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.

 

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

March 19 – 26, 2018 Updates

1. China Now Number 2 PCT Filer.  China has overtaken Japan to claim second place as a source of Patent Cooperation Treaty (PCT) applications  in 2017. In 2017, U.S.-based applicants numbered 56,624 PCT, followed by China (48,882) and Japan (48,208). Huawei Technologies (4,024 published PCT applications) and ZTE Corporation (2,965) – occupied the top two spots for PCT applications. They were followed by Intel (2,637), Mitsubishi Electric (2,521) and Qualcomm  (2,163).   Historically Chinese PCT applications have been concentrated in a few companies.

Chinese academic institutions are still minor users of the PCT.   Among the top 25 educational institution filers, there were only three Chinese academic institutions – Shenzhen University (no. 11), China University of Mining and Technology (no. 15) and Tsinghua (no. 19).

Computer technology (8.6% of the total) overtook digital communication (8.2%) to become the field of technology with the largest share of published PCT applications. These two fields were followed by electrical machinery (6.8%) and medical technology (6.7%)

2. China’s premier pledges market opening in bid to avert trade war On the heels of the Section 301 Report, Chinese Premier Li Keqiang reiterated pledges to ease access for American businesses, at the news conference following the closing session of the National People’s Congress (NPC). Li also said at a conference that included global chief executives that China would treat foreign and domestic firms equally, would not force foreign firms to transfer technology and would strengthen intellectual property rights. Another Vice Premier, Han Zheng,  made similar remarks at the China Development Forum.  Han said that China needs to “open even wider to the outside world,” and would do so via its Belt and Road Initiative.

According to Wall Street Journal citing unidentified source, U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer listed steps they want China to take in a letter to Liu He, a newly appointed vice premier who oversees China’s economy. The United States asked China to cut a tariff on U.S. autos, buy more U.S.-made semiconductors and give U.S. firms greater access to the Chinese financial sector. The article also reported that China and the U.S. have quietly started negotiating to improve U.S. access to Chinese markets.

 

Prison Inventions and Patent Subsidies

The South China Morning Post reported recently on jailhouse inventors, a topic that you may have first read about here. According to the SCMP and Beijing Youth Daily, various provinces have different commutation schemes for inmates that file patents, which are based on provisions in the criminal law permitting commutation based on meritorious service (Criminal Law, Art. 78).

As with their policy “cousin”, patent subsidy and innovation tax incentive programs, not all inventions are treated equally for purposes of obtaining government benefits. For example, according to 2005 Provisional Opinions on Specific Questions on Commutation of Sentences in Jiangsu,《关于审理减刑案件若干问题的意见(试行)》 one invention patent is equal to one utility model patent or three design patents.

Similar to patent subsidy programs, there is also any number of patent agents pursuing this type of business. However, the best practice for would-be inventors is likely if the convict or his/her representative finds a patent agent familiar with the practice of the local prisons as practices may vary.

Why the increased interest in jailhouse inventors? Probably the press has picked up on this issue with the December 9, 2014 decision of the Beijing Second Intermediate People’s Court which reportedly granted one year’s commutation of the sentence of the former Chinese Football Association Vice President Nan Yong.  Nan Yong was granted 4 patents in 2012 and 2013 for: a soccer practice device, a portable goal, assembly of mobile terminal supporting frames, and a desktop computer monitor.

Considering the large size of the US prison population (about 600,000 more than China), is this an untapped resource for encouraging innovation in the US :)?

Update of May 18, 2019:  Here is a recent article from the Shanghaiist about a death row rapist who may have earned early release by patenting a new manhole cover design.

 

Action Plan for Further Implementation of the National IP Strategy (2014-2020) Approved

According to a Chinese Government website, on  December 29, the State Council reviewed and approved the Action Plan for Further Implementation of the National IP Strategy (2014-2020) (Action Plan). The Outline of the National IP Strategy (NIPS) had been implemented for 6 years.  Premier Li Keqiang, and SIPO Commissioner Shen are quoted in the this brief summary.

Chinese authorities have pointed to three key aspects of the NIPS Action Plan:

A.  First, to “Strive to Build A Strong IPR Country”  (努力建设知识产权强国).

B.  To improve IP utilization and protection (知识产权运用和保护).

C.  Practical new steps are to be announced, including plans to promote the development of IP intensive industries (知识产权密集型产业发展).  This  includes greater coordination amongst various branches of national and local government.  Interestingly, and perhaps of greater concern, it also includes “strengthening patent pilot projects,  joint utilization of patents and collective management of patents… to strengthen the competitive advantages of industries.” (强化专利导航、专利协同运用、专利集群管理等工作…增强产业竞争优势).

Here is how I read the tea leaves on this announcement:

First, the references to China becoming an IP “strong country” , and not merely an IP “big country” is a new concept in the NIPS, and likely reflects the observations and approaches of former Commissioner Tian Lipu.  In fact, many observers believe that too much patenting, particularly patenting of a low quality, can be harmful to innovation. I have often noted in this blog that patent quality is a continuing negative side effect of China’s metric-driven approaches to innovation.  In addition, innovation is largely a local phenomenon – China’s efforts to become a strong innovative country this time will also include programs to make strong IP provinces and cities in China.

Second, the reference to IP utilization directly quotes the negotiated language of the Third Plenum and its commitment to “Strengthen the Utilization and Protection of IP” (加 强知识产权的运用和保护).  This was also something that former Commissioner Tian discussed as a positive outcome of that meeting.

Third, the reference to IP intensive industries is new to China’s strategic planning, and, as noted by Commissioner Shen, reflects the influence of the influential US government  2012 report on Intellectual Property and the US Economy.   Reference is also made by Commissioner Shen to IP intensive industries being low on resource demands and low polluting.

The legislative basis for the National IP Strategy is the China Science and Technology Promotion Law (Dec 2007).  Article 7 of that law provides that China will establish a NIPS, in order to promote innovation, encourage indigenous innovation (激励自主创新), and raise the utilization protection and management of IP.  This 2007 law was famous for codifying the concept of indigenous innovation, which elicited considerable concern at the time over potential discrimination against the foreign technology community.  This Action Plan introduces several new and useful concepts which, if implemented fairly, will benefit foreign and domestic investors alike.

 

 

Withering Problems in China’s Patent Drive? – The Latest from SIPO

SIPO’s six month report on patent filings, available on line in China shows some surprising data for the first six months of 2014.

Regionally, Jiangsu and Beijing are in the number 1 and 2 slots in terms of patent applications.  Both regions showed continued growth (slide 3).  Guangdong, however, showed a slight decline.  Anhui, Guangxi and Guizhou showed the most increase in patent applications in percentage terms (70-90%).  Interestingly, while invention patent applications increased by about 4% from domestic applicants, foreign applications were down about 11% (slide 9).  In general, increases in  Chinese-origin invention patents applications in China were not offset by decreases in utility model and design patents, with an overall decrease of 8 percent for Chinese versus a 2% overall increase for foreigners.

In terms of patent grants, amongst foreign countries, the United States showed an increase of 12% from the same period last year, while Japan and Germany (number 1 and 3, respectively amongst foreign filers), both showed declines of about 4.5%, as reflected in the following chart:

foreignpatentrates

In this chart, the orange and blue bars represent 2014 and 2013 respectively.  Japan, the USA , Germany, Korea and France are the first countries listed to the far left on the x axis.    The y axis reveals the number of granted invention patents in 2014.  The chart shows that patent grants were down for all three top foreign applicants for the first half of 2014 (by the percentages at the top of this graph). However, this could be due to drops in applications from several years prior.

The problem of low maintenance rates for Chinese-source patent applications also remains acute.  As I have previously blogged, China already shows lower patent maintenance rates than other IP-5 jurisdictions.  This report makes it clear that Chinese filers appear to be the predominant parties in China who prematurely curtail patent protection (p. 15).

patentmaintenance

The green line represents domestic patent filers; the orange line is foreign patent filers.  The x axis shows the year of the patent, through its 20th year, while the y axis shows percentage of patents filed.  The close-up image in the upper right corner is of SIPO’s own preparation.

The report also identifies Beijing as the city with the highest density of patents per capita (nearly 5,000 per million people).  Shanghai and Tianjin follow.  This further underscores that innovation is an urban phenomenon (page 17).  Guangdong also remained the main filer of PCT applications with nearly 6,000 applications — outpacing second place Beijing with about four times the number of applications (p. 25).

Some of the more dramatic changes are in utility model patents and design patents.  UMP applications from China dropped by 7.5% and design applications dropped by 28%.  The most dramatic drops were in non-service applications for UMP’s and in service inventions for designs (24.5% and 34.9% respectively).  However, foreign applications for UMP’s and designs continue to grow from a modest base (p. 29).   Non-service inventions still play a large role in China’s domestic utility model and design patent application portfolios (about 26.4% and 50.7% respectively).

 

In summary, the data shows continuing dramatic changes in China’s patent system, including shifting trends amongst domestic and foreign filers.  My guess is that the report shows the impact of an increased focus on invention patents by the government, and a decline in subsidies for utility model and design patents in key patenting regions.  The increase in service inventions for UMP’s is significant as it may show a shift to patenting in UMP’s for enterprises that actually practice the invention.   The rapid increase in regions like Anhui may be due to active government support in those regions.  The drops in patent filings for foreigners are surprising considering China’s continuing economic growth.  The report also underscores a predictable rise in China’s cities as centers of patenting activity.  Although individual PCT filers are not identified, the growth in PCT filings is probably to continued growth of companies like Huawei and ZTE from Guangdong.

December 11 in Beijing – International Program on Utility Model Patents

On December 11, SIPO, USPTO and other patent offices (Japan, EPO, Germany and Korea)  as well as companies and their counsel will be participating in an exciting international utility model program at the Changfugong Hotel in Beijing.  The free-of-charge program will cover both the protection and enforcement of UMP’s.  China’s UMP system has been the subject of some controversy due, in part, to its exponential growth, the vast predominance of Chinese ownership of UMP’s,  and the large damages that have sometimes been awarded in favor of Chinese patentees. This program will help shed light on the use (and abuse) of UMP’s, and compare China’s systems with those in other countries.