Unpacking the Role of IP Legislation in the Trade War

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Here is my attempt to unpack recent legislation and their relevance to the on-going trade dispute.

In recent months, China has amended its Foreign Investment Law, the Technology Import/Export Regulations (“TIER”), the Anti-Unfair Competition Law regarding trade secrets, and the Trademark Law, with new provisions on bad faith filings and damages. A summary of the Trademark Law revisions provided by SIPS is found here. China also amended the Joint Venture Regulations provisions removing provisions that which limited a foreign licensor’s freedom to license technology beyond years or to restrict use of licensed technology after the 10 year period had elapsed.

With the revisions to the TIER and the JV regulations, much of the basis for the US and EU complaints against China at the WTO regarding de jure forced technology transfer may have evaporated (WTO Disputes DS542, and DS549). However, the public dockets do not indicate that the cases have been withdrawn.

China seems to have determined that it has crossed a line in how much it can accommodate US demands. Bloomberg reported on a commentary published after the imposition of escalated sanctions in the influential “China Voice” column of the People’s Daily which accused the US of fabricating forced technology transfer claims. The commentary is entitled “If you want to condemn somebody, don’t worry about the pretext”, with the sub-title, written in classical Chinese: “‘Forced Technology Transfer’ Should Stop!”. (欲加之罪,何患无罪 – “中国强制转让技术论”可以休矣). The title is a quotation from the Zuo Zhuan, a classic of Chinese history written around 400 B.C. that realistically describes the palace intrigues, military tactics, assassinations, etc. from the chaotic “Spring and Autumn” period from 771-476 B.C. The People’s Daily view is also shared by a number of scholars and observers who view the problem as exaggerated or mischaracterized (apart from the TIER and JV regulations). However, this view has been rejected by USTR Lighthizer, as was reported in a recent NPR interview (March 25, 2019):

“CHANG: Though a number of scholars believe the Trump administration is overstating how often forced technology transfers are happening.

LIGHTHIZER: Well, I guess I don’t know who those scholars are. We did an eight-month study on it, and I think it’s the very strong view of the people that we talked to that it’s a very serious problem and has been for a number of years.”

(Update of May 21, 2019: A recent EU Chamber survey in fact showed an increase in businesses reporting that FTT is a concern, from 10% two years ago to 20%.)

There have also been several IP legislative developments that may not be as directly linked to US government trade pressure. Perhaps the most important is the launch of China’s new national appellate IP Court effective January 1, 2019. The NPC has released a draft of the civil code provisions on personality rights (See this translation). Personality rights can be important tools in addressing trademark squatting, such as in the Michael Jordan case with Qiaodan. CNIPA also released Draft Provisions for Regulating Applications for Trademark Registration (关于规范商标申请注册行为的若干规定(征求意见稿) which addresses bad faith registrations. CNIPA released a draft rule for public comment on Protection of Foreign GI’s (国外地理标志产品保护办法 (修订征求意见稿)on February 28, 2019. The comments focus on generic terms and a GI expert committee for examination of foreign GI’s. Here are INTA’s comments on the trademark registration and GI proposed rules. CNIPA also proposed changes to patent examination guidelines on such issues as proof of inventive step and what constitutes “common knowledge.” Here are AIPLA’s comments from April 4, 2019.

Still pending are proposed amendments to the Drug Administration Law, with comments due by May 25, 2019. This is a second public comment draft released by the NPC. Ropes & Gray has provided a useful analysis. The proposed changes to the DAL also include increased punitive damages for counterfeit medicines, in line with increased penalties in the IP laws (Trademark, AUCL, etc.). There are also proposed changes to the patent law which was released for comment earlier this year. Of particular interest to the pharma sector in the proposed changes were provisions calling for patent term restoration. However, a hoped for inclusion of patent linkage through an “artificial infringement” provision to trigger an infringement challenge by reason of a pharmaceutical regulatory approval has not yet materialized. There were also rumors that China and USTR has scaled back regulatory data protection for biologics from the 12 years that had originally been proposed by China in 2018 to the 10 year period provided by the US Mexico Canada Free Trade Agreement.

What is the relationship between all these legislative changes and the trade war? Larry Kudlow, the Director of the National Economic Council, described the legislative snafu that caused the administration to reinstitute tariffs as follows:

“For many years, China trade, it was unfair, nonreciprocal, unbalanced, in many cases, unlawful. And so, we have to correct those and one of the sticking points right now as we would like to see these corrections in an agreement which is codified by law in China, not just the state council announcement. We need to see something much clearer. And until we do, we have to keep our tariffs on, that’s part of the enforcement process as far as we are concerned.”

So what are the unenacted “laws” and what is the State Council “announcement” that Mr. Kudlow is referring to and which in his view launched this new trade war escalation? I doubt that Mr. Kudlow has read China’s Law on Legislation and understands the difference between a Law passed by the NPC and a State Council Regulation, particularly as US and European practice in recent months appears to be oblivious of legislative nomenclature and its role in determining what constitutes a legally binding document.

Perhaps Mr. Kudlow is talking about the NDRC 38 agency MOU published in late 2018 regarding punishments for serious patent infringement, including use of social credit system. The NDRC document is clearly inferior to a Law or State Council Regulation, but it was a directly promulgated document of a State Council agency. As the patent law amendments have not been enacted yet, he may be referring to this delay in enactment and the failure to increase damages for infringement as has been provided by other statutes. In my own view, the focus on punitive or even statutory damages is misguided as is increased administrative enforcement, as the primary reason that damages are low is the failure of most Chinese courts to impose fully compensatory damages and abide by priorities in law for establishing damages. But I hope to have more on that in another blog…

One thing is certain: China has been timing legislative developments with trade diplomacy. This may lead one to believe that China’s approach to the new laws was purely transactional, and/or there were other laws that the US was also expecting but that China has since declined to deliver. The previously mentioned NDRC 38 Agency MOU was enacted before the G-20 meeting but made publicly available shortly thereafter. The “Working Measures [sic] for Outbound Transfer of Intellectual Property Rights (For Trial Implementation), (State Council, Guo Ban Fa [2018] No. 19)” (知识产权对外转让有关工作办法(试行)) which was previously discussed here, appear to have been timed with the 301 announcement in March 2018. In addition, the revocation of TIER provisions, JV implementing regulations, and amendments to the Trademark Law and AUCL revisions all were enacted with incredible efficiency, often denying any opportunity for meaningful public comment in violation of prior procedural practices. A reasonable guess may be that there were some additional laws or regulations that the US was expecting but that China had determined it could not deliver, or deliver in the time frame provided. Nonetheless, the legislative track record thus far is quite impressive.

China’s improved environment for technology transfer and technology collaboration is coming at a time when the United States has tightened up its controls with China. The most notable legislation in this area is the John S. McCain Defense Authorization Act for 2018 (the “Act”), including the enactment of the Foreign Investment Risk Reduction Modernization Act and the Export Controls Act of 2018. These laws extended export control and foreign investment control authorities to foundational and emerging technologies, as well as to non-passive, non-controlling investments. Much of the technologies of concern overlap with Made in China 2025 and other Chinese industrial policy documents. Although the Act did not specifically create “black” and “white” countries as subjects of controls, the Congressional history did point to special concerns about China:

“Congress declares that long-term strategic competition with China is a principal priority for the United States that requires the integration of multiple elements of national power, including diplomatic, economic, intelligence, law enforcement, and military elements, to protect and strengthen national [t]security, [including] … the use of economic tools, including market access and investment to gain access to sensitive United States industries.”

The most recent report which analyzes the impact of US and Chinese regulations on Chinese investment in the United States by Rhodium Group is found here (May 8, 2019). The report notes an “over 80% decline in Chinese FDI in the US to just $5 billion from $29 billion in 2017 and $46 billion in 2016. Accounting for asset divestitures, net 2018 Chinese FDI in the US was -$8 billion. Meanwhile, American FDI in China dropped only slightly to $13 billion in 2018 from $14 billion in 2017.” The Rhodium report also notes that “the chilling impact of politics on US FDI in China was mostly visible in the ICT space where new investment declined significantly last year.” Other countries have also been enacting similar restrictions on FDI in sensitive areas, as pointed out in a recent article by my Berkeley colleague Vinod K. Aggarawal. Note: I will be speaking at a forthcoming AIPLA webinar on export controls and IP strategies on May 23, 2019 as well as at forthcoming events in China (to be announced).

In addition to these legislative efforts, the US has undertaken steps to restrict H1B visas for talented scientists and engineers and the FBI has created a new working group to address economic espionage from China. The Committee of 100 released an important paper in 2017 showing that Asian Americans were more likely to be prosecuted for economic espionage than any other ethnic group, are also subject to higher sentences and were twice as likely as other groups to have cases against them dismissed. Some observers fear that overly broad regulation and enforcement by the United States may now be encouraging exactly what China has sought to do for decades: repatriate to China the vast talent pool of Chinese scientists, engineers, and entrepreneurs to contribute to the technological development of the motherland.

Although there have been few legislative efforts directed to making US science and technology more competitive in response to these perceived threats from China, there have been several general reports and proposals. The National Institute of Science and Technology recently released a green paper, “Return on Investment Initiative for Unleashing American Innovation” (April 2019) to improve federal technology transfer and entrepreneurship. There are increasing calls for Congress to fund the long defunct Office of Technology Assessment, which once played an active role in analyzing US-China technology trade.

Several trade organizations and think tanks have called for increased US funding in science and technology, among them is the recent report of the Task Force of American Innovation, “Second Place America – Increasing Challenges to America’s Scientific Leadership” (May 7, 2019). The R&D graph at the head of this blog showing China’s rapid growth in R&D is from that report. The report notes:

“America’s competitive edge is now at stake, as China and other countries are rapidly increasing investments in research and workforce development in order to assume positions of global leadership. Our nation risks falling perilously behind in the basic scientific research that drives innovation, as our global competitors increase support for cutting-edge research and push to the forefront in fields such as artificial intelligence (AI), robotics, aerospace, advanced manufacturing, and the next generation of telecommunications networks.”

To round out this summary of legislative developments, there have been developments at the USPTO that impact US relations with China on IP. The USPTO published a proposed regulation which will regulate legal services for the rapidly increasing number of Chinese pro se trademark filers in the US (2/15/2019). This proposed regulation would require these applications to use a US licensed attorney. The purported purpose of this change in current practice is “instill greater confidence in the public that U.S. registrations that issue to foreign applicants are not subject to invalidation for reasons such as improper signatures and use claims and enable the USPTO to more effectively use available mechanisms to enforce foreign applicant compliance with statutory and regulatory requirements in trademark matters.” The rule also seems generally consistent with TRIPS Art. 3, which permits WTO members to require “the appointment of an agent within the jurisdiction of a Member … to secure compliance with laws and regulations which are not inconsistent with the provisions of [the TRIPS] Agreement”.

Another important development involves USPTO efforts to clarify subject matter eligibility under Sec. 101 of the patent act, and functional claim limitations for computer-enabled inventions under Section 112. The United States had been weakening and destabilizing protections in these important areas affecting artificial intelligence, fintech and biotech inventions at the precise time when China had been strengthening its protections. These are important steps towards strengthening predictability in our domestic IP system, which may be further strengthened by proposed legislative changes.

Ironically, China’s improvements in its investment and tech transfer environment are coming at a time of heightened concern over a Chinese technological threat and increased US and international regulatory scrutiny. It may be difficult, therefore, to perceive any immediate positive impact from changes in China’s investment environment. Indeed, the media has recently been reporting on decisions of different companies or entrepreneurs to close down R&D operations in each other’s markets. Hopefully, both countries may ultimately create the right mix of IP enforcement and protection, regulatory controls over collaboration and industrial policy to enable bilateral scientific collaboration to once again flourish and contribute to the global economy.

Upcoming China IP Program with the Boston Bar

The U.S. Patent and Trademark Office, Boston Bar Association and the U.S. Commercial Service for Massachusetts are bringing together thought leaders and policy makers on China IP issues from U.S. Government, academics to discuss China IP issues on April 18, 2017.  Here is the flyer of the Boston Bar China IP Program.

The Boston event is part of the U.S. PTO China team’s nationwide efforts to help U.S. businesses and inventors understand how they can obtain and enforce IP rights in China. Registration including breakfast and lunch is $25.00. The program lasts from 8 AM to 1 PM, and there are optional consultations with industry at the Commerce Department’s offices in Boston immediately following the program.  Prof. Mark Wu of Harvard Law School is the keynote speaker.

The next programs in this series will be in Dallas and Houston.

Stay tuned…

 

Upcoming Licensing Program in Taiwan

The American Institute of Taiwan (AIT) and the Taiwan Ministry of Economic Affairs, amongst others, are sponsoring a licensing program at AIT on March 30, 2017. The program will cover licensing issues faced by U.S. companies in Taiwan and Taiwan companies in the U.S., as well as open source innovation and tax considerations in licensing.

 A draft agenda with registration form is attached. If you are interested in attending, please register with AIT, Ms. Lisa Yang, as indicated on the form.

Program on Trademark Strategy For Chinese Companies Investing Overseas

·         Location: Chengdu, Qingdao, Shenzhen, Tianjin and Wuhan

·         Dates: 01 Jun 2016 to 08 Jun 2016

IP Key (the European IP technical assistance/exchange program) is organising 5 half-day Trade Mark strategy seminars in Chengdu, Qingdao, Shenzhen, Tianjin and Wuhan between the 1st  – 8th June.  The following is from their news release:

The purpose of the trade mark IP strategy conference is to support Chinese companies and legal representatives on IP issues as they internationalise their business. Experts will discuss the importance of an IP strategy and the tools available to support its successful implementation. Two EU experts, Mr. Christophe Gimenez, EUIPO, IP Attaché for the EU Delegation to China and Mr. Martin Beckman, Project Manager, EUIPO will share their knowledge and expertise on how to create an IP strategy with the support of international databases.

 The seminars are a good opportunity for Chinese companies who are doing businesses abroad, or are planning for international expansion, as well as trade mark agencies and specialist to learn more about the international tools that can help them be more strategic in their approach to protect and register trade marks abroad.

Simultaneous Interpretation in English and Chinese will be available at the conferences.

Agenda for each city is available online on the IP Key website:    

http://www.ipkey.org/en/activities/upcoming-activities/item/3976-trade-mark-ip-strategy-conference

 To register for the seminar, email the partner in the corresponding city:

Date

Time

City

Venue

Contact Person

Email

June 1st 2016

13:30 – 17:30

Chengdu

The Jinjiang Room, 5/F Century City International Convention Center, Chengdu, China

Finja Zhang

finja_zhang@eupic.org.cn

June 3rd 2016

13:30 – 17:30

Qingdao

The Blue hall, Sino-German Ecopark, No. 2877 Tuanjie Road, Huangdao District, Qingdao 

DING Ling

zdzscqzx@163.com

June 6th 2016

8:30 – 12:30

Shenzhen

6/F Landmark Building, 4028 Jintian Road, Futian District, Shenzhen, China

CUI Can

cuican@szfetsc.com.cn

June 7th 2016

9:00-13:00

Tianjin

37/F Tianjin World Financial Center, Tianjin Tower

LI Yinghong

cft801@163.com

June 8th 2016

13:30-17:30

Wuhan

Wuhan International Cooperation Chamber of Commerce, 489 Zhongshan Road, Wuhan, China

Ellena Du

ellenadu@126.com

 For more information about this activity or for general information about IP Key, please contact Jaspal Channa jaspal.channa@ipkey.org

Upcoming IPR and R&D Program in Nanjing

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SIPO and USPTO will be co-sponsoring a program on IPR issues of concern to conducting R&D in China.  The seminar will bring together government officials, senior IP and accounting experts, and corporate IP counsels to provide information of value to R&D centers in China.   The event will be held on May 31, 2016 at 8:30 a.m.-5:00 p.m. at the InterContinental Nanjing, address: 1 Zhongyang Road, Gulou District, Nanjing, Jiangsu.

A summary of the sessions are included below:
研讨会由如下7个主题构成:

Session 1: U.S.-China Current R&D and Collaboration Environments

主题1: 中美当前的研发和协作环境

Session 2: The Roles of IP in the Research and Development Process

主题2: 知识产权在研发过程中的角色

Session 3: Protecting Your IP: Discussion on IP Filing Strategies in U.S. and China

主题3: 保护你的知识产权:对中美知识产权申请战略的讨论

Session 4: Commercializing Your Innovations

主题4: 创新的商业化

Session 5: Drafting and Negotiating IP License Agreements – Domestic and Technology Imports; Intercompany Ownership and Transfers

主题5: 知识产权许可协议的起草和谈判–技术进口;公司间的所有权和转让

Session 6: High and New Technology Enterprises and R&D Tax Breaks

主题6: 高新技术企业和研发税收减免

Session 7: Panel Discussion of US and Chinese Experts on IP related opportunities and challenges for companies with R&D facilities in China

主题7: 圆桌讨论:中美专家就在华设立研发中心的企业面临的知识产权机遇和挑战的讨论

Please RSVP by May 24, 2016 to Aster CHEN at PTO_Shanghai_Office@trade.gov (Please include your name, title and company/organization).  Seats are limited to 100 on a first-come first-serve basis.

请在2016524日前回复陈书新 PTO_Shanghai_Office@trade.gov 确认出席,回复时请提供您的姓名、职务及单位/机构名称。100个席位,先到先得

Photo subject to creative commons license.  Source: http://www.lastampa.it.

Three Upcoming Programs

If you are near Portland, Oregon, Prof. Eric Priest of the University of Oregon, Chief Judge Rader (ret) and I will be talking at the University of Oregon about our joint efforts with the US Chamber on China IP related matters.  The program will be held form 12:00 to 1:30 on May 6th at the University of Oregon White Stag Building, 70 NW Couch Street, Portland, Oregon,  RSVP: teevee@uoregon.edu.  Oregon CLE is pending.

On June 2, 2016 in Beijing, IP Key will be cosponsoring a program on Infringement of Intellectual Property Rights Online.  Information is available here.

Another upcoming program on June 8 is in Alexandria, Virginia with the USPTO and George Mason University on licensing.  Although not strictly speaking a China-related program, I expect there to be  considerable discussion around China’s licensing environment.  Amongst the speakers will be Director Lee of the USPTO, Commerce Deputy Secretary Bruce Andrews, FTC Commissioner Ohlhausen, and former USPTO Director David Kappos.  I will also be speaking at this program.  The conference agenda and a link to registration are available here.

 

Three Upcoming Programs

Here are three upcoming programs:

Stanford is hosting a program on guiding cases at Stanford on Wednesday April 6, 2015.

The China General Chamber of Commerce is hosting a programChina-U.S. Intellectual Property Cooperation Dialogue & Chinese Brands Going Global Forum” on April 11, 2016 from 9:30 to 12:30 in New York City.  I will be moderating a session on IP developments in China, with leading companies, lawyers and officials.

George Washington University Law School is hosting a program with USPTO on IP developments involving China on April 14, 2016.  The program looks at challenges faced by US companies in China and challenges faced by Chinese companies in the US.  A dozen Chinese officials, including six judges will be attending the program.  I will be moderating the program with Dean John Whealan.  These programs are usually sell-outs, so please pre-register if you are interested in attending.  Here is the draft agenda. Registration is required for security to gain access to the USPTO, here’s the link: http://goo.gl/forms/TeyiFahzY8 .