The Good Faith Elephant in the IP Trade War

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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.

 

Ox Herding, Industrial Policy and China IP

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Many Westerners have little sense of how deeply industrial policy is built into the China’s intellectual property system.   In the past, this blog has reported on some of the industry focused plans, such as the biotechnology plan and the development and execution of the National IP Strategy. China has also woken up to the problem of its plans being misunderstood.  It recently released an animated film  encouraging foreigners to study the new 13th national Five Fear Plan (十三五), presumably to increase understanding of this newly released plan.

I recently participated in a panel on industrial policy and intellectual property at the 2016 Fordham IP Conference, where we discussed the role of industrial policy in antitrust, copyright and patent policy in China.   In my search for a new way of approaching this issue, I turned to another Chinese tradition regarding dispelling illusion to present to the audience how foreigners approach this issue.

The 10 Zen Ox Herding Pictures are useful metaphors for stages of awareness of industrial policy in IP, much as they are for Buddhist enlightenment, from finding the ox to enlightenment where the ox and self disappear.  In the West, the ox herding pictures were popularized through Cat Stevens’ album “Catch Bull at Four, ”  which had several songs related to Buddhist meditation and practice.  I think the analogy to dispelling illusion holds.

Here are my four stages of riding the “ox” of industrial policy in IP in China: unawareness of the ox; seeing the tail; understanding the ox; and riding the ox.

The first stage in understanding IP and industrial policy is unawareness.

Some individuals after a few visits to China and seeing the incredible growth and dynamism of the economy, believe that China is a fully market-oriented economy and may remain ignorant of how much China’s economy continues to be planned.   Denial is not unawareness, for an individual in denial is unlikely to notice the presence of industrial policy.

In fact, foreigners that are first introduced to industrial planning in China because of the incredible growth in China, much of it due to market mechanisms.  Notwithstanding this growth, the United States doesn’t have patent quotas, subsidies, early warning systems, administrative enforcement operating on annual campaigns, with an extensive administrative IP enforcement system – to name but a few “distortions” from letting markets govern the protection of intellectual property rights.  Moreover, as my colleague Eric Priest pointed out at the Fordham Conference with respect to copyright licensing, and as Prof. Breznitz has reported with respect to innovation, much of the dynamism in China’s economy has stemmed from places where the market, and not the state has governed the choices that enterprises make.

What, I believe, distinguishes Chinese industrial policy is its pervasiveness.   As an experiment in private practice a few years ago, I once copied and summarized several articles in a Chinese government affiliated publication about China’s patent holdings in a highly competitive ICT field.  The articles described several US companies as having a “monopolistic” control of the technology through their patents and described how China would develop competing technologies.  I send the articles to one of the fortune 100 US companies mentioned in the article.  One of their senior lawyers called me up suggesting that I must have infiltrated a Chinese competitors’ computer network.  “No”, I advised “in fact you too can subscribe to this government publication for about 10 USD per year.”

The next stage is seeing the tail.

Often the tail of the ox, but not its full body, is perceived first.  The tail may be manifested by actions of a Chinese partner or the Chinese government that seem contrary to market policies, but are probably mandated by government directives.   An example might include China’s failed launch of a home-grown 3G standard.  The tail gives us a glimpse of what is likely to be a much larger body.

Many companies at this stage may view industrial policy issues solely as government relations issues, and they may handle many IP issues as non-legal matters.   A foreign company might link up with large, well-connected companies thinking that a major Chinese company will offer some measure of protection or good “relations” (关系) for their business.   They may also have a large government relations or media relations team.   The company recognizes that the government plays an outsized role in China’s IP environment, but they have not yet judged how much that role might affect their plans.  Because of this focus on government relations, companies may also face risks involving compliance and/or legal ethical standards as they try to navigate their understanding that the Chinese government accomplishes its goals via ‘relations.’

A few years ago, I met with a company that was concerned about rampant patent infringement of its high tech steel alloy product.  They had partnered with a major SOE in a JV to manufacture market this product in China, and were surprised that the SOE seemed unable to stop the infringing activity.  I asked them if they had looked up any of the industrial policies surrounding this product, national or local.  They said they were unaware of any such policies, but instead relied on their SOE partner.  In a matter of minutes, we discovered several national and local policies Chinese plans to develop technologies and products in their field market.  I told them that it was my impression that they, in a sense, were targeted, before they ever entered into a venture in China.  The company had now seen the tail of the ox —  it was up to them now to decide how to best steer their activities in light of the national focus on their technologies.

The chief IP counsel of a European company recently told me of her client’s legal problems: “I feel like we are just seeing an iceberg.  What we are seeing with the courts and regulatory agencies is only a small part of the story.”  This lawyer was concerned about handling of patent validity determinations and regulations for her company’s products.  The tip of the iceberg that this lawyer in the form of interference with its actions, was in fact the tail of the ox, where industrial policy concerns may be affecting legal and policy decisions.

The third stage is understanding the ox.   Jeff Immelt of General Electric was one of the few CEO’s to recognize the importance of studying China’s five year plans.   Understanding the ox is not a simple task.  The plans are wide and far reaching, and extend deeply in the Chinese political system.   IP and innovation related plans, for example, also encompass areas such as talent development, subsidies for IP filings, government training, foreign cooperation and collaboration, public awareness, standards for civil service promotion, amongst other areas.    Properly understanding the ox means one needs to develop appropriate IP, government relations, media relations and related strategies based on how China plans and allocates resources.

Sometimes understanding the ox may mean abandoning certain pre-conceived legal ideas.  Generally, most western lawyers look to the law as written as their principle guide for planning a company’s behavior.  All lawyers should also look at the law as applied – recognizing that certain laws or provisions are likely to be actively enforced and have a more dramatic impact that statutory drafting may suggest, as they are incorporated into state or agency planning.  The numbers China  collects for planning and evaluation may tell a different tale from foreign perceptions of China’s IP system.  Whether or not they are fully accurate, they are often helpful to foreign positions, and they are the numbers that determine Chinese policy.

Being able to engage Chinese counterparts in the terms by which they could be useful to you or officials themselves are being evaluated is also helpful in advancing a company’s goals.   Some of the most remarkable discussions I have had with Chinese IP agencies have involved their plans; in most cases officials were quite familiar with their IP plans and were able to tell me their goals for patents per capita, PCT filings, copyright registrations, trademark filings, etc.  Increasingly those IP plans have also included specific goals for IP commercialization.   Interestingly, most plans have not adequately considered how to calculate trade secret protection in their planning matrices.

The last stage is riding the ox.  Once the ox is perceived and accepted as part of one’s business activity in China, it is a presence that can no longer be ignored.  Successful companies recognize that they will never tame the ox.  Instead they must learn to incorporate the ox into their IP strategies, so that they maximize their advocacy and effectiveness in the Chinese market.  Examples of this strategy may be Qualcomm’s recent efforts to invest in China and leverage its settlement with NDRC to obtain additional licensing income.  Other companies have also found that by teaming up with Chinese regulatory authorities, their perceived adversary of the regulatory state can often be an important ally.

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.

 

The Other Chinese Patent Development: China’s Autumnal Patent “Hook”

It is 2012, and China’s State Intellectual Property Office (“SIPO”) has once again released its end of the year data on patent filings for the year.  While patent data and scientific citation data suggest that China is on the cusp of becoming an innovative economy, there is another trend that has subsisted for several years:  China’s autumnal upward patent “hook.”

As I have remarked in several conferences during the past two to three years, the data suggests that if patents are a surrogate for innovation activity, one of the most significant factors in China’s innovation efforts are the time of the year:  China innovates in the fall.   February, however, appears to be a slow month for creativity, perhaps due to lack of external pressure (government subsidies, quotas), but also due to the hiatus caused by the lunar new year and the 28 day month. Continue reading