The Phase 1 IP Agreement: Its Fans and Discontents

How much will the IP Sections of the Phase 1 Agreement (the “Agreement”) with China change  IP strategies in China?   For the most part, the Agreement adds much less than its appearance might suggest.  Many of the important changes that the Agreement memorializes have recently been codified into law or set into motion for forthcoming codification.  There are some important prospective changes in the text, particularly regarding pharmaceutical patent protections and in civil and criminal enforcement.  If these changes are well-implemented, that could augur significant changes in the future.  Nonetheless, a cautious approach should be taken to these changes as well, as many of them have a long history of disappointing US rightsholders.  An additional problem with the Agreement is its reliance on administrative mechanisms that have a track record of not providing sustained protection for IP rights.

The IP-related sections are found in Chapter 1 (“Intellectual Property”) of the Agreement and Chapter 2 (“Technology Transfer”).  Chapter 1 is divided into several sections: General Obligations, Trade Secrets and Confidential Information, Pharmaceutical-Related Intellectual Property, Patents, Piracy and Counterfeiting on E-Commerce Platforms, Geographical Indications, Manufacture and Export of Pirated and Counterfeit Goods, Bad-Faith Trademarks, Judicial Enforcement and Procedure in Intellectual Property Cases, and Bilateral Cooperation on Intellectual Property Protection. Chapter 2 concerns Technology Transfer and is not divided into separate sections.

There are many concerning textual aspects of the Agreement.  For example, it is unclear to me why “Technology Transfer” was not considered an IP issue in the Agreement.  Additional ambiguities are supplied by inconsistent use of legal language as well as differences in the English and Chinese texts, both of which are understood to be equally valid (Art. 8.6).   A careful reading shows that in many cases the Agreement does not afford any new progress on particular issues, but merely serves as a placeholder on issues that have long been under active discussion (e.g., on post-filing supplementation of pharmaceutical data in patent applications).  In contrast to these provisions, however, there are several provisions that appear to break new ground, such as in consularization of court documents by foreigners.

Reactions from the dozens of people I spoke with about the Agreement in the US and China have been mixed.   One prominent Chinese attorney thought that Chinese IP enforcement officials were now much more likely to be responsive to US requests in forthcoming enforcement proceedings.  Several individuals thought that the Agreement would be a great stimulus to IP agencies and the courts in their enforcement efforts as well as in drafting new laws, regulations and judicial interpretations.  Many academics were perplexed by the unclear language in the Agreement.  Some experts shared my view that the Agreement places an undue emphasis on the wrong issues, such as punitive damages, administrative campaigns, and criminal punishment at the expense of compensatory civil compensation.  Due to the numerous errors and inconsistencies in the Agreement, many people speculated that the negotiators on the US side and/or the Chinese side may not have been adequately consulting with experts.  The administrative and Customs enforcement provisions were dismissed by many as show.  On the other hand, it did appear that the Chinese negotiators did rely upon their interagency experts.  Susan Finder, the author of the Supreme People’s Court (SPC) Monitor, told me that it was clear that the SPC (and likely the Supreme People’s Procuratorate [SPP]) provided input to the negotiating team.

Review of the Individual Sections and Articles

The trade secret provisions generally memorialize amendments already made to China’s Anti-Unfair Competition Law, including an expanded scope of definition of “operator” (Art. 1.3), acts that constitute trade secret infringement (Art. 1.4), as well as a shifting of burden of proof in civil proceedings where there is a reasonable basis to conclude that a trade secret infringement has occurred (Art. 1.5).  Interestingly, the United States asserts in this section that it provides treatment equivalent to such shifting of a burden of proof.  I am unaware of any nationwide burden-shifting in US civil trade secret proceedings.

The trade secret provisions also require China to provide for preliminary injunctions in trade secret cases where there is an “urgent situation”.   The use of preliminary injunctions to address early-stage trade secret theft has long been under discussion between the US and China.  This is an awkward hybrid of Chinese and English legal standards.   Generally the test in Chinese law for “action preservation”  as in US law for “preliminary injunctions” is whether there is irreparable injury arising from such urgent situation which necessitates provisional relief (See Sec. 101 of Civil Procedure Law)  An “urgent” situation which is not likely to cause irreparable injury does not require granting of a preliminary injunction.   China’s judicial practice currently permits the use of preliminary injunctions where there is a risk of disclosure of such confidential information (关于审查知识产权纠纷行为保全案件适用法律若干问题的规定, Art. 6.1).

The Agreement uses inconsistent nomenclature to describe preliminary injunctions.  The Chinese text does not refer to preliminary injunctions but refers to an overlapping concept of “action preservation.” Other provisions of the Agreement discuss “preliminary injunctions or equivalent effective provisional measures” (Art. 1-11).

Historically, Chinese judges have been highly reluctant to issue preliminary injunctions.  As Susan Finder has noted in an email to me, the language in the Agreement also does address the underlying structural problem that judges may be reluctant to give injunctions because they are concerned they will be found to have incorrectly issued them, and hence held accountable under the judicial responsibility system.  The utility of provisional measures is also quite different in the Chinese system than in the US.  China also concludes its court cases far more quickly than the United States, thereby providing more immediate relief, often without needing recourse to provisional measures if there is not an urgent need.

The Agreement also requires China to change its trade secret thresholds for “initiating criminal enforcement.” (Art. 1.7).   The Agreement does not specify what measures are to be reformed, such as the Criminal Law or Judicial Interpretations,  or standards for initiating criminal investigations by public security organs and/or the procuracy and State Administration for Market Regulation administrative enforcement agencies (See, e.g., 关于公安机关管辖的刑事案件立案追诉标准的规定(二)).  The issue of what constitutes “great loss” for calculating criminal thresholds has itself been the subject of discussion and changing standards over the years.

As mentioned in Susan Finder’s November 26, 2019, blogpost, a judicial interpretation on trade secrets is on the SPC’s judicial interpretation agenda for 2020, scheduled for issuance in the first half of the year.  Additional guidance may be expected from the procuratorate, SAMR, and Ministry of Public Security to address criminal enforcement issues.

Consistent with the Foreign Investment Law, the Agreement also prohibits government authorities from disclosing confidential business information (Art. 1.9).

The Pharmaceutical-Related Intellectual Property section of the Agreement requires China to adopt a patent linkage system, much as was originally contemplated in the CFDA Bulletin 55, but subsequently did not appear in the proposed patent law revisions of late 2018.   Linkage will be granted to an innovator on the basis that a company has a confidential regulatory data package on file with China’s regulatory authorities, and where a third party seeks to rely upon safety and efficacy information of another party.  The drafters seem to be describing a situation similar to an Abbreviated New Drug Application (ANDA) in the United States under the US Hatch-Waxman regime.  According to US procedures, a generic company needs to demonstrate, inter alia, bioequivalent safety and efficacy to an innovator’s pharmaceutical product in order to obtain regulatory approval.  Notice is thereafter provided to the patent holder or its licensee of the application for regulatory approval to address the possibility that the generic company may be infringing the innovator’s patent(s).   China’s proposed linkage regime also extends to biologics (Art 1.11).  Taiwan has also recently introduced a linkage regime.

The Agreement requires an administrative or judicial process for an innovator to challenge a generic company’s market entry based on the generic infringement of a patent held by the innovator  It omits a requirement to amend China’s patent law or civil procedure law to permit a court to act when there is an “artificial infringement” by reason of approval of an infringing product for regulatory approval, notwithstanding the lack of any infringing manufacturing, use or sale of the product prior to its introduction into commerce in China. The lack of a concept of “artificial infringement” could make it difficult to implement a civil linkage regime in China.  In fact, the US Chamber of Commerce and the Beijing Intellectual Property Institute (BIPI) had specifically recommended revising Article 11 of China’s patent law to address this issue.  BIPI had noted in its report that “Lacking of artificial infringement provisions results in lacking [sic] of legal grounds for the brand drug company to safeguard their legal rights.” This provision likely reflects continuing turf battles between the courts and China’s administrative IP agencies in enforcing IP rights.

The Agreement also does not reference regulatory data protection obligations, which was one of China’s WTO obligations, nor does it reference China’s efforts to adopt an ‘orange book’ similar to the US FDA’s to govern patent disclosures and regulatory data protection as recommended by CFDA Bulletin 55.  This section also reiterates in general terms a commitment by China to provide for post-filing supplementation of data in pharmaceutical patent matters, which has been a long-standing request of the US reflected in several JCCT commitments.  Permitting post-filing supplementation is necessary to support a linkage regime, as, in the absence of any meaningful patent grants, China’s patent linkage commitments would be a hollow outcome.

The  Patent Section continues the focus on pharmaceutical IP by providing for patent term extension due to regulatory delays for pharmaceutical patents, including patents methods of making and using pharmaceutical products (Art. 1.12).  The draft patent law already provides for patent term extension.  The additional encouragement is welcome, however.

There are no provisions in this Agreement addressing non-pharmaceutical patent concerns.   Companies that may have concerns about standards-essential patent prosecution or litigation, low-quality patents, patent trolls, procedures involving civil or administrative litigation involving patents or Customs enforcement of patents, China’s increasing interest in litigating global patent disputes for standards-essential patents, the relationship between industrial policy and patent grants, design patent protection, China’s amending its plant variety protection regime and acceding to the most recent treaty obligations, etc.,  will find that their issues are not addressed.

Section E on “Piracy and Counterfeiting on E-Commerce Platforms” addresses “enforcement against e-commerce platforms”.  By its terms, it does not specifically discuss e-tailers, online service providers or other third parties.

The text apparently seeks to clarify and update the E-Commerce Law by eliminating the liability of platforms for erroneous takedown notices submitted in good faith,  extending mandating a time period of 20 days for rightsholders to file an administrative or judicial response to a counternotification, and penalizing counter-notifications taken in bad faith.

Article 1.14 specifically addresses infringement on “major” e-commerce platforms. As part of this commitment, China also agreed to revoke the operating licenses of e-commerce platforms that repeatedly fail to curb the sale of counterfeit and pirated goods.  It is unclear from this text if this provision is limited to “major” platforms as the title suggests (in both English and Chinese), or to platforms of any size as the Article itself states.  In addition, it is unclear what kind of “operating license” is involved: the business license, or a license to operate an internet business.  Whatever license is involved, this remedy has theoretically been available for some time for companies that sell infringing goods.  As I recall, past efforts to use license revocations to address IP infringement had little success.  Smaller enterprises might also easily circumvent the license revocation by establishing a new business incorporated or operated under their name or that of a relative or friend.

Article 1.14  notes that the United States “is studying additional means to combat the sale of counterfeit or pirated goods.”  According to news reports, the USTR has threatened to place Amazon on the  list of “notorious markets.” Since the publication of the Agreement, Peter Navarro at the White House has also threatened to crack down on US platforms due to the increased pressure of the trade deal to “combat the prevalence of counterfeit or pirated goods on e-commerce platforms.”

The Geographical Indications (GI) Section (F) continues long-standing US engagement with China with respect to its GI system.   The Agreement ensures that multi-component terms that contain a generic term will not be protected as a GI, consistent with prior bilateral commitments.  China will also share proposed lists of GI’s it exchanges with other trading partners with the US to help ensure that generic terms are not protected as GI’s.  The competing GI systems of the United States and China have been the subject of decades of diplomacy.

Section G requires China to act against counterfeit pharmaceuticals and related products, including active pharmaceutical ingredients (API) (Art. 1.18).  It is unclear if these APIs need to be counterfeited to be seized, or if they should be liable for seizure because they are low quality or perhaps contribute to the manufacturing of counterfeit goods.  The issue of API’s contributing to the production of counterfeit medicine has long been a discussion point between the US and China and had been the subject of JCCT outcomes.

China is also required to act against “Counterfeit Goods with Health and Safety Risks” (Art. 1.19).  The text does not explicitly address unsafe products that do not bear a counterfeit trademark or the enforcement agencies that will implement this commitment.  Generally, the burden of enforcing against counterfeit products belong to trademark enforcers, rather than enforcement officials involved in product quality or consumer protection violations.  However, the National Medical Products Administration and/or the Ministry of Industry and Information Technology are specifically named as enforcement agencies in a related provision to this one (Art. 1.18).

This section also seeks to address “Manufacture and Export” of these goods, including “block[ing]” their distribution (chapeau language).  It does not elaborate on how such cross-border steps will be undertaken – such as by Customs agents, law enforcement authorities, cooperation between food and drug regulatory agencies, or through bilateral or multilateral law enforcement cooperation.

The failure to clearly designate a responsible agency in these commitments can lead to problems with enforcing IP rights.  The academic literature, including that of Prof. Martin Dimitrov,  has suggested that when multiple agencies have unclear and overlapping IP enforcement authority, they may be more inclined to shirk responsibility.  I hope that coordination mechanisms for these and other outcomes have been well-negotiated to address this issue.

Article 1.20 addresses the destruction of counterfeit goods by Customs, in civil judicial proceedings and in criminal proceedings.    Article 1-20(1) requires Customs to not permit the exportation of counterfeit or pirated goods  The Article does not define what is a “counterfeit” good, or whether manufacturing a product for export may constitute infringement by a third party that holds the right in China.

Article 1.20(2)(d) requires the courts to order that a rightsholder be compensated for injury from infringement in civil judicial procedures.

The Agreement requires that materials and implements which are “predominantly” used in the creation of counterfeit and pirated goods shall be forfeited and destroyed.  This “predominant use” test is derived from the TRIPS agreement. It regrettably provides a basis for goods that are demonstrated to have a less than dominant use (e.g.,  49.9 percent) to avoid forfeiture and destruction.   A better test might have been to encourage China to use a “substantial use” test, or a test based simply on use in commercial-scale counterfeiting and piracy.

Destruction of counterfeit goods in administrative trademark proceedings is not discussed in this Agreement.

Section H addresses bad faith registration of trademarks.  No specific action is required by China in the text.  However, certain steps have already been undertaken by relevant agencies to address this important issue.

Section I requires the transfer of cases from administrative authorities to “criminal authorities” when there is a “reasonable suspicion based on articulable facts” that a criminal violation has occurred.  “Criminal authorities” are not defined.  This could include the Ministry of Public Security and/or the Procuracy. The intent behind this provision is likely to ensure more deterrent penalties for IP violations and avoid the use of administrative penalties as a safe harbor to insulate against criminal enforcement.  This problem of low administrative referrals is an old one.  In bilateral discussions of the last decade, we would often inquire about the “administrative referral rate” of China, which is the percentage of administrative IP cases that were referred to criminal prosecution, which has historically been quite low. See National Trade Estimates Report (2009) at pp. 101-102.  However, if administrative agencies are required to transfer cases at an earlier stage to the Procuratorate, it will have little impact unless the prosecutors accept the case and initiate prosecutions.  A loophole in this text may be that it does not mandate that a case is accepted for prosecution after it has been referred by administrative agencies, thereby risking non-action by prosecutors.

Article 1.27 requires China to establish civil remedies and criminal penalties to “deter” future intellectual property theft or infringements.  These requirements are also found in the TRIPS Agreement.  The Agreement conflates the role of civil remedies and criminal penalties and their deterrent impact.   Civil remedies should, at a minimum, deter or stop (制止,阻止) the defendant from repeating the infringing act, whereas criminal remedies might provide broader social deterrence (威慑 as in nuclear “deterrence”). It is unclear from both the English and Chinese text what or who is being deterred.

The Agreement also requires China to impose penalties at or near the maximum when a range of penalties is provided and to increase penalties over time.

These provisions regarding criminal enforcement generally reflect concerns articulated in the unsuccessful WTO IP case the US brought against China to lower its IP criminal thresholds (DS362).  However, the lost lesson from that case may be that criminal thresholds are not as important as other factors in creating deterrence. Prosecutors may still decline to prosecute cases.  Law enforcement may also lack adequate resources. Judges may also have discretion in imposing sentences.  The calculation of the thresholds themselves, whether based on illegal income or harm caused, may be difficult to assess.  Simply increasing criminal cases through lower thresholds may not be enough to create a healthy IP environment.

The Agreement does nothing to advance procedural safeguards to criminal defendants in IP cases.  China’s IP history demonstrates that foreigners are often named as defendants in serious civil or criminal cases. The first significant criminal copyright case in China involved American defendants distributing counterfeit DVD’s.  More recently, patent preliminary injunction cases were granted in favor of two different Chinese entities in two cases against American defendants (Micron and Veeco). The largest patent damages case involved the first instance decision in Chint v. Schneider Electric (330 million RMB).  The NDRC investigation of Qualcomm similarly pioneered high antitrust damages in an IP licensing matter.  In many instances,  the final decisions in pioneering cases where foreigners lost were also never published.  Given this track record, we might not want to be advocating for harsher enforcement in the absence of greater commitments to due process and transparency.

The Agreement also pioneers by providing for expeditious enforcement of judgments (Article 1.28).  This is a welcome step and should also be supported by additional transparency in this area.

Over the past several years, there has been an increasing incidence of multijurisdictional IP disputes, particularly in technology sectors.  The Agreement does not address the problems arising from these cases.  It does not mention that China does not enforce US judgments, although the US has begun enforcing Chinese money judgments, nor does it address the practice of many Chinese courts to fast track their decision making to undercut US cases.  Generally, US lawyers cannot conduct discovery in China and formal international procedures to collect evidence are slow.  Both Chinese and US courts often rarely apply foreign law, even when such law may be more appropriate to resolution of a dispute.  Based on a recent program I attended at Renmin University, it also appears likely that Chinese courts will issue their own anti-suit injunctions soon.  The Agreement also does not require anything further in terms of judicial assistance in gathering evidence.  These are areas for potential cooperation as well as confrontation.  Indeed Berkeley and Tsinghua have held a continuing series of conferences on this topic.  At the recent Renmin University conference, British, German, US and Chinese judges exchanged their views on these topics in a cordial and productive manner.  It is my hope that this topic is an area of collaboration, not confrontation.

Regarding copyright, Article 1.29 provides for a presumption of ownership in copyright cases and requires the accused infringer to demonstrate that its use of a work protected by copyright is authorized.  It would also have been helpful if the US and China had discussed the problem of title by title lawsuits in China, which has also increased costs of litigation through requiring multiple non-consolidated lawsuits for one collection of songs or other works.  One Chinese academic confided in me that the current practice of requiring that each individual title be the subject of an individual lawsuit was not the original practice in China’s courts and that the old practice was more efficient for both the courts and rightsholders.

The Chinese and English texts of the Agreement also differ to the extent that the English text refers to the US system of related rights, while the Chinese next refers to the Chinese (and European system) of neighboring rights.

In terms of civil procedure, Article 1.30 permits the parties to introduce evidence through stipulation or witness testimony under penalty of perjury, as well as requiring streamlined notarization procedures for other evidence.  China generally lacks a concept of authenticating a document under penalty of perjury.  The impact of this provision is therefore unclear.

Article 1.31 similarly permits expert witness testimony.  Expert witnesses are already permitted under existing Chinese law, although the trend appears to favor greater use of such expert witnesses.  Moreover, Chinese courts have been expanding the role of expert technology assessors to provide support for technologically complex cases.  The exact impact of this provision is also uncertain, although we can expect further developments from the courts in this area in the future, particularly in anticipated guidance concerning evidence in IP cases.

Article 1.35 requires that China adopt an action plan to implement the IP chapter of the Agreement.  The Agreement also supports reinstatement of cooperative relationships with the USPTO, the USDOJ and US Customs.

Chapter 2 addresses US allegations regarding forced technology transfer.  It prohibits China from seeking technology transfer overseas consistent with its industrial plans subject to the qualifier that such plans  “create distortion.”  Distortion is not defined.

Other provisions prohibit require technology transfer as a condition of market access, using administration or licensing requirements to compel technology transfer and maintaining the confidentiality of sensitive technical information.   These are consistent with the recently enacted Foreign Investment Law and other legislation.

The Technology Transfer provisions do not address whether the provisions that were removed from the TIER  are now governed by China’s Contract Law and proposed Civil Code provisions on technology transfer contracts.  Clarity on this important issue could help support the autonomy of parties to freely negotiate ownership of improvements and indemnities.  The Agreement also does not address the regulation of licensing agreements by antitrust authorities or under China’s contract law or proposed civil code for the “monopolization” of technology.  The Civil Code provisions are now pending before the NPC and could have appropriately been raised as “low hanging fruit” in this Agreement.  Antitrust concerns in IP had also been raised by several parties in the 301 report concerning IP concerns (at pp. 180-181).  Hopefully, these issues will be decided in the Phase 2 Agreement.

Concluding Observations

It is often difficult to discern the problems that the Agreement purports to address and/or the appropriateness of the proposed solution(s).    In some instances, it also appears that USTR dusted off old requests to address long-standing concerns that may also not have high value in China’s rapidly changing environment. For example, it is unclear to me if commitments in the Agreement regarding end-user piracy (Art. 1.23) by the government are as necessary today when software is often delivered as an online cloud-based service and not as a commodity.  The leading software trade association’s position in the 301 investigation did not mention end-user piracy as a top-four priority (p. 4). Moreover, China had already been conducting software audits for several years and piracy rates had been declining.  The commercial value of these commitments is also uncertain under China’s recent “3-5-2 Directive”, where the Chinese government is obligated to replaced foreign software and IT products completely with domestic products within the next three years.  The issue does have a long and sad history. The U.S. Government Accountability Office had calculated 22 different commitments on software piracy in bilateral JCCT and economic dialogues between 2004 and February 2014.

Among the more anachronous provisions of the Agreement are the five separate special administrative IP campaigns that the Agreement mandates.  The general consensus from a range of disciplines and enforcement areas (e.g., IP, counterfeit tobacco products, air pollution and taxation) that campaigns result in “short term improvements, but no lasting change.” 

The situation was predictable: “late-term administrations may … be tempted to condone campaign-style IP enforcement, which can generate impressive enforcement statistics but have limited deterrence or long-term sustainability.” The Administration took this one step further, with enforcement campaign reports timed to be released during the various stages of the Presidential campaign.   Here are some of the administrative campaign reports we can expect, with some corresponding milestones in the Presidential campaign season:

March 15: China is required to publish an Action Plan to strengthen IP protection and to report on measures taken to implement the Agreement and dates that new measures will go into effect. (Art. 1.35)

May 15: China is required to substantially increase its border and physical market enforcement actions and report on activities by Customs authorities within three months (or by April 15, 2020) (Art. 1.21).

May 15: China is required to report on enforcement activities against counterfeit goods that pose health or safety risks within four months and quarterly thereafter (Art. 1.19).

June 15: China is required to report on enforcement at physical markets within four months and quarterly thereafter (Art. 1.22).  This report will coincidentally be released at the same time as the Democratic Party Convention.

August 15: China is required to report on counterfeit medicine enforcement activity in six months and annually thereafter (Art.. 1.18).  This report will coincidentally be released approximately one week before the Republican Convention.

September 15: China is required to report on third party independent audits on use of licensed software within seven months, and annually thereafter (Art. 1.23).

Also, a quarterly report is required regarding enforcement of IP judgments (Art. 1.28).

There is no explanation provided in the Agreement for the timing of each of these reports, their sequential staging or why the usual date for release of government IP reports (April 26) is not being used.

There are many other important IP areas not addressed in the Agreement.  The Agreement offered a missed opportunity to support judicial reform, including China’s new national appellate IP court, the new internet courts as well as local specialized IP courts at the intermediate level.  The Agreement also entails no obligations to publish more trade secret cases or to publish all IP cases as well as making court dockets available to the public, including data on enforcement of IP judgments.  Due to the relatively small number of civil and criminal trade secret cases and recent legislative reforms, the greater publication of cases would be very helpful in assessing the challenges in litigating this area and China’s compliance with the Agreement. The new appellate IP Court will be especially critical to the effective implementation of the important changes in China’s trade secret law as well as the implementation of the patent linkage regime.  The patent linkage provision also similarly neglects to describe the critical role of the courts in an effective linkage regime.  The Agreement to a certain extent memorializes the ongoing tensions between administrative and civil enforcement in China and regrettably reemphasizes the role of the Chinese government in managing IP through campaigns and punishment.

The trade war afforded a once in a lifetime opportunity to push for market mechanisms in managing IP assets through a reduced role for administrative agencies and improved civil remedies in China’s IP enforcement regime.   A high cost was paid in tariffs to help resolve a problem that the Administration estimated, or exaggerated, to be as high as 600 billion dollars.   The reforms in the Agreement hardly total up to addressing a problem of that magnitude.  While the continued emphasis on administrative agencies and limited focus on civil remedies is disappointing, there are nonetheless many notable IP  reforms in the Agreement in addition to legislative reforms already delivered.  I hope that a Phase 2 agreement will deliver additional positive changes.

Please send me your insights, comments, criticisms or corrections!  Happy Spring Festival!

 

Please send in any comments or corrections!

China’s “Naked Bolar” and the Tapering Momentum to Protect Innovative Pharmaceuticals

There have been several important developments in recent weeks involving pharmaceutical IP protection in both mainland China and Taiwan.  Based on these developments, mainland China appears to be slowing its momentum to afford better IP protection to innovative pharmaceutical products (perhaps as a negotiating position in the Trade War), while Taiwan is pursuing a more protective approach.

On August 26, 2019, China’s National People’s Congress adopted the new Drug Administration Law (“DAL”), which will take effect on December 1, 2019. The DAL was passed after almost two years of review and deliberation.  The legislative history is set forth in the  NPC Observer.    The new law addresses some important issues involving counterfeit and substandard medicines.  However, it does little to improve the IP regime for innovative medicines.

As noted in this blog, there had been expectations that certain IP issues such as patent linkage and regulatory data protection might be reflected in the DAL and especially pending IP legislation.  In the latest draft of the Chinese Patent Laws presented to the State Council in December 2018, no detailed improvement mechanisms of the patent examination/granting system were included with respect to pharmaceutical patents were included.   It was hoped that a linkage system would emerge as part of a package of legal reforms to resolve the US-China trade war or to implement as earlier CFDA policy decision.

China has long adopted one small part of a modern IP/regulatory approval mechanism to encourage its generic sector.  China’s “Bolar Exemption” which was incorporated into the 2008 Patent Law amendments (Article 69), exempts from infringement producing, using, or importing patented drugs or patented medical apparatus and instruments, for the purpose of providing the information required for administrative examination and approval.   This type of Bolar Exemption has often been called a “naked Bolar exemption” as it provides for the erosion of the innovator’s patent rights to exempt from infringement research to introduce competing generic drugs.  It is “naked” as it it does not compensate the innovator for the losses of the patent term caused by this exemption nor for the resultant instability to any marketing exclusivity the innovator may face by reason of accelerated challenges to the patents it holds.   One way of compensating the innovator for such erosion of the term is to extend it on the “back end”  before its expiration.  A 2019 draft of the patent law amendments sought to correct this lack of a patent term extension.  Another way of providing for greater stability would be establishing a patent linkage regime which “links” marketing authorization with patents that read on the relevant pharmaceutical product or successful challenges to its exclusivity.

The current naked Bolar regime has several adverse consequences. The most obvious and significant is that it does not provide legal support for approval and marketing of generic drugs that are proven not to infringe an innovator’s patent rights, as a “patent linkage” regime might.   A Bolar exemption only addresses research intended to support regulatory approval and is not an exemption from infringement.  To the extent that Chinese regulatory authorities may be relying on the Bolar exemption to approve the marketing of infringing generics, such an effort is legally misguided.  A naked Bolar is not a substitute for an IP and regulatory regime that balances the needs of generics and innovators.  As Amcham noted in its comments on the original Bolar exception provision: “Effective IP protection for pharmaceutical products requires notice, transparency, and time to resolve legal issues prior to the approval of a generic product.” Such protections are not afforded under the existing regime and could be with an effective linkage regime.

Another adverse consequence is that it erodes the term of the patentee without the kind of bargaining that went into the US Bolar exemption, creating a kind of sui generis exemption from infringement for additional acts of research to facilitate product introduction which is not otherwise permitted under the patent law.  To the extent that the naked Bolar expands research exemptions to production and warehousing of an infringing generic pharmaceutical, and does not adequately limited or compensate the rights holder,  it may violate the terms set forth the in the WTO decision EU v Canada (DS/114) where the WTO noted that the Canadian Bolar exception could only apply to regulatory review where  “no commercial use is made of resulting final products.” (line 7.45).   The Bolar exemption should not be used to bootstrap a broader researcher or pre-marketing exemption.  As former Chief Judge Rader noted of the US patent law in discussing research exemptions: “the Patent Act leaves no room for any de minimis or experimental use excuses for infringement. Because the Patent Act confers the right to preclude ‘use,’ not ‘substantial use,’ no room remains in the law for a de minimis excuse.”  (Embrex v. Service Engineering, 216 F.3d 1343 (Fed. Cir. 2000).

Finally,  the “naked Bolar” sends a wrong signal by suggesting that China is not fully committed to developing an innovative pharmaceutical sector, despite China’s considerable human resources, investments, rhetoric and planning to the contrary.

Judging by recent generic drug approvals in China, there may be decreased momentum on the ground to protect innovative pharmaceuticals through limiting regulatory approval during the pendency of relevant patent protection.  Several generic versions of innovative pharmaceutical products have recently been approved by China for different manufacturers at the time of these recent DAL amendments, including Azilsartan, a product originally developed by Takeda that addresses hypertension, and is now produced by Zhaoke Pharma, a wholly-owned subsidiary of Lees Pharma. Azilsartan and Esketamine (a Janssen product for treatment-resistant depression) are also now being produced by Jiangsu Hengrui Medicine.  Pomalidomide,  a Celgene-developed product for treating multiple myeloma,  is produced by Chiatai Tianqing Pharma.  Bendamustine, a Teva product for  chronic lymphocytic leukemia, is being produced by Nanjing Simcere Pharma.  These products have obtained approval priority from CFDA and are expected to be approved by the time the new DAL comes into effect.  As is evident from this list, some products (Azilsartan) are being produced in generic form by more than one manufacturer.  This phenomenon of multiple competing generic manufacturers who may not have had to pursue patent challenges to the innovator to obtain marketing approval (as in a linkage regime), could also result in competition amongst generic manufacturers without strong incentives for follow-on innovation to the original compound.

By comparisons to this apparent backsliding in Mainland China, the Taiwan Executive Yuan has passed the bill to enact the new Pharmaceutical Affairs Act (“PAA”) on January 31, 2018. Patent linkage was specifically approved in Chapter 4 of the new PAA. Previously, in 2018, the Taiwan Food and Drug Administration had issued two drafts of the Enforcement Rules for Patent Linkage. Further, in May 2019, the Taiwan Ministry of Health and Welfare and the Ministry of Economic Affairs held a public hearing to clarify the intent to extend the patent linkage system in PAA to biosimilars. In July 2019, the Ministry of Health and Welfare officially announced that it is considering adding transitional clauses to exempt biosimilars which have obtained official clinical trial approvals during the implementation phase of patent linkage system in Taiwan.

While there appears to be weakening momentum for patent linkage, the DAL does change the regulatory regime for counterfeit medicines and vaccines.  In an apparent effort to address public health needs, the DAL, as revised, modifies the definition of counterfeit drugs.   Under the prior version of the DAL, unapproved imported drugs are deemed as counterfeit. Although the new DAL still prohibits importing and selling of unapproved drugs in large quantity, the importation of small amounts of drugs which have been legally marketed in other countries for urgent clinical needs is exempted under the new DAL, subject to other relevant laws and regulation.  The DAL also seeks to strengthen regulation over vaccine manufacturing, most likely in response to the vaccine scandal of 2018. Under the DAL, out-sourcing of vaccine manufacture is strictly prohibited. The punishment on manufacture and supply of counterfeit vaccine has increased from 5 times of revenue to 30 times of illegal proceeds.  The vaccine Marketing Authorization Holder (“MAH”) must meet certain standards set out in the new Vaccine Administration Law. The regulators will also establish a national traceable platform for the production, transportation, and storage of vaccines.  Lastly, new mechanisms such as the MAH system, defective drug recall system, filing system of clinical trial institutions will be implemented.  The existing “Good Manufacturing Practice for Pharmaceutical Products” (GMP) certification system for drug manufacturers and the “Good Supply Practice for Pharmaceutical Products (GSP) certification system for drug suppliers will be canceled.

Looking at all of the various legislative and regulatory developments in Mainland China and Taiwan, it is hoped that mainland China will ultimately find the right balance of incentives to encourage the further development of its innovative pharmaceutical sector, much as the US did with its Hatch-Waxman Act, while continuing to develop a secure supply of high quality innovative and generic products.

This article was written by Mark A. Cohen and Angel Liu.

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.