Translation of Draft Patent Law Available

Thanks to He Jing of the Anjie Law Firm, attached please find an unofficial line-by-line translation of the recently released Patent Law Amendments 2nd reading.   Comments are due August 16, 2020.

Some highlights of this draft:

Partial Design Protection

Article 2 adds language back in to allow partial design protection.  This is a welcome development.  Article 42 also maintains the earlier draft’s extension of the duration of the design patent to 15 years.

Patent Abuse

Article 20 clarifies that the abuse of patent rights to exclude or restrict competition constituting a monopoly shall be dealt with under the anti-monopoly law.  The AML is itself under revision.

Good Faith/Public Interest

Article 20 continues to require “good faith” in patent filings and the exercise of patent rights, an important concept borrowed from the Trademark Law revisions which is having an increasing substantive impact.  The limitation that patents shall not be “allowed to harm public interests” raises similar concerns to me to the recently proposed amendments to the Copyright Law, about the definition of “public interest.”

Pharma Issues – Patent Term Restoration and Linkage

The notices of the NPC regarding the draft law, state that pharma-related IP issues were drafted to implement ‘”trade agreement(s).”   These are reflected in proposed Article 42 which provides for patent term restoration.  This draft removes the requirement of the “synchronous” launching of marketing approval outside of China with approval in China in order for patent term restoration to be granted.

Article 75 also sets forth an outline for a patent linkage regime, and calls for the drafting of more detailed measures to further implement the provisions.  Under this proposal, the innovator challenges a generic applicant for marketing approval within 30 days of the announcement of the application.  If the patentee does not file a lawsuit, a generic company may also request a determination from the courts or patent office of non-infringement based upon the China Patent Information Registration Platform for Listed Drugs.  A court or administrative procedure on patent infringement should render its decision within 9 months.  This draft lacks an incentive provision for a generic to successfully challenge an innovator through granting of a first generic marketing exclusivity due to a successful challenge to the patents. This skeletal section is also drafted as an addendum to the statutory exemptions to infringement, which appears to be an awkward placement.

Damages and Liability

Joint liability of Internet service providers for patent infringement has been removed.

Minimum statutory damages of RMB 100,000 has also been removed.  Statutory damages are capped at 5 million RMB.  Quintuple punitive damages up to 5 times remain from the prior draft.   The statutory damage maximum increases to RMB 5 million (Art. 71). In addition to the continuing focus on increases in damages, this draft also continues the momentum for a larger role for patent administrative enforcement.

The extension of the statute of limitations to three years has been retained from the prior draft (Art. 74).

Several provisions address the proposed “open licensing” system (Chapter 6).

The draft also encourages a flexible remuneration system including “equity, options, and dividends” to enable inventors or designers to reasonably share the proceeds of innovation (Art. 16).

Update of August 16, 2020:  The American Bar Association Intellectual Property Law Section and Section of International Law have made their comments on the draft Patent Law Amendments available here.

 

 

 

Collaboration or Confrontation: Beyond the False Dichotomy in US-China IP Relations

Recently several writers have criticized the Trump administration’s strategic choice of confrontation over collaboration with China.  Among them was an open letter published in the July 2, 2019, Washington Post, “China is Not an Enemy,” or “Making China A US Enemy is Counterproductive” (based on its hyperlink) that was signed by several former officials and scholars. Prof. Alastair Iain Johnston of Harvard University also wrote an excellent article, “The Failures of the ‘Failure of Engagement’ with China.”  Chinese commentators have also chimed in.  One of the signatories of the July 2, 2019 letter, Jim McGregor spoke on a podcast about the limitations of collaboration.  A counter-letter, “Stay The Course On China: An Open Letter To President Trump” .  The debate is also an extension of the Stanford University report “China’s Influence and American Interests: Promoting Constructive Vigilance” from 2018, which also generated its share of controversy.

The authors of these studies discuss all aspects of the US-China relationship – trade, security, scientific, intellectual property, etc., and fold these issues into the collaboration vs. confrontation dichotomy. I lack the breadth to discuss all aspects of a complex relationship.  My focus is solely on IP and innovation and the role of collaboration or confrontation. 

An assumption of many of these authors is that we should avoid making China an enemy unnecessarily.  I agree. At the same time, many of the commentators seem to suggest that either IP engagement or confrontation may be counterproductive because of systemic failures of the WTO, or past disappointments.  As Prof. Johnston notes: “[T]here is no doubt that there are persistent WTO incompatible non-tariff trade barriers, including weak intellectual property protection, technology theft, and non-transparent regulatory practices, among others.” 

Overall, the IP-related arguments present a false dichotomy between engagement or confrontation.  Bilateral engagement is only one tool, and it need not be sacrificed to more assertive strategies.  The toolbox includes varied approaches. Softer advocacy might include training programs in China on novel issues, supporting more focused strategies by businesses, joint collaboration on shared challenges and trade agreements that include China (such as a bilateral investment treaty), to name a few.  More assertive postures might involve critical white papers or non-papers, multilateral engagement, WTO or other international law diplomacy or cases, trade agreements that exclude China (TPP), and, in appropriate circumstances, quid pro quo retaliation such as tariffs and sanctions.  Simply put, carrots and sticks are not exclusive of each other.  Moreover, there are a variety of carrots and sticks.  Sticks, however, carry a cost and need to be carefully considered before deploying.

One of the legacies of the Obama administration on IP was that it was over-committed to dialogues.  As Chinese trade diplomacy has been highly transactional, this had permitted China to “buy time” without committing to any trade concession.  For those who lived through Obama’s excesses and opposed them, President Trump has demonstrated himself to be Obama’s Hegelian opposite.

The explosion in IP dialogues during the Obama period is well documented. For example, the 2015 Joint Commission on Commerce and Trade (JCCT), which was co-chaired by the Department of Commerce and USTR and was the highest-ranking trade-specific bilateral dialogue.  It established IP-specific sub-dialogues, exchanges and programs on such topics as: standards, trade secrets, geographical indications, sports broadcasting, media boxes and copyright, on-line enforcement (including referrals to another IP-related working group involving criminal law), case law and databases with the judiciary, bad faith trademarks, copyright legislation, IP legislation and protection of plant varieties.  Additionally IP was discussed outside of the JCCT in dialogues with a range of US agencies, including antitrust (DOJ/FTC), criminal law (DOJ/DHS), innovation (OSTP) and strategic and economic dialogues (State, USTR, Treasury), as well as at the WTO (USTR), WIPO (PTO), and in plurilateral discussions, such as the IP-5 (the five largest patent offices), TM-5 (the five largest trademark offices) and ID-5 (the five largest industrial design offices).  There were also other dialogues, including judicial exchanges (2016) and commercial rule of law (2016), which also focused on IP.

Properly and economically utilized, dialogues can advance understanding where ignorance is a major impediment to resolving differences. They can build trust and long-lasting government to government relationships.  Dialogues may also spread the burden of advocacy among the US government, industry and trade associations and even foreign governments.  Educational training and assistance can also be leveraged for seeking additional concessions.  They also help establish a baseline for a measured approach to escalating issues to increasingly higher political levels.  However, dialogues should never become ends in themselves and need to be periodically evaluated for their effectiveness and efficiency.  

In a typical, hypothetical IP matter, a strategic approach to dialogues and engagement might involve a white-boarded multiple-year plan for the US that reflects the varying interests of the US government, foreign governments, industry, and academia.  The plan might progressively escalate concerns from a discussion around, say, bad faith trademarks, to a seminar on this topic, a meeting between the heads of the US and Chinese trademark offices, a JCCT meeting at a political level, a TM-5 meeting, a program with the International Trademark Association or the EU’s technical “IP Key” assistance effort, comments on proposed legislation, a meeting among cabinet-level officials and/or a WTO case.  These approaches may be consecutive or simultaneous. This type of strategy is also well known in Chinese military history, as “coordinating one’s strategies” 连环计 i.e., never relying on a single strategy but having many to fall back on, which is the 35th of the 36th classical military stratagems 三十六计. 

There have been several successful examples of coordinated engagement in IP that have delivered real changes over the years.  Examples include China’s providing design patent protection for graphical user interfaces, which involved multi-year engagement by industry, academia, the Chinese and US patent offices, and ultimately the offices of the JCCT, to deliver a tangible commitment in Chinese patent office practices.  Another example during the Obama period is the reform of China’s pharmaceutical patent examination process, which involved a similar process.   A longer-term engagement focused on the creation of China’s specialized appellate IP court.  It also involved several judges of the Court of Appeals for the Federal Circuit (CAFC) (including former Chief Judge Rader), the Federal Circuit Bar Association, academia, and others over a nearly 20-year period.  

To be effective, however, dialogues must be strategic.  The 2015 JCCT, by contrast, seemed to have an approach of letting “a 100 dialogues bloom”  (百对话齐放).   

An example of the failure of dialogue and coordinated strategies is found in the US handling of a request of China to revise China’s discriminatory Administration of Technology Import/Export Regulations (TIER).  The 2015 JCCT included a commitment to “support a technology licensing joint seminar to be convened by MOFCOM in the first quarter of 2016.”  This was a strikingly modest ask of the very senior US and Chinese officials that chaired the JCCT: a Chinese Vice Premier and three US Cabinet-level officials.  However, JCCT support was necessary to overcome entrenched Chinese resistance. Moreover, despite the JCCT commitment, China did not follow through on this modest ask.  Despite such high level support, China did not host the seminar.   

During this same time period, the US Chamber of Commerce, Global IP Center,  published a report through its “Track II”, IP Cooperation Dialogue calling for reform in the TIER. The Track II Dialogue seeks to encourage expert non-government IP-engagement and not rely solely on over-politicized official bilateral dialogues.  It includes former judges and patent office officials, as well as academics (including this author). The 2016 Report also did little to convince official China to reform the TIER.

USG persisted.  The 2017 JCCT reiterated the commitment to “hold a joint seminar”. This program was ultimately convened on March 18, 2017,  However, the program concluded with no change in China’s position regarding the reform of the TIER.     

With no demonstrable momentum by China, USTR identified the TIER in its 301 investigation of China’s technology transfer practices.  It also filed a WTO case in March 2018. China finally took notice and amended these discriminatory provisions in 2019. Now that the offending provisions of the TIER have been amended, the WTO case has been suspended.  Today, with the suspension legal case, its full implementation should be monitored.  It appears that “collaboration” did not work, but a more confrontational approach resulted in a positive outcome.

However, while it is likely that China would not have amended the TIER absent the WTO case, dialogue on the TIER also played the important roles of coordinating USG positions, elevating an issue politically, involving other foreign governments, testing the waters with senior leadership in China, and making sure that the US proceeded in a measured and thoughtful manner.   Many foreign governments, including the European Union and Japan were involved in these dialogue efforts and many also supported the WTO case.  Even more striking, the WTO “win” on the TIER is ironic as it came from an administration (Trump) has generally shown opposition to multilateral institutions as well as dialogues.   In fact, the President has demonstrated that a thoughtful combination of collaboration and confrontation with a diversity of approaches may be the most effective for advancing IP and innovation issues.

Nor is it wrong to cast the United States as the sole cause of the demise of softer approaches.  China contributed to the demise of dialogues and similar mechanisms in its use of bilateral meetings as instruments of delay and retaliation.  It responded to the first WTO IP case that the US brought in 2007 as an “act of aggression” that it would “fight to the bitter end” in 2007 (DS/362).  China thereafter suspended many forms of IP-related cooperation with the US.   In the build-up to DS/362, the United States also sought to compel China to publish all its IP cases, which the WTO declined to support (a TRIPS “Article 63” request).  China also did not oblige in that request. 

DS/362  was the only WTO case brought against China on IP prior to the Trump administration. That case dealt with infringement of consumer goods – notably, copyright piracy and trademark counterfeiting, particularly criminal and customs remedies. DS/362 did not involve technology. Anybody claiming that the WTO has been a failure with respect to China’s enforcement of patents and trade secrets should look elsewhere.  That case has not yet been brought.

USTR likely viewed DS/362  was a failure. The US did not succeed in compelling China to amend its criminal IP laws in DS/362, nor in requiring China to make its cases publicly available.  As a consequence of losing the case, the US government lost faith in the WTO as a mechanism for resolving IP-related disputes. USTR instead launched a series of bilateral and multilateral negotiations, including a proposed Anticounterfeiting Trade Agreement and revised model IP texts in bilateral and plurilateral trade agreements.  

The ensuing devaluation of WTO mechanisms was, in my view, premature.  While lawsuits in the US often appear binary in their outcomes, pressuring foreign countries to adopt legal regimes that they are otherwise opposed to at the WTO is much more complex.  Additionally, US impatience is not well-justified as the US itself has also been slow in responding to many WTO rulings.  USTR’s assessment regarding DS/362 may also have reflected its own institutional limitations. USTR is thinly staffed and lacks resources to engage in softer programs such as technical training or monitoring.  USTR relies heavily on industry suggestions, which may also be short-term in nature.  Unlike other US government agencies involved in IP, USTR is not the lead USG agency in a number of important IP exchanges, such as at the World Intellectual Property Organization, Interpol or the World Customs Organization. It does not participate in or promote IP office related exchanges,  does not have IP officers or law enforcement officers posted to China, and does not have a China Resource Center like the USPTO, which provides statistical analyses of IP-trends in China.  Despite this lack of depth, it has two important primary functions: negotiates deals with trade officials and bring disputes. This binary choice is limited when compared to the much broader toolbox that can be used to address an IP issue. 

The arguments that the WTO does not work in addressing IP-related disputes also ignore the success achieved by the Trump administration in seeing the TIER revised, as well as the demonstrable impact that DS/362 had in elevating the importance of criminal trademark and copyright enforcement to China, despite the setback of a loss in dispute proceedings.  The victory the US achieved in the criminal enforcement case materialized in the form of an uptake in criminal IP prosecutions. China increased its criminal IP cases from 904 in 2007 (the date DS/362 was filed) to 15,121 cases, involving 17,869 people in 2012This is a  16 fold increase.  By 2012, the Chinese criminal IP docket also grew to over 200 times the  US criminal IP docket of 2018. which consisted of 117 defendants in 67 cases.  One Chinese Supreme People’s Court judge confided in me that he attributed that increase to the spotlight that the US gave to the importance of criminal IP in China’s evolving IP ecosystem. For some recent analysis on these trends, please see Dan Prud’homme and Zhang Taolue’s excellent book “China’s Intellectual Property Regime for Innovation” (Springer 2019) which summarizes recent research on this increase, and provides data on criminal IP cases, defendants, prosecutions and convictions.  

A similar argument regarding the ultimate success of the US claims might be made about the request of the US that China should make all its IP cases publicly available in 2005/2006 (the so-called “Article 63 Request”). By 2014, China had decided to publish the  majority of its cases of all types.  This publication of cases has been welcomed by the legal and judicial community alike and has helped to provide greater predictability in adjudication, minimize corruption and provide a basis for strategic IP enforcement.  

By contrast to these successes, there was one claim in DS/362 that had no significant positive impact.  This failure was not due to China’s intransigence. In DS/362 USTR also alleged that China’s disposal of seized infringing goods by auction offended WTO requirements to dispose of such goods outside of the channels of commerce.  However, WTO rules only require Chinese Customs to seize goods upon importation (TRIPS Agreement Art. 51). China was and remains primarily an exporter of counterfeit and pirated goods.  The WTO was unable to identify a single instance where China had auctioned off counterfeit goods imported into China.   “No infringing goods destined for importation”, the panel stated “have ever been auctioned…during the period for which statistics are available.” (Para. 7.351).  The Customs claim, criminal IP claim and the case publication achievement all underscore the continual need for good data to support IP engagement of either the “carrot” or “stick” variety.

Arguing over whether China is becoming our enemy and the need for confrontation is redolent of the post-Korean War China rhetoric in the US.  A better approach might be to remake the US government into an institution that better understands, persuades and strategizes on complex technological and IP issues in China.  During the past 30 – 40 years, the US government has defunded or terminated every technology–oriented agency that cared to engage in a significant way with China, including the Office of Technology Assessment in Congress, the Technology Administration in Commerce, and the Office of Science and Technology Policy in the White House.  USTR’s mandate is  too limited to effectively engage in collaboration. USPTO has the deepest technical resources on IP and innovation issues, but lacks political clout. We need to coordinate more closely, and provide incentives for deeper engagement among all US agencies as well as with industry in order to be effective.   These issues have been apparent since at least the time of China’s WTO accession.  As I noted at a conference at the 24th Annual Fordham University IP Conference in 2016 (Session 4B-b “Asia and the Political Landscape”):

MR COHEN:… One of the lessons from WTO accession was — and I don’t know how to say this gently — how … under-informed US industry was about the legal system.  I say that because if you look at the number of civil cases involving intellectual property, in the year that China joined the WTO — and the negotiations occurred in the years before — there were about thirty.  So one could, theoretically, have contacted every company that had filed a lawsuit involving IP and you still wouldn’t have a very large cohort.

So a lot of trade negotiations, unfortunately but necessarily, are based on hypothetical constructs.  What makes a good legal system, with big words like “impartial,” “fair”?…

METALITZ:  So who was under-informed in that situation?  Was it the US negotiators or was it the US industry?  US industry — you’re right — was not bringing these cases.  But that may not have been out of ignorance. That may have been out of a supposition that they would not be useful.

BAI:  May I chime in?… I have seen US government officials talking about China when they don’t get their briefing right…. 

One way to improve policy is to hire the right people.  We need to promote and reward individuals who have the three “magic” skills: knowledge of Chinese law, knowledge of Chinese IP  or technology, and Chinese language skills. These individuals should also be given roles commensurate with their knowledge and skills.  The 2013 Report of the Commission to Stop American IP Theft, also identified this as an issue in the staffing of our embassies overseas: 

Strengthen American diplomatic priorities in the protection of American IP. American ambassadors ought to be assessed on protecting intellectual property, as they are now assessed on promoting trade and exports. Raising the rank of IP attachés in countries in which theft is the most serious enhances their ability to protect American IP. 

The need to restructure US government on tech and IP issues has long affected the quality of our “engagement.”   

Whether confrontation or engagement are pursued, the choice is complex, should be well-coordinated, and will need to evolve based on circumstances.  It should be based on the right information made by well-informed people.  It is not, ultimately, an ideological issue as many of the recent articles might otherwise suggest.  

Revised: July 21, 2019, October 8, 2019.

 

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 absolute 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.