 2015 JCCT.  It does not set forth commitments about fairness or equal treatment which have been raised before in industrial policy drafting (as was addressed in the 26th JCCT on semiconductor policy), antitrust investigations, patent prosecution or litigation (for which there is a wealth of empirical data).

Article 25 also appears trade responsive.  It would be useful at this time to determine the current magnitude of forced technology transfer in foreign direct investment, and to determine how it subsists and whether it has measurably decreased since the trade war began, including whether legitimate licensing transactions have stepped in to provide increased revenue for technology licensors as a result of these and other reforms, including revision of the Administration of Technology Import/Export Regulations.

 

 

 

Unpacking the Role of IP Legislation in the Trade War

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Here is my attempt to unpack recent legislation and their relevance to the on-going trade dispute.

In recent months, China has amended its Foreign Investment Law, the Technology Import/Export Regulations (“TIER”), the Anti-Unfair Competition Law regarding trade secrets, and the Trademark Law, with new provisions on bad faith filings and damages. A summary of the Trademark Law revisions provided by SIPS is found here. China also amended the Joint Venture Regulations provisions removing provisions that which limited a foreign licensor’s freedom to license technology beyond years or to restrict use of licensed technology after the 10 year period had elapsed.

With the revisions to the TIER and the JV regulations, much of the basis for the US and EU complaints against China at the WTO regarding de jure forced technology transfer may have evaporated (WTO Disputes DS542, and DS549). However, the public dockets do not indicate that the cases have been withdrawn.

China seems to have determined that it has crossed a line in how much it can accommodate US demands. Bloomberg reported on a commentary published after the imposition of escalated sanctions in the influential “China Voice” column of the People’s Daily which accused the US of fabricating forced technology transfer claims. The commentary is entitled “If you want to condemn somebody, don’t worry about the pretext”, with the sub-title, written in classical Chinese: “‘Forced Technology Transfer’ Should Stop!”. (欲加之罪,何患无辞 – “中国强制转让技术论”可以休矣). The title is a quotation from the Zuo Zhuan, a classic of Chinese history written around 400 B.C. that realistically describes the palace intrigues, military tactics, assassinations, etc. from the chaotic “Spring and Autumn” period from 771-476 B.C. The People’s Daily view is also shared by a number of scholars and observers who view the problem as exaggerated or mischaracterized (apart from the TIER and JV regulations). However, this view has been rejected by USTR Lighthizer, as was reported in a recent NPR interview (March 25, 2019):

“CHANG: Though a number of scholars believe the Trump administration is overstating how often forced technology transfers are happening.

LIGHTHIZER: Well, I guess I don’t know who those scholars are. We did an eight-month study on it, and I think it’s the very strong view of the people that we talked to that it’s a very serious problem and has been for a number of years.”

(Update of May 21, 2019: A recent EU Chamber survey in fact showed an increase in businesses reporting that FTT is a concern, from 10% two years ago to 20%.)

There have also been several IP legislative developments that may not be as directly linked to US government trade pressure. Perhaps the most important is the launch of China’s new national appellate IP Court effective January 1, 2019. The NPC has released a draft of the civil code provisions on personality rights (See this translation). Personality rights can be important tools in addressing trademark squatting, such as in the Michael Jordan case with Qiaodan. CNIPA also released Draft Provisions for Regulating Applications for Trademark Registration (关于规范商标申请注册行为的若干规定(征求意见稿) which addresses bad faith registrations. CNIPA released a draft rule for public comment on Protection of Foreign GI’s (国外地理标志产品保护办法 (修订征求意见稿)on February 28, 2019. The comments focus on generic terms and a GI expert committee for examination of foreign GI’s. Here are INTA’s comments on the trademark registration and GI proposed rules. CNIPA also proposed changes to patent examination guidelines on such issues as proof of inventive step and what constitutes “common knowledge.” Here are AIPLA’s comments from April 4, 2019.

Still pending are proposed amendments to the Drug Administration Law, with comments due by May 25, 2019. This is a second public comment draft released by the NPC. Ropes & Gray has provided a useful analysis. The proposed changes to the DAL also include increased punitive damages for counterfeit medicines, in line with increased penalties in the IP laws (Trademark, AUCL, etc.). There are also proposed changes to the patent law which was released for comment earlier this year. Of particular interest to the pharma sector in the proposed changes were provisions calling for patent term restoration. However, a hoped for inclusion of patent linkage through an “artificial infringement” provision to trigger an infringement challenge by reason of a pharmaceutical regulatory approval has not yet materialized. There were also rumors that China and USTR has scaled back regulatory data protection for biologics from the 12 years that had originally been proposed by China in 2018 to the 10 year period provided by the US Mexico Canada Free Trade Agreement.

What is the relationship between all these legislative changes and the trade war? Larry Kudlow, the Director of the National Economic Council, described the legislative snafu that caused the administration to reinstitute tariffs as follows:

“For many years, China trade, it was unfair, nonreciprocal, unbalanced, in many cases, unlawful. And so, we have to correct those and one of the sticking points right now as we would like to see these corrections in an agreement which is codified by law in China, not just the state council announcement. We need to see something much clearer. And until we do, we have to keep our tariffs on, that’s part of the enforcement process as far as we are concerned.”

So what are the unenacted “laws” and what is the State Council “announcement” that Mr. Kudlow is referring to and which in his view launched this new trade war escalation? I doubt that Mr. Kudlow has read China’s Law on Legislation and understands the difference between a Law passed by the NPC and a State Council Regulation, particularly as US and European practice in recent months appears to be oblivious of legislative nomenclature and its role in determining what constitutes a legally binding document.

Perhaps Mr. Kudlow is talking about the NDRC 38 agency MOU published in late 2018 regarding punishments for serious patent infringement, including use of social credit system. The NDRC document is clearly inferior to a Law or State Council Regulation, but it was a directly promulgated document of a State Council agency. As the patent law amendments have not been enacted yet, he may be referring to this delay in enactment and the failure to increase damages for infringement as has been provided by other statutes. In my own view, the focus on punitive or even statutory damages is misguided as is increased administrative enforcement, as the primary reason that damages are low is the failure of most Chinese courts to impose fully compensatory damages and abide by priorities in law for establishing damages. But I hope to have more on that in another blog…

One thing is certain: China has been timing legislative developments with trade diplomacy. This may lead one to believe that China’s approach to the new laws was purely transactional, and/or there were other laws that the US was also expecting but that China has since declined to deliver. The previously mentioned NDRC 38 Agency MOU was enacted before the G-20 meeting but made publicly available shortly thereafter. The “Working Measures [sic] for Outbound Transfer of Intellectual Property Rights (For Trial Implementation), (State Council, Guo Ban Fa [2018] No. 19)” (知识产权对外转让有关工作办法(试行)) which was previously discussed here, appear to have been timed with the 301 announcement in March 2018. In addition, the revocation of TIER provisions, JV implementing regulations, and amendments to the Trademark Law and AUCL revisions all were enacted with incredible efficiency, often denying any opportunity for meaningful public comment in violation of prior procedural practices. A reasonable guess may be that there were some additional laws or regulations that the US was expecting but that China had determined it could not deliver, or deliver in the time frame provided. Nonetheless, the legislative track record thus far is quite impressive.

China’s improved environment for technology transfer and technology collaboration is coming at a time when the United States has tightened up its controls with China. The most notable legislation in this area is the John S. McCain Defense Authorization Act for 2018 (the “Act”), including the enactment of the Foreign Investment Risk Reduction Modernization Act and the Export Controls Act of 2018. These laws extended export control and foreign investment control authorities to foundational and emerging technologies, as well as to non-passive, non-controlling investments. Much of the technologies of concern overlap with Made in China 2025 and other Chinese industrial policy documents. Although the Act did not specifically create “black” and “white” countries as subjects of controls, the Congressional history did point to special concerns about China:

“Congress declares that long-term strategic competition with China is a principal priority for the United States that requires the integration of multiple elements of national power, including diplomatic, economic, intelligence, law enforcement, and military elements, to protect and strengthen national [t]security, [including] … the use of economic tools, including market access and investment to gain access to sensitive United States industries.”

The most recent report which analyzes the impact of US and Chinese regulations on Chinese investment in the United States by Rhodium Group is found here (May 8, 2019). The report notes an “over 80% decline in Chinese FDI in the US to just $5 billion from $29 billion in 2017 and $46 billion in 2016. Accounting for asset divestitures, net 2018 Chinese FDI in the US was -$8 billion. Meanwhile, American FDI in China dropped only slightly to $13 billion in 2018 from $14 billion in 2017.” The Rhodium report also notes that “the chilling impact of politics on US FDI in China was mostly visible in the ICT space where new investment declined significantly last year.” Other countries have also been enacting similar restrictions on FDI in sensitive areas, as pointed out in a recent article by my Berkeley colleague Vinod K. Aggarawal. Note: I will be speaking at a forthcoming AIPLA webinar on export controls and IP strategies on May 23, 2019 as well as at forthcoming events in China (to be announced).

In addition to these legislative efforts, the US has undertaken steps to restrict H1B visas for talented scientists and engineers and the FBI has created a new working group to address economic espionage from China. The Committee of 100 released an important paper in 2017 showing that Asian Americans were more likely to be prosecuted for economic espionage than any other ethnic group, are also subject to higher sentences and were twice as likely as other groups to have cases against them dismissed. Some observers fear that overly broad regulation and enforcement by the United States may now be encouraging exactly what China has sought to do for decades: repatriate to China the vast talent pool of Chinese scientists, engineers, and entrepreneurs to contribute to the technological development of the motherland.

Although there have been few legislative efforts directed to making US science and technology more competitive in response to these perceived threats from China, there have been several general reports and proposals. The National Institute of Science and Technology recently released a green paper, “Return on Investment Initiative for Unleashing American Innovation” (April 2019) to improve federal technology transfer and entrepreneurship. There are increasing calls for Congress to fund the long defunct Office of Technology Assessment, which once played an active role in analyzing US-China technology trade.

Several trade organizations and think tanks have called for increased US funding in science and technology, among them is the recent report of the Task Force of American Innovation, “Second Place America – Increasing Challenges to America’s Scientific Leadership” (May 7, 2019). The R&D graph at the head of this blog showing China’s rapid growth in R&D is from that report. The report notes:

“America’s competitive edge is now at stake, as China and other countries are rapidly increasing investments in research and workforce development in order to assume positions of global leadership. Our nation risks falling perilously behind in the basic scientific research that drives innovation, as our global competitors increase support for cutting-edge research and push to the forefront in fields such as artificial intelligence (AI), robotics, aerospace, advanced manufacturing, and the next generation of telecommunications networks.”

To round out this summary of legislative developments, there have been developments at the USPTO that impact US relations with China on IP. The USPTO published a proposed regulation which will regulate legal services for the rapidly increasing number of Chinese pro se trademark filers in the US (2/15/2019). This proposed regulation would require these applications to use a US licensed attorney. The purported purpose of this change in current practice is “instill greater confidence in the public that U.S. registrations that issue to foreign applicants are not subject to invalidation for reasons such as improper signatures and use claims and enable the USPTO to more effectively use available mechanisms to enforce foreign applicant compliance with statutory and regulatory requirements in trademark matters.” The rule also seems generally consistent with TRIPS Art. 3, which permits WTO members to require “the appointment of an agent within the jurisdiction of a Member … to secure compliance with laws and regulations which are not inconsistent with the provisions of [the TRIPS] Agreement”.

Another important development involves USPTO efforts to clarify subject matter eligibility under Sec. 101 of the patent act, and functional claim limitations for computer-enabled inventions under Section 112. The United States had been weakening and destabilizing protections in these important areas affecting artificial intelligence, fintech and biotech inventions at the precise time when China had been strengthening its protections. These are important steps towards strengthening predictability in our domestic IP system, which may be further strengthened by proposed legislative changes.

Ironically, China’s improvements in its investment and tech transfer environment are coming at a time of heightened concern over a Chinese technological threat and increased US and international regulatory scrutiny. It may be difficult, therefore, to perceive any immediate positive impact from changes in China’s investment environment. Indeed, the media has recently been reporting on decisions of different companies or entrepreneurs to close down R&D operations in each other’s markets. Hopefully, both countries may ultimately create the right mix of IP enforcement and protection, regulatory controls over collaboration and industrial policy to enable bilateral scientific collaboration to once again flourish and contribute to the global economy.