How to Measure the Steps to a Binding Truce…

“The real question is so we do a memorandum of understanding, …. How long will that take to put into a final binding contract” (President Trump)

“From now on … we are going to use the term ‘trade agreement’” (Amb. Robert Lighthizer)

 

This week President Trump and Amb. Lighthizer debated whether the administration will be concluding an “Memorandum of Understanding” or a “Trade Agreement” with China to resolve the current trade dispute, as detailed in Bloomberg.   However, both countries cannot enter into treaties or agreements ratified by their legislatures in the short time available to them.  The more meaningful question is not whether an “agreement” is binding, but whether the underlying commitments require actions that are binding.

US-China trade agreements have often had the staying power of the dew on a summer’s rose.  One reason was that the underlying commitments did not require clear, binding legal action.  A good example of such a non-binding commitment was the 2010 JCCT agreement on government procurement of indigenously innovated products:

China and the United States will not adopt or maintain measures that make the location of the development or ownership of intellectual property a direct or indirect condition for eligibility for government procurement preferences for products and services. China and the United States will continue to discuss whether this principle applies to other government measures.

What was the “measure” that China was not supposed to adopt or maintain?  To someone unaware of its background,  it appears that the United States had a similar problem as China.  Furthermore, a US reader may think that we asked China to enact a “law” to address discriminatory government procurement.   Oxford defines “measure” as a “legislative bill.”  By contrast, Chinese legal scholars know the term “measure” as vague and not binding.  As an example: the word “measure” appears 32 times in China’s accession documents to the WTO in a descending hierarchical order as “law regulations and/or [other] measures. ” As an ambiguous term, it could mean either a  type of law or regulation (both of which or binding) or a non-binding administrative rule.

The 2010 commitment predictably  led to problems in implementation by localities who did not believe they were bound by this negative commitment.  As my colleague Stanley Lubman noted in a Wall Street Journal blog in July 2011:

[W]hile government policy on procurement has receded from the original position and “indigenous innovation” has been “delinked” from government procurement requirements, implementation of this shift is problematic because acceptance and commitment by sub-central (provincial and municipal) governments are needed to make it meaningful.

The 2016 JCCT Commitment on innovation of indigenous innovated products attempted to clean up the vague language from the 2010 JCCT by acknowledging issuance of a State Council document was required:

The General Affairs Office of the State Council issued a document recently, requiring all local regions and all agencies to further clean up related measures involving linking the indigenous innovation policy to the provision of government procurement preferences, so as to practically implement the commitment made by the Chinese side.  The U.S. side welcomes this development.

This commitment, in its legal terms, is a vast improvement over the 2010 JCCT commitment. It clarified that the obligation was not a bilateral one.  It also required the State Council, an authoritative agency with the power to bind inferior agencies, to issue a “document” (presumably a regulation in the heirarchy noted above).  Finally, it required local governments to “clean up” conflicting “measures” with an identified offending policy.  Using a high level document to address inferior legislative acts also made the commitment more easily verifiable.

This problem of binding commitmetns and conflicts with local policy is nearly identical to current issues of “forced technology transfer” where local governments may sense that there is currently no national law that doesn’t prohibit them from demanding that foreign technology owners relinquish their rights.  China’s proposed adoption of a Foreign Investment Law that prohibits forced technology transfer would be one positive step in the direction of addressing that issue.  However that law and its enforcers should specifically address contrary policies and incentives that exist throughout the country.  To further ensure enforcement, at a minimum the new national appellate IP court should have original jurisdiction over challenges brought by foreign businesses against these local practices.   The court could provide  transparent, verifiable, professional and fast resolution by accountable authorities independent of direct local influence.

A 2016 GAO report on clean energy cooperation with China provides another example of a meaningless trade commitment.  That reported stated:

The U.S. Patent and Trademark Office has identified a potential discrepancy between Chinese law and the bilateral U.S.-China Science and Technology Agreement upon which the IP Annex to the CERC [Clean Energy Research Center] Protocol is based, according to U.S. Patent and Trademark Office officials. These officials stated that the potential discrepancy is related to ownership of any improvements made to IP licensed between U.S. and Chinese entities.

This language underscores the problem that a bilateral MOU or “agreement” may have no legal significance when there is a contrary State Council regulation, namely China’s Administration of Technology Import-Export Regulations (TIER).  The TIER mandates that the Chinese side own any improvements to technology licensed in bilateral science cooperation projects, and is therefore at odds with the inferior negotiated agreement.  This text leaves the dispute open to future diplomacy, which is not a realistic approach for private business disputes.

There are numerous other examples of poor drafting or drafting of IPR commitments that at best would accomplish only short term goals.  USG and Chinese negotiators in their haste to resolve a difficult set of issues should not lose sight that the underlying commitments of any agreement that meaningfully address US concerns must be phrased in terms of legally binding actions.  These legally binding actions must also be durable, and should not be be countermanded by local measures. They should also be easily susceptible to USG verification.

Patent Litigation, Local Protectionism and Empiricism: Data Sources and Data Critiques

Professors Brian Love, Christine Helmers and Markus Eberhardt have recently co-authored an article Patent Litigation in China: Protecting Rights or the Local Economy?.  The article has been excerpted in the IAM,  discussed on Prof. Don Clarke’s Chinalaw listserve and is also set to be published in 18 Vanderbilt J. Ent. & Tech. L. (2016).  It has created a bit of a stir.

The authors seek to counter certain generalizations regarding the nature of China’s IP (utility patent) enforcement environment.   They bring to an English language reader many useful observations regarding the patents that are being litigated, favored locations for litigations of different technologies, and that local protectionism is not apparent in the litigated cases that were studied.  What has most attracted attention, however, is something that really should not have:  foreigners win cases.  This is not new news and probably oversimplifies what the data suggests.  The conclusion itself reflects mostly on the lack of knowledge of the West on China’s IP system.  Indeed, I personally believe that a review of all available data would likely lead to a different conclusion on how foreigners win cases and the nature of Chinese “local protectionism.” Unfortunately, by relying primarily on English language secondary sources, an incomplete database and data that is over five years old, the article doesn’t address why foreigners bring so few cases when they are winning and what are the factors that contribute to success or failure.

I have divided my observations on this article into three parts: (a) why foreigners winning cases is “old news”; (b) what litigant behavior and the databases likely say about “win” rates; and (c) manifestations and data on local protectionism.

  1. Win Rates as Old News

The authors suggest that they are the “first large-scale empirical study of patent litigation in China” and that “empirical study of Chinese patent enforcement is virtually non-existent.”

In fact, there are a wealth of surveys on foreign “win rates”胜诉率 in the Chinese IP courts, most of which draw upon a larger sample than the 471 patents cases used by the authors, which included only 49 cases with foreign plaintiffs and 29 cases as defendants — a rather small sample.

Here’s a random survey of prior studies on foreign win rates that I found in preparing this review of the article.

 

1.According to a press report of a Shanghai news conference, the success rate for foreigners in first instance IP trials was 84.6% for the 447 cases filed in Shanghai from 2009-2013.

2. Of the 2,691 cases adjudicated in the Beijing Number 1  Intermediate court for the period 2006-2010, foreigners had a full or partial win rate of 55.2%.

3.A newspaper report on success rates for foreigners on IP cases in Zhejiang  reported success rates of 95% for 2013 out of 85 foreign cases adjudicated that year, with rates as high as 99% in 2010.

4.  A sample of 350 foreign-related cases conducted by the Guangdong High Court in 2010 to the first half of 2013 of 1272 cases filed (not including Taiwan, Hong Kong and Macau), revealed success rates of 70-80%, with relatively low settlement rates of 10-20%.  Foreign cases constituted about 2.25% of all IP cases.

5.  A study of the leading cases discussed in the gazette of the Supreme People’s Court for the 30 year period from 1985 to 2014 reported a success rate in the 33 foreign cases (out of 157 cases filed) of 73%, with foreigners playing the role of plaintiff in two-thirds of the cases.

6.  A study reported by the renowned Judge Sun Hailong in Chongqing in 2015 noted that for the period of 2003 -2007 the success rate for Chinese litigants was 5.78%.   This report also challenges the notion, that “inland provinces”, such as Sichuan, are somehow hotbeds of local protectionism, which the authors of the Love study noted has “little empirical evidence… to support or refute.”

7.  The Shanghai Number 2 Intermediate Peoples Court reported for the period 2006-2010, that the success rate for foreigners on IP cases was 86.3% of the 80 cases heard.  Foreigners were plaintiffs in 94.5% of the cases filed.

8.  In an English language September 27, 2012 letter of SIPO Commissioner Tian Lipu to USPTO Director Kappos, SIPO also points to analyses it conducted of foreign win rates, noting that in the 800 foreign cases surveyed from a number of different provinces (including inland provinces), foreign companies on average stood a better chance of winning their cases than Chinese parties, with foreigners winning all design patent cases in Guangdong.  The study notes that in Shanghai foreigners were more likely to appear as defendants and their win rate was 59% compared to 52% for domestic defendants   When foreigners acted as plaintiffs in Shanghai, their win rate in first instance cases was 77.8% versus 59.3% for domestic parties.

The above data, in general, supports all of the conclusions of the authors, except for the notion that their study is path breaking.  The notion that foreigners win patent cases in China is not new news. However, I differ with the implicit conclusion that local protectionism or other challenges hardly exist…

(2) What the Databases Say About Win Rates and Empirical IP Research in China

The authors reliance on some rather old cases in the CIELA database (www.ciela.cn) actually may be said to undercut their conclusions.  CIELA catalogues approximately 30,000 IP cases for the period 2006-2014.   This is a fraction of the total cases filed during this period.    In 2014 alone, there were 133,863 IP cases accepted by the courts, of which patent cases constituted 9,648 and administrative patent cases were 539.  CIELA especially lacks in settled cases and cases litigated after 2011 (article, fn. 23).  Indeed, the small sample of invention patent cases selected by the authors in a multiple year period was about 1/20 of the numbers of patent cases in 2014 alone

Because China’s IP policies change quickly compared to the United States, recent samples can be very important.  In using data prior to 2012, the authors chose to ignore many recent developments, which could have affected their conclusions  These include the expiration of the National IP Strategy and a new plan for 2014-2020, a lack of data on the IP Courts, and the lack of reference to administrative patent litigation.   The growth of administrative patent enforcement litigation may be the most disruptive of this study as SIPO, heard 35,884 patent administrative enforcement cases in 2015, up 46.4% from 2014, of which 14,202 were patent infringement cases, and 21,237 were patent passing off cases.   The Love study sample pales in comparison to these numbers. Unfortunately, we know very little about the disposition of these cases.  Moreover enhancing administrative patent enforcement appears to be a current priority of SIPO, including in proposed amendments to the patent law.

The authors’ data however might also be compared with other, more recent and comprehensive sources.  A competing commercial database, Darts IP, offers considerably more cases, especially recent cases. Here is what I understand that Darts collects on Chinese civil patent litigation compared to CIELA:

Ciela Total Civil Patent cases Darts IP Total Civil Patent Cases
2007 699
2008 531
2009 566
2010 631 1516
2011 852 1719
2012 736 2067
2013 271 1755
2014 0 2490
2010-2014 Total 2490 9547

 

The DARTS IP decisions also include data on provisional relief and settlements, as indicated above, which CIELA does not as fully report.

Nonetheless, I believe the honor of the largest judicial database likely belongs to the courts themselves.   Chinese judicial databases have become increasingly more comprehensive.  As Susan Finder has noted on her Supreme Peoples Court Monitor Blog, the SPC has recently upgraded its case database, to include over 14,000,000 separate documents and has become a “a rich source of understanding how the Chinese court system is operating, through (for example) a focused search of a  specific type of case…”.  Chinese judges have told me that the largest collection of cases involving patent infringement at this time likely belongs to another judicial database, the IPR court decision database.  Whatever their respective holdings, I believe that judicially-maintained databases will be increasingly useful in undertaking the kinds of empirical analyses that are needed, including analyses of the fairness and independence of the Chinese judiciary.  One early effort in using these databases was Xin He and Su Yang’s important article on the handling of civil law suits in Shanghai.   “Do the ‘Haves’ Come Out Ahead in Shanghai Courts?, Journal of Empirical Legal Studies, Vol. 10, Issue 1, pp. 120-145, 2013 ), which analyzed 2,724 adjudication decisions in Shanghai to reach their conclusions that “stronger parties not only win more often, but also do so by a large margin.” This article did not focus on “local protectionism”, but its conclusions suggest that bias persists in less visible forms than simple discrimination against outsiders.  I do not believe that IP is an exception to other forms of civil litigation in terms of political pressure.

Finally, there is the problem of database selectivity, which was also discussed on Don Clarke’s list serve, and is acknowledged by the authors.  The reasons for the high win rates are likely to be buried in other data, including the very low percentage of cases in China that are foreign related, which has resulted in a high degree of self-selecting of cases that foreigners bring.  Moreover, many important cases in China have simply not been published, among them the landmark first instance case of Chint v. Schneider, which resulted in the largest patent damages (for a utility model) in China’s history, and the important first instance antitrust case of Huawei vs. Interdigital, both of which involved foreigners who lost.  Finally, the CIELA database has its own weaknesses in terms of focusing on China’s key courts.  For example, CIELA records only two patent infringement law suits from the Supreme People’s Court (with a 50% “win” rate), which is hardly the situation for China’s most important court.

(C) Local Protectionism

Local protectionism, as the authors point out, has long been a concern to foreign rights holders in China.  However, what constitutes local protectionism, other than a fear of the foreign and unknown, has rarely been defined.  The authors define local protectionism in value-terms, such as “bias”, “corruption” and “lack of impartiality” especially in China’s inland provinces.   It is equally clear that local protectionism is not merely a foreign concern.  Chinese officials have also repeatedly complained about local protectionist barriers of various kinds, including in IP enforcement.

I do not believe that local protectionism is only question of where a party is located, but rather, consistent with Xin He and Su Yang’s view, the political power and influence that a local company may have on the local judiciary or other enforcement officials.  Local protection also is not necessarily an issue of whether one is forced to litigate in a remote inland province, as the authors suggest, and which the articles I cite at the beginning of this review (which include data from inland provinces) refute.  At its base local protectionism derives its influence from a locally employed and appointed judiciary.  In fact, a well-connected foreign company which has many employees may have significant local influence in a given Chinese locality, which is also dependent on the employment and taxes provided by that foreign entity.   Thus, foreign companies may also benefit from local protectionism – or at least to a degree.

I believe that most foreign rights holders, facing the uncertainties of a legal culture that bears the opprobrium of being “local protectionist” would actually file their cases in jurisdictions where they are likely to benefit from the most local protectionism possible.  The article appears to corroborate this when it notes, that “foreign entities appear in the data more often as patentees than accused infringers.”  However, further studies would be useful to corroborate linkages between industrial interests, R&D, and patent litigation in China.

Local protectionism may be influenced by local interests.  However, as the authors note, IP litigation in China tends to be clustered.  However, such clustering can be a double-edged sword.  Local judges who are more familiar with a particular technology or industry, may also be more sympathetic and knowledgeable about a given technology, as much as they may be inclined to favor a domestic litigant.

One place the authors might have looked at to validate if local protectionism is the basis for plaintiff’s filing of cases would be to compare cases involving the same parties or same set of facts.  For example, one might look at appellate reversal rates of judgments rendered in favor of foreigners.    Earlier (unpublished)  studies I conducted on the CIELA data shows a dramatic shift away from foreigners’ favor when they appeal their favorable first instance decisions, with about a 30% foreign win overturn rate on appeal, compared to 17% for domestic plaintiffs.  The data below needs to be updated but nonetheless gives a sense of general trends.

The data might be compared with data on the Court of Appeals for the Federal Circuit.  For example,  Janicke and Ren found no statistically significant evidence of bias against foreign parties in Fed Circuit, in which 26 percent involved foreign defendants accused of patent infringement. See: See Paul M. Janicke & LiLan Ren, Who Wins Patent Infringement Cases? 34 AIPLA Q.J. 1, 9 (2006).  Other cases of this nature include: Kimberly A. Moore, Xenophobia in American Courts, 97 NW. U. L. REV. 1497,1499 (2003); Trimble, Foreigners in U.S. Patent Litigation: An Empirical Study of Patent Cases Filed in Nine U.S. Federal District Courts in 2004, 2009, and 2012 (17 Vand. J. Ent. & Tech L . ).  Still another fruitful area of comparison is in reviewing decisions by different courts on counterpart foreign patents, or on technology that is the subject of trade secret litigations in different jurisdictions, to determine if there is a bias towards one country or another.

Another way of approaching local protectionism is to be less empirical and instead look at national policies and anecdotes that suggest there may be unchecked bias.  For example, the appointment of judges by local people’s congresses for a term could suggest local favoritism. Recent national judicial policies which favor courts “vigorously” asserting jurisdiction in international matters, and “restricting foreign parties to litigation from leaving China” can create significant risks for foreign litigants.  Many academics and officials have expressed growing concerns over due process rights for foreigners in Chinese IP litigation.  In addition, there have been several high profile cases in the United States which have which have suggested that the Chinese government may be actively intervening in cases.  In at least one case (Huawei vs Interdigital) a Chinese judge has urged Chinese companies to aggressively use Chinese  antitrust law to address “technology roadblocks in China and overseas” (华为公司善于运用反垄断法律武器进行反制,值得其他中国企业学习。…国内企业,在突破技术壁垒为自己赢得发展空间上,要大胆运用反垄断诉讼的手段. ). There are also telling cases such as the matter of Hu Zhicheng, an engineer, who was involved in a patent dispute with his former business partner turned competitor.   Investigators allegedly tried to force him to sign rights to his US patents to the former business partner, and subsequently jailed him for 17 months for alleged commercial theft.  Prosecutors later withdrew the commercial theft case.  He was not released until June 2013.

One of the oddities of practicing Chinese IP in Washington, DC is that it exists at the intersection of both IP law and Chinese legal studies.  Both of these areas have benefitted enormously from empirical research to support sounds academic analysis, business strategies and government policies.  China’s legacy of state planning has also made much of the debate in China about IP policies highly data-oriented.  However, much of the discussion in the West on Chinese IP has been less empirically-dependent.  This study of Profs. Love et al, is one important step in deepening domestic awareness of how many of our assumptions need empirical support and further research.  The need for such empirical research was one of the reasons that the USPTO set up a China Resource Center, which is an important part of USPTO’s international plans.   I believe we have just started on a long journey of accessing and analyzing the increasingly rich area of empirical analysis of China’s IP environment.

Please send any corrections or edits to this blog to me at chinaipr@yahoo.com.

Update (July 12, 2016):  Jacob Schindler at IAM reported on July 4, 2016 that, according to a Chinese judge, foreign litigants in the Beijing IP Court had a 100% win rate in civil IP cases in 2015.  The win rate for all plaintiffs was 72.3%.

Of course, the issue remains: if the win rate is so high, why is the percentage of foreign related cases so low? As pointed out in this blog, one reason may be that foreigners self-select cases which they believe they have a very high chance of success.