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

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

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

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

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

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

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

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

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

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.

Sino Legend Saga Ends at US Supreme Court

The future ain’t what it used to be. (Yogi Berra)

Earlier this January, 2017, Sino Legend lost its long battle to have an ITC decision excluding its products form the US market reversed by a Supreme Court denial of its cert petition.

As I noted previously, the case presented an unusual set of circumstances, where Chinese courts had found that there had been no trade secret theft occurring in China, the USITC had found that there was trade secret infringement in an exhaustive opinion, China’s Ministry of Commerce sought a rehearing en banc after Sino Legend lost on appeal at the Federal Circuit, and a petition for certiorari was lodged by Sino Legend to the Supreme Court.  Attached are some of the US Supreme Court legal documents, including:  the petition for certiorari  (September 30, 2016); the amicus brief   of the Ministry of Commerce (Nov. 2016); the brief of   USITC in opposition (Dec 6, 2016);  brief of party respondent SI Group in opposition (Dec 6, 2016); reply of petitioners (December 20, 2016); and the Supreme Court’s denial of cert (Jan 9, 2017).

In its cert petition, MofCOM sought a reversal not only of the Sino Legend case but ultimately of the legal principle underlying the Tianrui decision.    The Chinese parties noted that in Sino Legend there a determination that there was no infringement in the case as litigated in China for facts arising in China.  As MofCOM’s brief notes:

[MofCOM] is disappointed by recent actions of the ITC. In wrongly interpreting Section 337 of the Tariff Act to allow the ITC to bar imports into the United States based on alleged actions conducted, and adjudicated, wholly within the borders of China, the ITC has impugned the sovereignty of China and refused to accord the comity expected of a trade partner.

MofCOM’s amicus brief further states:

The displeasure of [MofCOM] with what has unfolded in this, and other, recent ITC cases involving alleged trade secret violations should not go unnoticed. In this matter, there is no dispute that the alleged actions occurred entirely within China, by Chinese citizens, while working at Chinese companies. The alleged acts of misappropriation  were first raised by Complainant’s Chinese subsidiary in China. Both criminal and civil proceedings were instituted in China for these alleged misdeeds. The alleged conduct and actors in question were ultimately vindicated. However, Complainant, unhappy with the failure of proof in China, sought institution of a Section 337 proceeding in the United States based on the same conduct already adjudicated in China. The ITC conducted an investigation, ignored the rulings in China to the contrary, and determined that not only could the ITC bar products based on this conduct, but also that some of Complainant’s justify a limited exclusion order of Petitioner’s product.

The Chinese media had regrettably inaccurately described this case when it was decided at the ITC as a big victory for China involving a finding of no infringement in the US and China; rather a limited exclusion order was granted by the ITC in lieu of a general exclusion order.  China’s Supreme Court had also picked up on this inaccurate description when it regrettably determined that was one of the top 10 IP cases for 2014.  This recognition was troubling also as the complainant in the Sino Legend 337 case had sought a retrial of its case in China, which was denied by China’s Supreme People’s Court two  years later, in 2016.

The differences in final results in the US and Chinese decisions may also be due in part to disparate emphases in trade secret adjudication, with Chinese courts emphasizing similarities of technology between the parties, and the US courts relying more on unfair access to the technology by the alleged misappropriator.  One lesson of this saga is that comity may be more challenging to apply in trade secret litigation, which remains a relatively unharmonized area of IP law among various countries, and which is further weakened by differences in civil procedure including the limited availability of pre-trial discovery in China and many other countries.