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 second draft with the final round scheduled for consideration as early as March 2020.  Comments are being accepted by the NPC through January 26, 2020.

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.

Some Key Substantive Provisions

Articles 632 and 633 address  service invention (employee inventor) compensation, noting that  employers “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.

第六百三十二条 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应当从使用和转让该项职 务技术成果所取得的收益中提取一定比例,对完成该项职务技术 成果的个人给予奖励或者报酬。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。

第六百三十三条 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。 第六百三十四条 完成技术成果的个人有在有关技术成果文 件上写明自己是技术成果完成者的权利和取得荣誉证书、奖励的 权利。

Article 632 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. A legal person or an unincorporated organization shall extract a certain percentage 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. 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 633 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. 

Article 659 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.

第六百五十九条 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,依照本法第三百零一条的规定仍不能确 定的,一方后续改进的技术成果,其他各方无权分享。

Article 659 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 301 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 658 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

第六百五十八条 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 658 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 revisions of the Technology Import/Export Regulations and other laws and regulations.  As a higher level, more recent legislation, the Civil Code language would ultimately be more authoritative than the TIER in the event of any conflict.  Among the provisions that reference other laws and regulations is Article 660 which provides that these other laws shall normally govern.  However, Article 660 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 vague language such as “mutual benefit”,  “hindering technological progress”, “certain percentage”  and default provisions that govern if another language is unclear.  If this provision is enacted as drafted, the immediate solution to this problem will be clear contractual drafting and/or revisions of prior license agreements.

第六百六十条 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

Article 660 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 635 contains identical language to Article 329 of the Contract Law, and Article 648 is nearly identical to Article 343 of the Contract Law:

第六百三十五条 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 635 A technology contract that illegally monopolizes technology, hinders technological progress, or infringes on the technological achievements of others is invalid.

第六百四十八条 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 648 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 legislative changes on technology transfer from earlier in 2019 to ensure that they had the intended effect, particularly as operational implementation 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.

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.

 

 

 

Upcoming Events – Early November

On the calendar:

Philadelphia friends: I will be at U Penn on November 12, speaking from 4:30 – 6:30 with Zhou Hanhua (CASS) and Samm Sacks, (New America) on technology issues in US-China relations.

Other events:

On Wednesday November 6, I will be speaking with Philip Rogers on supply chain disruption and strategies at the sourcing summit  in San Francisco (6:15-7:00 PM) with Greg Fisher of the Berkeley Sourcing Group.  The topic is supply chain disruption and counter-strategies.

On November 13, I will be speaking at the IP Dealmakers Forum in New York City with Jamie Simpson, Chief Counsel, House Judiciary Subcommittee on Courts, IP, and the Internet and  Malathi Nayak, Reporter, Bloomberg Law (moderator).  The topic is “Patent Policy Update: US and Beyond”.

Looking forward to catchup and engaging with my panels and the audience!

Licensing IP In a Changing Trade Environment

 

This first part of my two-part article, Licensing IP in a Changing Trade Environment first appeared in Intellectual Asset Management  (IAM) issue 97, published by Globe Business Media Group – IP Division. To view the issue in full, please go to IAM Media

The second part of the article on how a changing geopolitical climate is affecting IP licensing is expected in IAM issue 98.

The 600 Billion Dollar China IP Echo Chamber

“Most people use statistics the way a drunkard uses a lamp post, more for support than illumination.”  Mark Twain

What are the losses due to “IP Theft” from China? On a recent trip to Washington, DC, I heard the range of $300 billion to $600 billion repeated from various sources without any critical gloss. These numbers have taken on a greater legitimacy than they likely deserve, in terms of capturing the scope of US concerns, the magnitude of the loss and shaping the Trump administration’s unilateral retaliation.

The 2017 and 2013 reports from the Commission on the Theft of American Intellectual Property (the “Commission”) appear to be the origin of much of this data.  The data was also referred to in the Section 301 Report (p. 8) and in a subsequent White House report “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World” (June 2018).

In 2017, the Commission found that “Chinese theft of American IP currently costs between $225 billion and $600 billion annually.” The Commission pulled together different sources of data, including sales of counterfeit and pirated goods ($29 billion), and that “the value of software pirated in 2015 alone exceeded $52 billion worldwide.” The Commission further noted that there was “a paucity of reliable data on the economic costs of patent infringement” and that American companies were most likely the leading victims of this “IP Theft.”  It estimated losses of at least 0.1% of the $18 trillion U.S. GDP.

The largest single loss contributor to the Commission’s estimate was based on data provided by create.org and later repeated by the White House, that trade secret theft cost between 1% and 3% of US GDP, and totaled between $180 billion and $540 billion.  One critic (Stephen S. Roach) of these loss figures recently noted that “the figures rest on flimsy evidence derived from dubious ‘proxy modeling’ that attempts to value stolen trade secrets via nefarious activities such as narcotics trafficking, corruption, occupational fraud, and illicit financial flows. The Chinese piece of this alleged theft comes from US Customs and Border Patrol data, which reported $1.35 billion in seizures of total counterfeit and pirated goods back in 2015.”  One area of overlapping concern I have with Mr. Roach is the use of Customs seizure data to justify allocating as much of 87% of global “IP Theft” to China. Seizures by US Customs of Chinese originating counterfeit and pirated goods are as high as 87% of global totals. However, this does not mean that China is the source of 87% of the world’s production of these goods, nor does it address trade secret infringement or patent infringement origination. See The 2017 Commission Report at p. 3.  Misunderstanding about the utility of Customs data contributes greatly to the weaknesses of many IP infringement loss estimates.

The 2013 Commission Report noted that “it is safe to say that dollar losses from IP theft are hundreds of billions per year, which is at least in the range of total exports to Asia in 2012 (valued at $320 billion).” This report pulled together several sources, including OECD data that estimated global trade in counterfeit and pirated goods as $200 billion in 2005 (p. 25).  All the studies to date, including this 2013 Report, have recognized the difficulties inherent in doing accurate loss estimations, although many have also not distanced themselves from sources, such as the OECD 2005 data which had not stood the test of time.

Remarkably, the loss data itself has been relatively consistent over approximately two decades despite different methodologies and varying definitions of what constitutes “IP Theft”. During my tenure at the US Embassy (2004-2008), the typical guestimate was $200 billion to $250 billion per year.  These guestimates enjoyed wide currency in Washington.  For example, Congressional Reports, such as H.R. 110-617 “Prioritizing Resources and Organization for Intellectual Property Act of 2008” stated: “[I]ncreasing intellectual property theft in the United States and globally threatens the future economic prosperity of our nation. Conservative estimates indicate that the United States economy loses between $200 and $250 billion per year, and has lost 750,000 jobs, due to intellectual property theft.”  This data was typically based on counterfeit and pirated goods “compris[ing] six to nine percent of all world trade, the bulk of which violates the intellectual property rights of United States businesses and entrepreneurs.”  (Id.). Six to nine percent, however, easily gets rounded up to 10 percent, as Congressman Donnelly from Indiana noted at about the same time:

“It is estimated that these [counterfeit] products comprise almost 10 percent of world trade, that they are costing American companies nearly $250 billion in revenue and an estimated 750,000 jobs.”

The number was also widely adopted by IP advocates. The U.S. Chamber of Commerce in its report What Are Counterfeiting and Piracy Costing the U.S. Economy, (2004) circulated the 200- 250 billion dollar number, as did a National Geographic film. In fact, I used the $250 billion dollar figure when I was IP Attache in Beijing (2004-2008) to urge additional support for my elevation in diplomatic rank, as it seemed rather odd that I had been tasked with a problem costing nearly 750,000 jobs and I had no staff of my own. An article in Ars Technica (2008) noted that this earlier $250 billion/750,000 job number may have its origins in a Forbes magazine article from 1993. There are also references to loss calculations of 200 billion dollars per year appear from as early as 2002 in Congressional reports.   To the extent that these calculations rely upon a base estimate of “approximately” 10 percentage points of world trade being in counterfeit or pirated goods, this data point harkens back to an OECD estimate of world trade in counterfeit goods at 5% in 1998. That number was however revised downward to 1.95% in 2007, at an estimated value of $250 billion. The OECD data seems to be the origin of the $250 billion IP Theft loss figures current at that time.

Other USG studies have shown a more cautious approach. A 2010 Government Accountability Office (“GAO”) study analyzed the economic effects of counterfeit and pirated goods and found that “it was not feasible to develop our own estimates [of the total value of counterfeit or pirated goods] or attempt to quantify the economic impact of counterfeiting and piracy on the U.S. economy.” Noting the lack of data as a primary challenge to quantifying the economic impacts of counterfeiting intellectual property and goods, the GAO concluded that “neither governments nor industry were able to provide solid assessments of their respective situations.”

The U.S. International Trade Commission in a well-researched report,  China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy, (2010) calculated that the theft of U.S. IP from China alone was equivalent in value to $48.2 billion in lost sales, royalties, and license fees. This estimate falls within a broad $14.2-billion to $90.5 billion range.  The breadth of this range is explained by the fact that many firms were unable to calculate their losses. Of the $48.2 billion in total reported losses, approximately $36.6 billion (75.9%) was attributable to lost sales, while the remaining $11.6 billion was attributable to a combination of lost royalty and license payments as well as other unspecified loss.

The current concerns around “IP Theft” as identified in the Section 301 Report include licensing of technology, an issue that is not covered by US Customs seizure data. Any calculation of losses due to IP Theft from non-payment of royalties should include estimates of lost royalties or license fees. Most of the current calculations do not include such data. Nonetheless, as I have noted elsewhere, accurately calculating lost royalties can be especially difficult as many licensors use tax haven jurisdictions to manage patent portfolios. There may be implied licenses in product purchases form OEM suppliers, and there can be valuation challenges. However, China’s relatively small role as a purchaser of US technology and its dominant role as an exporter of high tech or information technology products does suggest that it is a significantly under-licensed (infringing) economy. For example, China has leaped from exporting only 2% of the world’s information technology products in 1996, to 33% in 2015. Yet China has purchased very little technology directly from the US over the years, and its technology payments are a very small share of total trade. There is likely a huge shortfall in unpaid royalties from Chinese manufacturers.

Many discussions around IP theft have also declined to take into account cybercrime and other security threats. According to an often cited 2013 report by the International Data Corporation (IDC), direct costs to enterprises from dealing with malware from counterfeit software were estimated to hit $114 billion in 2013 and “potential losses from data breaches” might have reached nearly $350 billion.” However, data breaches are not necessarily a form of IP infringement, as they can be undertaken for other purposes, including simply injuring the computer system of a competitor through a denial of service attack.

Apart from differences in methodology, there are different definitions of “IP Theft” that should be affecting total loss calculations. The FBI currently  defines “Intellectual property theft” as “robbing people or companies of their ideas, inventions, and creative expressions—known as ‘intellectual property’—which can include everything from trade secrets and proprietary products and parts to movies, music, and software.” This definition notably would exclude any non-willful infringement, i.e., where there is no “robbing” as well as trademarks – which are not specifically enumerated.

In its 2013 Report, the Commission offered some examples of “IP Theft”, which also excluded trademark protection, and failed to discuss patent protection: “IP theft varies widely in both type and method. It ranges from more commonly known forms, such as software and music piracy, to more elaborate types, such as the use of economic espionage tactics to steal complex industrial trade secrets. Each type of IPR violation harms an economy in unique ways and brings with it a discrete set of challenges that make both deterrence and enforcement difficult.”

These approaches to “IP Theft” are different from the meanings advanced for the same term in the last decade. Victoria Espinel, who has had a long and distinguished career in IP and international IP issues, testified in Congress in 2005 when she was with USTR and spoke of “IP Theft”  in terms of the fight against ‘fakes’, declining to mention patents for inventions or trade secrets.   This was consistent with the focus at that time on criminal copyright and trademark focus of US government advocacy in China, including the bringing of a WTO case (DS362):

“Our companies report billions of dollars in lost revenue, irreparable harm to their brands and future sales, all of which ultimately affects U.S. workers who design and produce legitimate products forced to compete against Chinese fakes. We want and look forward to working closely with you and your staff in combating the theft of American IP in China.”

“IP Theft” of the prior decade certainly appears under-inclusive in not focusing on patent or trade secret infringement.  It also fails to reflect that most IP infringement is addressed by civil remedies, where questions of willfulness are secondary to the harm being caused. Criminal remedies, while important, are relatively rare in most legal systems. This approach is consistent with the TRIPS obligation to treat IP as a “private right.” Moreover, the TRIPS Agreement itself does not require member states to criminalize patent infringement or trade secret infringement.  Finally, there may be grey areas including market access barriers, investment restrictions, government procurement restrictions, informal government supported forced technology transfer, or aggressive use of antitrust laws that many would argue need to be included in the definition of “IP Theft”.  Many of these would also be very difficult to quantify.

“IP Theft” is also slightly over-inclusive, as there are also certain forms of bad-faith behavior that may be sanctioned by the state and permissible under international IP rules. For example, rights holders in China face a significant burden of bad faith patent and trademark applications that entail costs of challenging and invalidating these rights, while US-based rights holders often complain about non-practicing entities and patent trolls.

Individuals who might suspect an exaggerated “IP Theft” loss estimate might be surprised to know that there are data points that have typically been omitted from these calculations. For example, US Customs data typically does not include the value of goods excluded from the US market under Section 337 exclusion orders. I am unaware of any methodology that attempted to extrapolate from US damage awards in US courts against Chinese infringers. USTR in its 301 report, was also unable to calculate the value of “forced technology transfers” in joint ventures or technology transfers. Certain rights, such as plant varieties and plant patents are typically not included in loss figures, nor are losses due to design infringements. Consequential damages (attorneys fees/court costs/losses to brand value/harm to public health or safety) are also often not included in the above calculations.

There are also factors that could reduce the loss figures that have often not been used.  Assumptions about the US being the overwhelming victim of “IP Theft” are hard to substantiate. I suspect that different countries and industries bear different costs in different markets. European companies, for example, likely suffer most from trademark and design infringements of luxury goods.  In the United States, over 50% of US patent applications originate with foreigners; logically this may mean that a substantial portion of the injury suffered by US companies overseas due to patent infringement may be attributable to innovations that occurred outside of the United States.

Calculating how much “IP Theft” originates from China also ignores whatever the “baseline” is for infringement in the US.  Historically, for example, the greatest value of software piracy losses were in the United States, According to BSA data for 2017, China’s piracy losses were 6.8 billion, while the US was 8.6 billion. In addition to other deficiencies, US Customs data is based largely on the pro-active behavior of US rightsholders and thereby considerable selection bias. As one example, if “IP Theft” priorities were based on Custom data, apparel, watches and footwear would be the major area of US trade concern with China, as there were the three categories of goods most seized by US Customs in 2017.

“IP Theft” losses also do not necessarily reflect losses due to unredeemed WTO commitments, nor are they based solely on violation of WTO disciplines.  The TRIPS Agreement, for example, does not require members to criminalize willful trade secret theft – which is likely a major contributor to the current calculations. Moreover, if the calculations were one that adhered to WTO procedures, then the various methodologies would also need to look to WTO jurisprudence in terms of calculating damages when a WTO member fails to implement a WTO decision involving IP. A good reference point might be the “Irish Music” (DS160), which the US lost, and where the US was required to pay 1.2 million euros per year as an arbitral award in the early 2000’s. Another reference is the Antigua/gambling dispute, where the island of Antigua was permitted to retaliate against US IP interests in the value of 21 million dollars per year, considerably less than a claim by Antigua of 3.44 billion dollars.

Tying tariffs to losses due to IP theft has other challenges.   While it may help address a sense of national outrage, the unilateral imposition of tariffs on Chinese imports is unlikely to benefit any US victim of IP theft, nor do the tariffs themselves appear to be geared to a particular loss threshold. Instead, the tariffs are loosely based on loss estimates but appear primarily oriented to forcing China to change its behaviors.

A cynical reader looking at the data might conclude that large loss numbers are self-serving and make compelling rhetoric in the echo chamber of Washington, DC. Someone looking over the history of the data might, however, view their weaknesses as due to such factors as difficulties in collecting data, the growth of the Chinese economy and changes in infringement practices, and changing technologies including the growth of the Internet as a vehicle for content and goods delivery. The current focus on “technology” in the scope of IP Theft might be viewed as a belated recognition of how the Chinese economy has become more technology-oriented in the past decade.

In my view the statistics do serve as more than a “support” of the type referred to by Mark Twain, above. They also help to “illuminate” a deeply felt and sustained injury that is otherwise hard to calculate.

Note: The author (Mark Cohen) has contributed to many of the reports noted above, typically in a private capacity.

Corrections to the above are welcomed.

THE TIER IS REVISED…

After nearly twenty years of advocacy, China has finally revoked certain offensive provisions of the Administration of Technology Import/Export Regulations (“TIER”), effective March 18, 2019.   The decision was made by State Council decision no. 709, paragraph 38 of March 2, 2019,  which provides as follows:

三十八、删去《中华人民共和国技术进出口管理条例》第二十四条第三款、第二十七条、第二十九条。

第四十一条改为第三十九条,修改为:国务院外经贸主管部门应当自收到本条例第三十八条规定的文件之日起3个工作日内,对技术出口合同进行登记,颁发技术出口合同登记证。

A rough translation is:

38. Delete Article 24, Section 3, Article 27 and Article 29 of the Regulations of the People’s Republic of China on the Administration of Import and Export of Technology.

Article 41 shall be changed to Article 39 and revised as follows: “The competent foreign economic and trade department of the State Council shall, within 3 working days from the date of receipt of the documents stipulated by this Article 38  register a technology export contract and issue a technology export contract registration certificate.

The relevant provisions being modified of the TIER, as translated on the WIPO website, are as follows:

24 (3): Where the receiving party to a technology import contract infringes another person’s lawful rights and interests by using the technology supplied by the supplying party, the supplying party shall bear the liability therefore.

27: Within the term of validity of a contract for technology import, an achievement made in improving the technology concerned belongs to the party making the improvement.

Article 29 A technology import contract shall not contain any of the following restrictive clauses:

(1) requiring the receiving party to accept any additional condition unnecessary for the technology import, including buying any unnecessary technology, raw material, product, equipment or service;

(2) requiring the receiving party to pay exploitation fee for a technology when the term of validity of the patent right in which has expired or the patent right of which has been invalidated, or to undertake other relevant obligations;

(3) restricting the receiving party from improving the technology supplied by the supplying party, or restricting the receiving party from using the improved technology;

(4) restricting the receiving party from obtaining technology similar to that supplied by the supplying party from other sources or from obtaining a competing technology;

(5) unduly restricting the receiving party from purchasing raw material, parts and components, products or equipment from other channels or sources;

(6) unduly restricting the quantity, variety, or sales price of the products the receiving party produces; or

(7) unduly restricting the receiving party from utilizing the channel for exporting products manufactured using the imported technology.

This is one of 49 separate legislative provisions being modified by notice 709 of the State Council.

The TIER was itself part of ongoing WTO disputes (DS542, and DS549).  In addition, it was called out by USTR in its 301 Report on China’s forced technology transfer regime .  A panel had recently been composed in the US case against China (DS542).  The State Council has now addressed the most onerous provisions of the TIER by removing those provisions that had most obviously violated China’s National Treatment obligations under TRIPS Article 3, including footnote 3, which addresses discrimination in “the availability, acquisition, scope, maintenance and enforcement of intellectual property rights as well as those matters affecting the use of intellectual property rights.”

The legislation is immediately effective.  However, it does not address contracts that had previously been negotiated under the prior TIER.  Article 84 of China’s Law on Legislation does provide for the possibility of retroactive effect where the new legislation is made in order to better protect the rights of citizens, legal persons and other organizations, and may apply in this circumstance.  It will be up to the courts and/or the State Council to issue necessary interpretative guidance.

Interestingly, China did not take a “phased” or “limited” approach to revoking these terms, such as providing for limiting the application of mandatory provisions to protect smaller businesses or creating a default provision that could be waived in writing.  The Chinese government, to its credit, thus intended to rely solely upon the market and any other general provisions of the Contract Law.  China also did not seek to clarify the relationship between the TIER and China’s Contract Law or Antimonopoly Law, which had overlapping provisions with the TIER, and which should now apply more clearly and equally to foreign and domestic licensors.  However, the TIER provision regarding non-profit oriented technical cooperation, including government to government science and technology cooperation also continues to be in effect.  Specifically, article 2 of the TIER states that the legislation governs “technical cooperation” including “technical services and transfer of technology by other means.” (Art. 2).

It will be interesting to determine if the changes in the TIER have any impact on the manner in which technology is transferred by foreign companies to China, including use of affiliated/subsidiary companies of foreign companies in China to import foreign technology to avoid application of the TIER to technology imports.  The majority of US licensing transactions to China had been through such intermediated/affiliated entities.  After the affiliated licensee takes over the licensing activity of the licensor, any subsequent sub-license was believed to be governed by China’s Contract Law.

The amendment also comes shortly after China passed a new Foreign Investment Law on March 15, 2019, which also purports to address the forced technology transfer problem identified in the Section 301 report.  These legislative efforts thus appear to be part of a package intended to address US concerns.

Blog post by Mark Cohen.  Thanks to Jill Ge of Clifford Chance, Shanghai for pointing out this legislative development to me.  Thanks as well to the many lawyers, companies, officials, judges, and business people over the years who have advocated for revising the TIER and to the State Council for finally undertaking these revisions.

A Statistical Snapshot of IP Prosecution, Admin. Enforcement and Monetization for 2018

As reported by zhichanli, CNIPA (the new agency formed from SIPO, SAIC and AQSIQ’s – IP authorities within the State Administration for Market Regulation) held a news conference on January 10 to report on statistical developments for 2018.  Here are some of the highlights:

Explosive Patent Growth Continues: 1,542,5000 invention patent applications were received by CNIPA, an increase from 2017 when it was 1,381,594.  432,000 patents were granted.  Of these 346,000 were domestic patent applications (2017: 326,970).  This leaves 86,000 foreign applications for 2018 (2017: 93,174).  There was therefore an increase of  5.8% to 19,030 in Chinese domestic patent grants in 2018, while foreign grants appear to have dropped by 7.7% to 7,174.  Any drop in a growing economy and IP system can be indicative of a problem of some type.

In total 93.3% of the domestic invention patents were service inventions, which is one indicator of possibly increasing quality.    Huawei remained the lead domestic filer with 3,369 invention patent applications.

CNIPA had a busy year examining 808,000 invention patents, 1,874,000 utility model patents (an increase from 1,687,593), and 667,000 design patents (an increase from 420,144).  The PRB heard 38,000 cases, resolved 28,000 and invalidated 5,000 patents.

Comparative data on 2017 is drawn from this report.

Trademarks Too, on Overdrive: CNIPA received 7,337,1000 trademark applications (2017: 5,748,00) and registered 5,000,7000.  Of these, 4,797,000 were domestic applicants.  In aggregate, there were 18,049,000 trademarks registered in China (2017: 14,920,000).  The good news is that the rapid growth in TM applications is slowing.  In 2017, there had been a year-on-year increase of 55.7% in trademark applications. In 2018, the increase was “only” 31.8%.

Patent Administrative Enforcement Continues to Be the Focus:  CNIPA reported 77,000 administrative patent cases, with an increase of 15.9% over the previous year.  35,000 cases involved patents disputes, of which 34,000 involved infringement (an increase of 22.8%).  43,000 cases involved counterfeit patents, with an increase of 10.9%.  There were also 31,000 cases involving illegal trademark activities.  This was an increase from approximately 30,000 the year before, which was itself a decrease of 5.1% from the prior year.  The apparent administrative enforcement realignment to patents thus continues, despite recent moves to improve the civil patent system, including the establishment of a specialized IP court at the SPC level, and the relatively high historic utilization of the administrative trademark system by foreigners.

Another odd development: 2018 marked the launch of the first administrative case involving infringement of a registered semiconductor layout design.

TM’s Remain Number 1 in Geographical Indications: There were 67 sui generis GI registrations approved, presumably under the former AQSIQ system, and 961 GI trademarks registered.   The trademark-based GI system thus appears to be occupying a dominant role.

Cross-border Trade In IP – is it Growing:  CNIPA also reported that “usage fees” for IP rights in cross border trade increased to 35 billion USD.  Comparative data to prior years and breakout data with individual countries would be especially useful, in order to do year-on-year comparisons and to also compare with US data on licensing revenue.  As reported in an earlier blog, according to official Chinese statistics for 2013, technology import contracts into China were reported at 41 billion dollars, with patent licensing contracts constituting 15.4% of that total.  I don’t have comprehensive data to make even preliminary comparisons at this time – and such data would be highly useful.

Summary: Altogether, the report shows a rapidly growing huge IP system, with active government involvement, encouragement and planning.  The report also suggests that there may be a diminishing foreign role, relative and/or absolute, in certain areas.  Finally, this report is the first hint of how the combined CNIPA may report on its joint activities in patents, trademarks, semiconductor layout designs, GI’s and administrative enforcement.  Additional data is usually released around IP Week of each year (April 26).