On Avoiding “Rounding Up the Usual Suspects” In the Patent Law Amendments …

 

Although many of the proposed changes in China’s patent law amendments are welcome, the draft amendments also present a difficult  choice in two key areas: (a) patent administrative enforcement and (b) punitive civil damages.

(A)The draft, if enacted, would enhance patent administrative enforcement through national coordination of large cases (Art. 70), expanding authority of administrative enforcement for infringement (Art. 69), and enhanced fines of five times illegal earnings or up to 250,000 RMB (Art. 68).  These efforts should be seen against the background of a huge ramp up in administrative enforcement in patents,  that has now eclipsed administrative enforcement of trademarks (77,000 to 31,000 cases).    Moreover, there appears to be a continuing interest of the Chinese government in special campaigns to deal with patent infringement, such as in a recently announced MOU with NDRC, and in a proposed campaign to deal with infringement issues faced by foreigners at the beginning of the current 301 investigation.

How much will these efforts help foriegn business people? The record on special campaigns is that most improvements are short-lived and perhaps focus too much on “rounding up the usual suspects” by local enforcement agencies (Casablanca).  Enhancements in administrative patent enforcement are also an about-face from the prior dominant role that trademarks played in administrative IP enforcement and the relatively minor role that patent administrative enforcement traditionally played in China.  Also of concern is that administrative trademark enforcement had uniquely been frequently utilized by foreign entities as complainants/victims.  For example, there were 17,022 administrative trademark enforcement actions taken by SAIC on behalf of foreigners in 2011.  This was nearly 14 times the number of all foreign-related civil litigation involving all types of IP rights that were disposed of by the China courts in that year (1,321).    In addition, as the Apple design patent case demonstrated in Beijing, foreigners may easily end up on the defensive side in these administrative patent cases that are typically brought by local government officials.    It is therefore uncertain how much, if at all, enhanced administrative patent enforcement will benefit foreigners.

(B)  The proposed draft would also provide for punitive damages upon a judicial finding of  willful patent infringement (Art. 72), with a maximum of 5x damages.  To many this may appear to be a welcome improvement. Punishing willful IP infringement is currently a policy that both the US and Chinese leaders share.  On the US side, the term IP “theft” appears 119 times in the Section 301 Report, while civil damages and compensation appear hardly at all.  On April 9, 2018, President Trump tweeted that he is “Defiant” and that he “Will End …Massive I.P. Theft” by China. Premier Li Keqiang apparently shares some of this enthusiasm.  He had noted in his annual report on the work of the government, that China needs to “improve IP protection, and implement a system for punitive damages against infringement “加强知识产权保护,实行侵权惩罚性赔偿制度” .

While punishment is an important tool, the more pervasive problem is that basic civil remedies are too weak.  Actual damages are in fact rarely imposed by Chinese courts and, have been the outlier.  Courts impose statutory damages in over 90% of all patent cases as well as in other IP areas.  In the Beijing IP Court median damages awarded for patent infringement in 2016 were only 112,500 RMB, or less than 20,000 USD. Rather than unduly emphasizing punishment, a better structural place to start is in improving the civil system to achieve maximum compensatory deterrence.

Intellectual property is fundamentally a private right (TRIPS Agreement, preface), and adequate civil remedies should therefore be the priority.  Using remedies that are not at the core of a healthy IP system based on private rights (administrative remedies/punitive damages)  are not a substitute for predictable, compensatory private remedies. In fact, the administrative system affords no private compensation to victims.  Punitive and administrative remedies are also often left to the discretion of the enforcement agencies, which can result in unpredictable enforcement.  In 2017 for example, despite the pressure on China to address trade secret theft, criminal cases declined by 35%.

By focusing on deterrent civil remedies that are fairly administered, the US will find common cause with many Chinese officials.  The issue was addressed  by Justice Tao Kaiyuan of the Supreme People’s Court  who similarly believes that the civil patent system is the primary enforcement mechanism for private patent rightsJustice Luo Dongchuan, who is now in charge of China’s new appellate IP circuit court, also underscored the importance of the IP courts in advancing rule of law in a visit to the US.  In an article I wrote,  with former PTO Director David Kappos and Chief Judge  Rader (ret), we also underscored that China’s administrative system is fundamentally unlike the judicial mechanisms of the USITC, and that better recourse to improved patent enforcement can be had with the courts.

Moreover, these punitive and quasi-legal remedies could easily be turned against the foreign community.  Consider, for example, that due process for foreigners has been a long-standing concern  in Chinese IP matters, well before the current concerns over retaliation over the proposed extradition of Huawei’s CFO.  Moreover, several cases have demonstrated that   foreigners are often the test cases for “improved” enforcement mechanisms in IP, such as in Chint v. Schneider (high patent damages), Iwncomm v Sony (injunctive relief in a SEP case), AMEC v Veeco (preliminary injunctions in patent infringement matters), antitrust cases involving licensing  and even the first publicized criminal copyright case, in which the principal defendants were two Americans (Guthrie and Cody).

I believe that China needs to focus its patent enforcement resources on the courts, and especially to give the new national appellate IP court a try in providing balanced and fair enforcement of IP rights, both foreign and domestic.  Both the US and China might try to focus more on much delayed and long overdue improvements in the civil system, some of whic are contemplated by the patent law amendments.  A rhetoric based too much around punishment may in the end prove to be self-defeating in the absence of necessary legal guarantees such as improvements in awarding compensatory damages, greater procedural due process, and improved transparency in the courts and administrative agencies.

shenzhenstrictlyprotectip

Bottom photo of the author in front of a Nanshan District Shenzhen IP Office sign “Create the Most Strict IP Protection Pioneering District” (Jan. 2019).  The opinions expressed in this blog are the author’s own.  Please address any corrections or improvements to: chinaipr@yahoo.com

 

 

The Good Faith Elephant in the IP Trade War

elephant-in-the-room

It is impossible to talk about structural issues in China’s IP regime and its impact upon foreigners without addressing the lack of a comprehensive approach to “bad faith” activities in all its forms in China.  This issue has likely undermined more of  the credibility of the Chinese government than any other in IP, and it has affected the greatest number of US companies.  Chinese officials may not realize it, but every medium to large sized company I have met in the US has been affected by it.

Any lawyer who has counseled a US company on doing business in China knows the drill: before you enter the market there are likely to be trademark squatters, bad faith patent registrants, difficulties in protecting trade secrets used by trusted employees, amongst others.  Even the President has been a victim with squatting on the Trump mark.

China has generated its own vocabulary around bad faith activity.   “IP theft”, a term that has been promoted by the Trump administration, reflects an overarching concern about Chinese tolerance of state-sponsored or willful infringement.  Another similar concept is “forced technology transfer.”  The history of these terms goes back decades.   “Patent hijacking” refers to behavior before 2008 of misappropriating designs and other inventions based on China not requiring absolutely novelty as a condition for patent grants.   A “Naked Bolar” regime refers to a regime which grants an exemption from certain forms of patent infringement without providing a counterpart benefit to an innovator for the erosion of its patent rights (this may be corrected in the proposed patent law revisions).  “Ambush marketing” and “trademark squatting” may  not be new to China, but China remains a focus of these concerns.  China also has some vocabulary of its own which often do not make it into English, such as  “旁名牌” (saddling along famous brands) and patent “cockroaches” (instead of patent trolls).

China has also created global precedent over willful (bad faith) behavior in DS/362, the WTO case involving China’s criminal IP enforcement regime.  As the WTO panel indicated in that case:

“[T]he word “wilful” … precedes the words “trademark counterfeiting or copyright piracy”. This word functions as a qualifier indicating that trademark counterfeiting or copyright piracy is not subject to the obligation in the first sentence of Article 61 unless it is “wilful”. This word, focussing on the infringer’s intent, reflects the criminal nature of the enforcement procedures at issue.”

Good faith may be an underperforming concept in China, but it is also a low-hanging fruit for trade negotiators. It is in Article 4 of the General Principles of the Civil Code as well as Article 6 of the Contract Law.  It was incorporated into Article 7 of the revised Chinese Trademark law.  The Supreme People’s Court recently found that warehousing trademarks without intent to use is a basis for invalidating marks, albeit not under Article 7.  It is part of the Guangdong High Court Rules on SEP disputes in telecommunications (good faith in negotiations).  It is also part of the guidance from the Beijing High Court for handling of patent validity matters.

The problem isn’t that good faith doesn’t exist in China’s IP regime, but that it is selectively applied.  In addition to the examples already cited, it is under consideration in the proposed Patent Law revisions in terms but only for good faith litigation, and it is an underlying concept in punitive damage provisions in the Trademark Law and the proposed Patent Law Revision. The concept has not yet appeared in substantive copyright or trade secret law.  Companies like Taobao are using a determination of “good faith” in facilitating take-downs

Selective application of “good faith” concepts is evident from its inconsistent application across various IP laws.  Why must trademarks be prosecuted in good faith, but not patents? Why is bad faith patent litigation a concern in the proposed patent law revisions, but why not trademark, trade secret, copyright or other IP-related litigation? The concept needs to be utilized to address such difficult issues as the epidemic of low quality patents and bad faith trademarks.  It should not be used to resolve other, easier challenges such as extracting more rents from foreigners in patent litigation as in the Guangdong rules on SEP disputes.  In fact China back-slid in applying good faith concepts while this trade war was brewing.  The removal of “employee” as a covered party (经营者) in China’s revised trade secret law (Anti Unfair Competition Law) facilitates bad-faith employee behavior.

Adjudicating what constitutes good faith need not involve inquiries into subjective attitudes.  Courts and agencies can rely on objective indicia from China’s data-rich environment: companies that file multiple trademarks that they don’t use  them; trademark registrations than use others’ prior rights; on-line merchants  that routinely infringe IP rights; serial violators of injunctions; patents that are routinely invalidated and/or filed based on others’ designs; comprehensive data that shows foreigners that are being treated fairly drawn from China’s new judicial databases;  willful violators of non-compete agreements, and others.

Bringing good faith into full play would be a triple win: good for China’s IP system, good for US rights holders, and good to help re-establish trust between China and other countries.  Trade negotiators may wish to consider it being a part of any “structural” commitment from China in the current trade dispute  It can be implemented by China’s National People’s Congress as a legislative interpretation or as an amendment to China’s civil law, and in specific laws now under consideration (patent law, copyright law).  The SPC at an appropriate time might prepare a judicial interpretation articulating its application in specific circumstances.  It also has the added advantage of being easily monitored, as data analytics can be harnessed to determined if real progress is being made in a wide range of areas.

It is time to bring good faith more directly into China’s IP system.

 

Public Comment Draft of Patent Law Revisions Released by NPC

The National People’s Congress has released a public comment draft of the long-awaited revised patent law on its website .  Here is the draft itself, and here are the official explanations on the draft , along with other laws released by the NPC.  The comments are due by February 3, 2019.

The NPC Observer’s summary of the legislative history to date is here.   Based on a quick read, the biggest disappointment remains the absence of a patent linkage regime, as was noted of the State Council draft.  The inclusion of patent term restoration (five years) for pharmaceuticals is however, a plus.  There are also provisions on 5x punitive damages, extension of term for design patents (15 years), on-line infringement, expanding administrative enforcement, dealing with “counterfeit” patents, reversals of burden of proof for information on damages caused by the infringer, and an extension of the statute of limitations to three years, amongst other positive aspects.  There is also a good faith requirement to deter abusive patent litigation, but not one for prosecution of patents (e.g., a duty of candor).

In addition to filing comments electronically, commentors can use snail mail, by writing to NPCSC Legislative Affairs Commission 全国人大常委会法制工作委员会.  Instructions may be found at the NPC Observer website.

The draft may have been expedited in order to show a package of reforms that adddress US concerns in light of imminent trade discussions between the US and China, and as such appears to be part of larger package – perhaps even including the establishment of the new SPC IP Court.

I welcome readers to submit any translations of the proposed law and any comments they file to this blog for further publication.

Trade and Peace on Earth: Part 2

pendency

In the first part of this blog, I talked about unilateral steps that the United States and China have been taking during the ‘trade war’ to address concerns regarding forced tech transfer.  In this section I look at bilateral steps that can be taken.   I begin by looking at what the US and China should not do (“Do No Harm”), and then I focus on 5 areas for legislative reform:  trade secrets, licensing, good faith, patents and litigation. I conclude with confidence building steps.

Do No Harm:

There are some bilateral steps taken from playbooks of the past that China and the US should not do:

  1. Political campaigns, particularly to address patent or trade secret infringement. These actions are great for politicians, but they offer no prospect of durable relief.
  2. Accepting Chinese political statements or enactment of normative documents (inferior to State Council “regulations” 法规) that have no binding effect.
  3. Permitting two different fact sheets in Chinese and English to emerge from discussions – Diplomatic discussions should not be a “Rashomon” (羅生門) (see picture below) –  subjective explanations of a common experience.  We have already  differing interpretations of recent negotiations.  For a formal document, that generally means that an agreement needs to be reached several days before a due date in order to ensure there is a harmonized text.
  4. Entering into an agreement that is not verifiable or that the US government doesn’t have the resources to verify.

In his June 9, 2010 testimony  before the Congressional Security Commission, USTR’s Lighthizer, then a private attorney, noted that “China’s commitment to the rule of law is very much in doubt, and the U.S. government continues to express major concerns about China’s failure to respect  U.S. IPR.”  Given the investments to date in effecting change in China, I hope that USTR seeks durable legal changes that have too often been atypical.

The prognosis, however, is not positive.  Willingness to “horse trade” ZTE sanctions and Huawei extradition for trade concessions is one indication of US willingness to bend its rules.  Similarly, Xi Jinping apparently suggested at Buenos Aires that he would approve the NXP merger with Qualcomm at this time.  Many countries, including the US have extended  bilateral science and technology cooperation agreements with China without necessary legal changes to China’s licensing regime in place that would definitively facilitate sharing of improvements between the countries.  The administration’s reluctance to bring trade cases involving IP against China is another sign that negotiation, rather than durable legal changes, may become the dominant means of resolving the current impasse.  However, if we accept extra-legal commitments from China, how can we expect China to make structural changes in accordance with rule of law?

Nonetheless, it isn’t too hard to develop a range of possible legal outcomes that would help address US concerns over the IP issues identified in the Section 301 Report, provided they are carefully monitored.  Here is my initial positive list:

Trade Secrets:

China adopts a unified, stand-alone trade secret law.  This law would address the problem of scattered trade secret laws, insure that criminal trade secret cases are prosecuted, and that employees are treated as subject of trade secret protection and as actors in trade secret infringement, provide appropriate burden of proof reversals (e.g., for “inevitable disclosure” or in proving aspects of misappropriation), establish punitive damages, provide for referral mechanisms from administrative or civil proceedings to the courts, etc.  China previously rejected the idea of a stand-alone law in revising its current Anti-Unfair Competition Law, yet many leading Chinese IP authorities still consider it to be a useful concept.

China might also follow recent Korean legislative practice criminalizing overseas trade secret misappropriation with the intention to benefit a  domestic entity, and imposing aggravated penalties in such circumstances.  Such a provision, if enforced and monitored, could help address US concerns about Chinese indifference to overseas trade secret thefts, as well as set the stage for greater cooperation in transborder trade secret theft.

Technology import/Export Regulations and Licensing:

The Chinese government is already seeking to revise the Catalogue of Foreign Investment in China,  and is considering a Foreign Investment Law to provide greater protections against forced technology transfer, including, hopefully, provisions regarding Joint Venture ownership of foreign licensed technologies.  These positive steps are still not enough, due to pervasive national and local incentives in China at this time to acquire new technologies and the difficulties in tracking forced technology transfer.  As one additional step, China should vest jurisdiction in disputes over such forced technology transfer in the newly established circuit IP tribunal of the Supreme Peoples Court, in order to insure a consistent, high-level focus and opportunity for redress, including expanding its jurisdiction over decisions to approve or deny joint venture registrations.

China has also shown no interest to date in revising the Administration of Technology Import/Export Regulations (TIER).  Chinese intransigence in this area is harmful to China.  Until China amends its law, I suggest that the US consider enacting legislation imposing reciprocal treatment on Chinese licensors of technology to the United States, as ITIF has also suggested.

I also encourage formation of a bilateral non-governmental commission (“Bilateral Commission”) to review progress in forced technology transfers.  If necessary, the US could reimpose sanctions if sufficient progress is not made.  This Commission should also require that China regularly publish reliable licensing data on the quantity of legitimate technology transfer occurring between China and other countries, including technology transferred as part of a joint venture formation.  This information could support better data-driven discussions on technology flows between China and other countries.

Patents:

China’s patent law reform offers the possibility for concrete changes that should not be missed.  Of particular concern, is the absence of a patent linkage regime in the current draft.  USTR might consider requiring China to make necessary changes in its patent and food and drug laws to fully implement a modern pharmaceutical patent linkage regime, including data exclusivity and patent term restoration.

The Section 301 report also hardly addressed potential issues involving discriminatory treatment in patent prosecution, such as has been alleged from time to time in China.  As examples, low rate of patent grants in pharmaceuticals, and disparate treatment in granting of SEPS have been the subject of academic and industry concern.  Consideration of discriminatory treatment, or lack thereof, should be the focus of any future collaboration between the US and China (such as my proposed Bilateral Commission).

This issue of bias need not be “tip-toed” around.  China fired what was likely the first salvo when it alleged unfair treatment by USPTO regarding an IWNCOMM patent application at the USPTO during a JCCT meeting (a “Rashomon” meeting, where there was a  different U.S. outcome sheet).  USPTO data, however, generally shows that Chinese patent applications in the US are treated as well if not better than US applications, according to my former colleague Larry Lian (see, e.g.,  slide 14 above and the accompanying deck).  China has not produced similar data on American applications in China or refuted the research to date in this area.

The United States and other countries might also look at temporal studies to see if there is any link between changing industrial policies and behavior of China’s patent office towards foreigners.  One promising area of research that one of my students undertook in my Chinese IP class this year suggests that there could be temporal differences in patenting behavior over a multi-year period: as China increasingly focuses on national policies to stimulate indigenous innovation, bias rates may be affected.

The US should also push China to reform its metrics driven approach to patent filings, which wastes resources and distorts markets.

Good Faith/Bad Faith:

One of the discrete trends in China’s domestic IP environment is an increasing focus on the role of good faith / bad faith in a range of IP-related activities.  Elevating the legal consequences of bad faith actions could lead to structural changes in China’s IP regime.  Good faith has been an increasing factor in dealing with bad faith trademark registrations, in Guangdong IP court guidance on SEP negotiations, as well as in trust-losing patent behavior in the recent NDRC MOU providing for coordinated interagency action involving patenting behaviors, and will likely play a part in consideration of punitive damages for patent infringement in the proposed patent law reforms.  It could be extended further to impose a duty of candor on patent and trademark applications, provide for deterrent penalties against frivolous IP litigation, address contempt of court, etc.  Despite my concerns regarding the social credit system, it can also be tasked to monitor bad faith behavior in IP and non-IP related areas, to support claims for enhanced damages or referrals to criminal prosecution.  The courts can take an initial look at this area across a range of judicial sectors.

Litigation:

China’s efforts to publish cases and increase transparency over the past several years are laudable, but the work is not complete and confidence in the judicial system thereby suffers.  The courts should insure that, wherever possible, all cases are published.  Cases involving national or trade secrets could be expunged of confidential information but otherwise be made public.  The current data on trade secret theft is especially incomplete.  Complaints and other motion papers, including dismissals due to settlements, should be made available to the public, along with preliminary and interim injunctions.   Generally speaking,  China’s transparency efforts are vulnerable to claims of selection bias, which undercut the utility of these efforts for comprehensive trade negotiation purposes.  Transparency has the potential to create and support structural change, and it should be exploited for that purpose.

Confidence Rebuilding:

Assuming that the US and China can get past this 90 day milestone, efforts to improve the environment for high tech also need to be established  There were some efforts underway in the Obama administration that can create incentives for improvement in China’s IP regime (e.g., accession to the TPP), and positive environments for technology collaboration (e.g., the US-Clean Energy Research Center).  There is a tremendous upward potential for collaboration between the US and China if the right frameworks can be developed.

One thing is clear: real accomplishments, not conferences and dialogues, are needed.  As I often reminded my Chinese colleagues over the years, reform in China should not be an entirely self-serving process. The world needs better scientific collaboration to address many of the looming global challenges we face.  If China plays its cards correctly it can emerge as a balanced global stakeholder and welcome partner in innovation.  Otherwise, I fear that the trend could be ever downward.

January 2, 2019 Update:  A translation of the draft Foreign Investment Law, which is now open for public comment is available at the NPCObserver website.

(Note: Please feel free to add your suggestions!  Also, I am indebted in this blog to the work of my students in my Chinese IP class at Berkeley this year, many of whom prepared papers on some of the suggestions in this blog).

Movie poster for Rashomon, below:

rashomon

Trade and Peace on Earth: Part 1

O ye who read this truthful rime From Flanders, kneel and say:
God speed the time when every day
Shall be as Christmas Day.

(Frederick Niven, “A Carol from Flanders”, regarding the WW I Xmas truce)

We are in the middle of the 90-day trade war truce, which was announced at the G-20 in Buenos Aires. Is there, however, an opportunity for a lasting trade peace?  Let’s look at developments to date…

Shortly after the Buenos Aires G-20 meeting on December 1, 2018 at which the 90 day truce was agreed to, USTR Robert Lighthizer gave an interview on Face the Nation where he  hinted at the pathway forward, noting: “We have had conversations ongoing.  We have had conversations ongoing for over a year.”  Lighthizer went on to say that we need structural changes and market opening “on this fundamental issue of non-economic technology transfer.”  Lighthizer’s focus was three-fold: forced technology transfer, cyber theft and state capitalism.  Lighthizer noted that tariffs will be raised in March unless a satisfactory solution is found.  In fact, USTR has announced on November 19 a deadline of March 2, at which time tariffs will be raised.  March 2 is 90 days after the December 1 meeting.

Notwithstanding LIghthizer’s assertions of on-going discussion, there have been several significant developments which suggest that there may not have been much real communication.  Typically, a new administration needs one to two years before adequately coming to terms with how China negotiates on IP and what may be the “low hanging fruit” in IP improvements that could have a durable impact.  This administration and China have not had anything approaching a “honeymoon” period.  It is not surprising, therefore, that some of the developments during this past year, as well as during the truce period appear, to be missing the mark.

If we dial back to the period when the 301 investigation was on-going, China failed to publicly disclose data on civil trade secret cases for 2018, and actually reduced its criminal trade secret prosecutions by approximately 35% to only 26 cases in that year. China’s revised trade secret law (Anti Unfair Competition Law) (eff. 1/1/18) also weakened trade secret protections by expanding the ambiguity around protections and procedures, where a non “business operator”, such as an employee, misappropriates trade secrets.

The United States also did not always engage comprehensively during this period. Although the United States filed a WTO case against China on March 23, 2018 (the day after the Section 301 Report was released) regarding compulsory licensing terms, the complaint does not specifically call out trade secrets (undisclosed information) as a form of technology licensing.  The European complaint, by contrast, more thoughtfully notes that “China imposes a different set of rules on the import of technology, including industrial property rights, other intellectual property rights and undisclosed information (“intellectual property rights”).”

Other recent efforts undertaken by China suggest that there may also have been some lack of understanding of US interests, including perhaps an undue emphasis on patent licensing.  NDRC, China’s powerful state planning agency,  announced a special Memorandum of Understanding/campaign mechanism involving 38 government agencies to address six types of “dishonest  conduct” by patenting enterprises and individuals.  The “MOU For Cooperation for Joint Disciplinary Actions Against Subjects of Serious Mistrust in the Field of Intellectual Property (patents).” 关于对知识产权(专利)领域严重失信主体开展联合惩戒的合作备忘录  is dated November 21 (before the G-20), but  was published on December 2 (immediately after).

How effective will this MOU be?  For some time, the academic data has suggested that such special campaigns have rarely brought any durable progress.  In fact, China suggested a special campaign for three months at the beginning of the 301 investigation. My response on the record to that suggestion was:

“Many scholars think that these short campaigns have limited duration and effect . . .. So, I’d like to know why is this particular program any different from other ones before it? Why not extend it or make it permanent? Or perhaps should the focus be on judicial reform or other areas?”

The data also shows that foreigners rarely use the administrative patent system and, as I have pointed out, along with former Chief Judge Rader and former PTO Director Kappos, vesting the administrative agency in charge of granting patents with the ability to bring infringement actions and special campaigns may not be conducive to independent adjudication of rights.

Another “truce-responsive” legislative effort appears to be in the works from China’s National People’s Congress, where a first reading of a new “Foreign Investment Law” is reportedly  now under consideration. The law would combine existing laws regarding foreign investment into one statute and is intended to insure that foreigners are accorded national treatment and can participate in government procurement and standards setting, as well as insure that transfer technology is on voluntary terms.  It  hopefully may address some aspects of forced technology transfer that have been identified by USTR in its 301 Report.

There have also been two other significant developments that could affect the landscape for technology transfer and IP protection in China that have a longer history and could be helpful to foreigners facing IP issues in China.  One of these is China’s proposed draft patent law amendments which have also been submitted to the NPC and have gone through its first reading.  The draft offers some improvement on judicial procedures and remedies (including discovery for calculation of damages, and improved damage calculations).  This latest draft also strengthens administrative enforcement, and extends the term for design patents to 15 years (in anticipation of accession to the Hague Agreement on the International Registration of Industrial Designs), provides for enhanced protection of patents in e-commerce, extends patent term for innovative pharmaceutical patents by five years.  However, it may also have weakened protections for pharmaceutical patents, as press reports thus far omit any reference to patent linkage, continuing a trend since this past August.

In my estimation, the most positive development is the establishment of a new specialized appellate circuit IP  tribunal attached to China’s Supreme People’s Court and under the direction of long time IP judge, Luo Dongchuan, now Justice of the SPC.  The new circuit tribunal will have national jurisdiction over technologically complex IP cases and will open for business January 1, 2019.   This court could also have an important impact on technical trade secret cases, patent disputes in key areas, such as semiconductors and pharma cases, appeals from China’s patent office, in insuring consistency of decision making across various intermediate courts, and in other areas.

Interestingly, none of these changes address Lighthizer’s other goals of addressing cyber theft and state capitalism.

There have been other changes in how the US engages with China that suggest some modifications in the bilateral relationship are permanent.  US companies have now begun wondering how they can take advantage of US Customs rules regarding determinations of country of origin of products with Chinese content, to minimize the potential application of 25% punitive tariffs.   They are busy revisiting Customs doctrines regarding “substantial transformation, including the progeny of cases and rulings since the landmark decision in Anheuser Busch v. United States 207 U.S. 556 (1907), in order to see how they might restructure manufacturing in China through conducting more assembly or finishing outside of China.  For Customs lawyers this must be a boon period.  At the same time, the US Department of Commerce has published new, potentially restrictive rules on “foundational” and “emerging” technologies, which may be targeted towards China, and the Treasury Department/Committee on Foreign Investment in the United States is conducting a pilot program that could restrict “passive, non-controlling” foreign investments in technology.  Meanwhile, Huawei’s CFO was arrested pending extradition to the United States, and Fujian Jinhua is banned from acquiring US technology, as it has been determined to be a threat to US national security.  It is clear to me that even if this stage of the trade war were to end, a new normal in trade relations with China has emerged and significant steps will need to be taken to reestablish trust.

My next blog will offer some ideas for reducing the bilateral temperature.

Christmas Day, 2018 (rev. 5:00 PM).

SEP Litigation and Licensing in China: Are There New Voices in the Room?

morevoices

A string of recent events suggest that there is increasing confidence by the foreign community in China’s antitrust and licensing regime and that some of the aggressive posturing in the past by the Chinese government on the ”hegemony” of foreign ownership of SEP’s  countries, or (more recently) the abuse of dominance of foreign SEP owners (in cases like Huawei vs Interdigital and NDRC v Qualcomm), is shifting to a more balanced view.  Hopefully, policy developments in this new phase will also facilitate China’s efforts to become a global innovator and technology exporter.

One of the more hopeful signs of faith in the Chinese legal system was Qualcomm’s filings against Meizu, Since its initial court filings in China, Qualcomm has filed 17 complaints against Meizu.  In addition, Qualcomm announced in October 2016 that it launched a 337 action against Meizu in the United States, and is pursuing litigation in Germany and France.

In another sign of confidence Canadian NPE, Wireless Future Technologies Inc, a subsidiary of Canadian PIPCO WiLAN, filed a patent infringement lawsuit against Sony in the Intermediate People’s Court of Nanjing.  The choice of the Nanjing court, rather than one of the specialized IP courts has been a source of some speculation, with the media suggesting any of three factors: faster litigation times, local contacts and even, perhaps, anti-Japanese sentiment.   Two other reasons: Jiangsu’s efforts to use actual or implied royalties to assess damages, rather than the low statutory damages that applied in the vast majority of cases in China. Damages in a “model case”  for patent infringement in 2014 using a royalty based calculation that was first adjudicated by the Nanjing Intermediate Court, were 3,000,000 RMB, relatively high by Chinese standards.   See 江苏固丰管桩集团有限公司 vs宿迁华顺建筑预制构件有限公司, 南京中院(2014)宁知民初字第00108号 , 江苏高院(2015)苏知民终字第00038号.  Finally, and perhaps, most importantly, Sony’s phones are made by Arima in Wujiang, Jiangsu Province.

The Financial Times has written on the Arima case, noting that “A new corporate era beckons in which a Chinese judge could conceivably cut off the lifeblood of some of the world’s most valuable companies. It was not so long ago that China’s legal system just did not factor into the risk calculus of most global companies.” 

Chinese companies are also showing confidence overseas by bringing cases brought against foreign competition. Earlier this year, Huawei brought SEP-related litigation in the United States against Samsung in both the United States and China, and against T-Mobile in the Eastern District of Texas.

China’s growing SEP portfolio may be contributing to this change in perspective.  As Dina Kallay of Ericcson noted at the recent Fordham Antitrust conference: “Of the ten largest contributors of technology to cellular standards — and we like to measure it by accepted technical contributions, so it’s not just measured by the number of patents, which arguably you can play with — but by how many of your technical contributions were accepted into the standard, …Three … are Chinese — Huawei, ZTE, and CATT (Datang).  No other nation has as many companies in the Top Ten list.”  Considering China’s increasing investments in the United States and its rapidly improving patent portfolios, might a Chinese company soon be a complainant in a Section 337 litigation?

By the way, Huawei’s website impressively identifies their contributions to IP in standards as follows;

  Huawei has filed over 57,800 patent applications in China, U.S., Japan, European Union, South Korea, and Brazil, as well as other countries and districts, of which approximately 15000 are in the area of wireless communications.

  Huawei has 2,137 essential patents in the area of wireless communications…

In the area of wireless communications, Huawei has submitted approximately 20,009 proposals to international standard organizations … 40% of which have been adopted.

Huawei’s extensive experience in standards setting and its own investments in IP have likely contributed to its  opposition to some of the mandatory disclosure / mandatory licensing  standards-related aspects of  the proposed revisions to China’s patent law (eg., Article 85). Interestingly, Huawei objected to this provision due to the the complexity of international regulation of standards setting organizations, and because it alleged that foreigners do not participate in the development of Chinese domestic standards; therefore this provision might primarily be applied by Chinese against Chinese.  Nonetheless, its rejection would be a positive step by avoiding an unfortunate precedent for SIPO and reducing overregulation of standards setting bodies.

One can also point to other recent factors, such as government to government engagement, and the pressure of overseas litigation in Huawei vs ZTE (ECJ), Sisvel vs Haier (Germany), Unwired Patent vs Huawei and Samsung (United Kingdom) and Vringo vs ZTE (SDNY and other jurisdictions) as other informative experience and perhaps sources of pressure for greater international conformity.

These changes in IP ownership, standards participation, litigation experience and maturity due to increased engagement are likely having their effect on domestic policy. Within China, early this year draft IP abuse guidelines of NDRC recognized that ownership of an SEP does not automatically confer market dominance.  In July of 2015, the State Council announced its plans for China turning into a “strong IP economy”, and identified several projects involving standards.  One of the projects identified by the State Council calls for the development of rules on standard essential patents that are based on FRAND licensing and “stopping infringement”, with the involvement of AQSIQ, SIPO, MIIT, and the Supreme People’s Court (Art. 38).  As the focus of this task is on stopping infringement, rather than “abuse of dominance”, this suggests to me that a more rights-holder friendly approach.

Another hopeful sign which I have been following are suggestions that China’s Technology Import/Export Regulations  (“TIER”) may now be under revision, as was noted in the European Business in China Position Paper (2016/2017) .   Some aspects such as ownership of improvements have been the subject of the TIER  and also appear to factor into AML enforcement policy such as in the Qualcomm case. (see also QBPC’s paper on the TIER at “应允许当事人对后续改进的技术成果的权利归属进行自由约定”, attached here.[Chinese Language]).

What do you think? Please feel free to comment  with your own experiences or examples (in favor or against) in this area!

Rev. Nov. 19, 2016