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 However, the public dockets do not indicate that the cases have been withdrawn.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,何患无罪 – “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.

Anti-Unfair Competition Law Released for Public Comment

The National People’s Congress released a draft of the Anti-unfair Competition Law for public comment on February 25, 2017.  A draft translation is already available on the China Law Translate website, which has also posted the Chinese original. I previously published a draft with comments of the ABA and George Mason’s Global Antitrust Institute here. The comment period closes March 25, 2017.  The NPC Observer blog is also following developments, including posting the official explanation, which I have also made available here . 

SPECIALIZED IP COURTS ABOUT TO LAUNCH IN THREE CITIES – AND ARE THEY GOOD FOR FOREIGNERS?

Recent Chinese efforts at developing specialized IP courts and in promoting greater judicial independence suggest that the system may significantly improve in the years ahead. According to press reports, some of these efforts may take final form at the 10th meeting of the 27th Session of the Chairman’s Council of the 12 Session of NPC Standing Committee which will be held on August 25 through 30. At that meeting, the NPC Standing Committee will review the bill submitted by the Supreme People’s Court which is the Draft Resolution of SPC to Establish IPR Courts in Beijing, Shanghai and Guangzhou.

Why specialized IP courts? On August 12, 2014, Deputy Chief Judge Jin Kesheng (金克胜), of the third civil (IPR) division of the Supreme People’s Court, said: “In recently years, the speed of increasing IP court was grow slow smoothly, however, there are more and more the new style cases and complicated cases involving foreign parties so that these cases were difficult to judge and the attention from the public to these cases were enhanced. The number of case filed at the Supreme Court was increasing, especially in patent cases with more complicated technology and huge market value and interest. Additionally, the administrative cases are growing rapidly, the proportion of cases involving the fields of medicine, electronic, telecommunication patents are increasing. The proportion of cases in competition cases involving network technology and new business models is large, business secrets and counterfeiting cases continue to increase, and the Supreme People’s Court is hearing antimonopoly cases for the first time… Therefore, this year the Central Committee of the Party and some related departments did some investigations with regard to establishing a specialized IP courts…”

 China has had specialized IP tribunals (ting 庭), beginning with an initial experiment in 1993 in Beijing. Currently there are about 3,000 judges in sit these tribunals. In addition, there are 560 tribunals throughout the country, including basic, level, intermediate, high court and supreme people’s court tribunals or divisions.   In recent years, China has been experimenting with more basic courts (e.g. Yi Wu People’s Court and Kun Shan People’s Court) hearing IP cases including patent cases. Historically, these tribunals had sometimes been called “No. 3 Civil Tribunals” (e.g. No.3 Civil Tribunal of Shanghai Higher People’s Court, No.3 Civil Tribunal of Pudong District People’s Court), “No. 5 Civil Tribunals” (No.5 Civil Tribunal of Shanghai No.1 Intermediate People’s Court, No.5 Civil Tribunal of Shanghai No.2 Intermediate People’s Court) or IP Tribunals (IP Tribunal of Zhuhai People’s Court). Increasingly these tribunals may combine civil IP jurisdiction with administrative review and criminal jurisdiction (“three in one tribunals”).

 As civil enforcement is the lion’s share of judicial IP litigation, the civil experience of these judges has in a sense helped also to develop the capacity of China’s judiciary to handle criminal and administrative litigation. In addition, by combining civil, criminal and administrative jurisdiction there is a greater likelihood of consistent handling of matters that may cross jurisdictional boundaries such as use of administrative evidence in civil cases, providing civil compensation in criminal matters, referring administrative or civil matters to criminal litigation, or handling patent and trademark validity matters in conjunction with an ongoing civil case. Today all of these matters may be handled in one tribunal.

 What prior work has been done in this area by the Chinese government? While specialized IPR courts have been talked about for some time, institutional improvements in the IPR tribunals were set forth as a national goal in the Outline of the National IP Strategy (2008) which was coordinated by SIPO. The NIPS stated “Studies need to be carried out on establishing special tribunals to handle civil, administrative or criminal cases involving intellectual property”. The SPC took an important step in this direction in July 2009, when it directed the civil IP tribunals in the Beijing No. 1 Intermediate Court to handle validity matters on appeal from China’s patent and trademark offices. (最高人民法院关于专利、商标等授权确权类知识产权行政案件审理分类的规定).

 The impetus to develop specialized IP courts in China took an even greater leap forward back on November 12, 2013, at the Third Plenum Session of Eleventh Communist Party Central Committee (the “Third Plenum”). The Third Plenum set as a goal to “explore the establishment of intellectual property court(s).” Since that time, Beijing, Shanghai, Guangzhou, Nanjing, Chengdu, Zhengzhou had started to apply for establishing the IP court with the Supreme Court. On March 10, 2014, Zhou Qiang(周强), the President of the SPC discussed the work schedule of 2014 and said that the Supreme Court would promote to establish the specialized IP court. On July 9, 2014, the Supreme Court at its press conference outlining judicial reforms for the Supreme Court (2014-2018) discussed establishing Specialized IP courts at places where IP cases are concentrated. Professor Tao Xinliang (陶鑫良) had proposed establishing the IP Intermediate Court at some places where IP cases concentrated to judge the civil IP cases and administrative IP cases of the first instance and the civil IP cases, administrative IP cases of the second instance and some criminal IP cases. (Prof. Tao Xinliang 陶鑫良<Some thoughts on Establishment of Specialized IP Court建立知识产权法院的若干思考> Madame Tao Kaiyuan (陶凯元) , a Vice President of the Supreme Court, and a former Director General of the Guangdong IP Bureau (where she likely worked with Vice Premier Wang Yang(汪洋)) has also said that the SPC should continue to promote three-in-one IP tribunals.

Why might China be adding a new emphasis on a specialized IP court in additional to combined tribunals? A specialized IP court may promote and improve the civil judicial enforcement system by providing more resources, promote the independence of the judiciary, and provide for more training of judges, particularly on technical patent matters. The judges of a specialized IP court might be even more professional and autonomous. They might be better able to handle the administrative cases, criminal cases and civil cases at the same time. Like other specialized courts (e.g maritime, military, railway court), civil/criminal and administrative jurisdiction would also combined, reflecting the subject matter expertise of the judges in that court and likely reducing subject matter and venue conflicts for IP litigation.

 The SPC has not yet published the detailed program for implementation of specialized IP courts. In addition, we have heard little about important areas of the IP tribunals’ jurisdiction which are not as directly related to IP, such as antimonopoly law, unfair competition and licensing, and whether these areas will also remain within the specialized court jurisdiction. We assume they will be, and would actually hope that other IP-related areas could be specifically included (such as consumer protection, substandard products, and geographical indications). However, we have seen nothing to date discussing these areas.

Will a specialized IPR court be good for foreigners? Most foreign rights holders have continuing concern with local protectionism and political influence in IP adjudication. Beijing, which appears to be a focus for development of a specialized IP court is the jurisdiction that appears to hear the most foreign cases. As we have previously blogged, foreign parties are involved in approximately 47% of their administrative appeal docket (which is primarily based in Beijing); or about 1349 cases, nearly equal to the number of infringement cases in 2013 of 1429. Hopefully, giving the Beijing courts more independence and confirming their “three in one” approach will provide greater judicial autonomy for the Beijing courts.

One concern is whether specialized IP courts will indeed function in a more independent manner than IP tribunals. The US experience with our specialized national patent court, the Court of Appeals for the Federal Circuit, has generally been that the CAFC has some impact on correcting local biases at the trial court level, including possible anti-foreign jury bias. This is borne out by data which shows that in general, reversal rates in favor of foreigners is higher at the CAFC than reversal rates in favor of domestic entities.

 U.S.: Patent Infringement Civil Litigation Appellate Win Rates

 

Overall

Foreign Companies

Patent Owner Win Rate

25%

27%

Accused Infringer Win Rate

75%

78%

Source:Paul M. Janicke & LiLan Ren, Who Wins Patent Infringement Cases?, 34 AIPLA Q.J. 1 (2006).

However, according to data from the CIELA database (www.ciela.cn), second instance patent appeals in China generally show an inclination to support the Chinese domestic party against the foreigner.

China : Invention Patent Litigation Data

 

All Plaintiff

Foreign

Domestic

1st instance win rate

73%

78%

72%

2nd instance win rate

52%

40%

52%

Overturn rate

19%

30%

17%

Mean compensation

RMB 439,614

RMB 230,827

RMB 525,939

Medium compensation

RMB 100,000

RMB 125,000

RMB 100,000

Duration

8.2m

11.8m

6.9m

(Courtesy of Tim Smith of Rouse & Co. )

Why might appellate IP courts or tribunals behave differently in each country? First, the CAFC is a national court, not a regional or local court. In this sense, it may be more accountable to national law and reputation than local courts. The CAFC under former Chief Judge Rader had in fact been a leading global proponent of national specialized IP courts. Second, the CAFC has a different jurisdictional role. It does not retry cases, rather it hears appeals. In addition, it hears both patent validity and infringement matters in one court. Moreover, its decisions on matters of law are binding on lower courts. As such, it has more authority in deciding legal matters, and in instructing lower courts on proper adjudication. For example, the CAFC had taken an active role in addressing venue issues at the E.D Texas on patent litigation issues. A third reason is found in China’s political situation. In general, Chinese courts are much less independent than US courts. Local Chinese courts, particularly in remote areas, may also tend to be even less accountable to national law and policy. Second instance Chinese courts may be more susceptible to receiving national policy directives and may therefore be more susceptible to national political influence in adjudicating disputes. Moreover, local statutes enacted by local people congress are at a higher political hierarchy than national administrative rules (部门规章). The local political congresses that enact these statutes also appoint judges. When a second instance case is heard, for example, in a provincial high court, there may in fact be a problem of more direct political influence through political actors in the provincial capital.

The limited data available to date suggests to me that while specialized IP courts have promise, their potential impact will also be affected by national judicial reform efforts and may continue to be constrained by existing limitations in the political independence of the Chinese judicial structure. As Susan Finder has noted in her blog, there are several efforts under way to address some of these systemic issues in the Chinese judicial system, which may also bear promise for Chinese IP adjudication. In sum, specialized IP courts may not be the panacea that foreigners might otherwise seek in minimizing anti-foreign bias in local adjudication in China, but I do believe they offer some hope for a better and stronger judiciary.

 By Mark Cohen, with Ms. Yao Yao of Fordham Law School (LLM Candidate, 2015).

Ministry of Commerce IP Program in DC December 5

Chen Fuli, IP Attaché at the Chinese Embassy in Washington, DC the morning of December 5.   The program is free of charge, but seating may be limited.   You should RSVP at: lishuai@mofcom.gov.cn.

The topics are all ones that I have actively followed in this blog.  Here is the tentative agenda:

International High Level IPR Cooperation Forum

Dec 5,  Georgetown Holiday Inn

2101 Wisconsin Ave, NW, 20007, Washington DC

 9:00-9:20  Opening remarks, by Both China and U.S. Representatives

 9:20-9:40   New developments in IP enforcement in China, by Director Jing Zhang from the Office of Fighting Against IPR Infringing and Making or Selling Counterfeit and Shoddy Products under the State Council

9:40-10:00  New amended Chinese Trademark Law, by Deputy Director General Qing Xia from CTMO

 10:00-10:15 Q & A

 10:15-10:30 Coffee Break

 10:30-10:50  Amending of Chinese Copyright Law by Deputy Director Ping Hu from NCAC

10:50-11:10  Amending of Chinese Patent Law and Regulation on Service Invention by director Yanhong Wang from SIPO

11:10-11:30  New practice of IP trials after the amendment of Chinese Civil Procedure Law by Judge Yuanming Qin from SPC

11:30-11:50 Q & A

11:50-12:00 Closing Remarks

—————-

12:00-13:30                    Lunch (hosted by China for all the participants)

In addition to the speakers noted above, there will also be Chinese official participants from public security, Customs, procuratorate, AQSIQ and other agencies, which should help make for lively discussion and interaction.  I hope to see you there!

The Brave New World of Chinese IP Legislation – Trademarks

One thing is for certain about the current crop of revised IP laws in China: they are primarily being drafted to accommodate and anticipate China’s own needs, and not in response to international pressure or WTO accession.  A second important theme is harmonization with China’s own new laws and optimization of experience already learned, such as the revised Civil Procedure Law and Tort Law, as well as emerging doctrines and experience in antitrust and standardization laws.  These motivations are quite different from the drafting efforts of a decade ago.  The shift was clearly evidenced in the 2008 Patent Law amendments. Continue reading

Why the Proposed Amendments to the Patent Law Really Matter … and Maybe Not Just For Patents

It is rare that I can blog on a patent issue in China that has implications reaching far beyond intellectual property, to property rights and civil law, WTO and TRIPS, and even the role of the courts.  These recently released draft amendments to the patent law, however, have a much broader scope of impact. Continue reading