The WTO IP Cases That Weren’t

Every once in a while, someone asks me: “What WTO claims could the US possibly have made against China?” 

The question is especially relevant in light of the recent decision of the incoming Biden Administration to nominate Katherine Tai a Chinese-speaking, veteran WTO litigator with an understanding of Chinese industrial policy and a solid track record on multilateral engagement.   Many of the more important IP-related issues in China are today wrapped up in industrial policy.

I offer these thoughts in order to better assess past US efforts at the WTO and for such time, if any, that the WTO becomes a preferred venue for resolution of United-States China IP disputes.    As USTR did not bring a single IPR case against China during the Obama Administration, I hope these suggestions are helpful.  I believe that it is time to rethink the US reluctance to bring WTO cases at the WTO.  In fact, the best WTO track record on China IPR ironically belongs to the Trump Administration which brought  a successful IPR case in the first fifteen months of its tenure.  If a Biden Administration wishes to demonstrate that cases can have an impact, it may similarly wish to consider launching IPR dispute cases at the WTO or pursuant to the Phase 1 Trade Agreement early in its term.

I have rated each of these potential claims with stars: *  = “should be rejected or no need to file”; ** = “requires further study or might be worth filing if circumstances change” ; *** = “elements of this claim have merit or might be considered after further research for filing in the mid-term” and **** =  “the claim has a good risk/reward proposition or might be considered for filing in the near term.”  I have generally not factored into these calculations the possibility of defensive risks or alternative options.  A defensive risk reflects the possibility that the US might be charged for violation of the TRIPS Agreement.  An example of a defensive risk may be the extensive invocation of national security exemptions for IP and other issues during the Trump Administration (Art. 72, TRIPS Agreement).  Alternative options might typically include such strategies such as bilateral negotiations, dispute resolution under the Phase 1 Trade Agreement, seeking to accelerate existing reforms underway in China, or some form of collaborative pressure with other countries.

This list is not exhaustive.  I list the claim in the order of the Section in which it principally appears in the TRIPS Agreement (I-III, V), and under other WTO Agreements. 

A. General Provisions and Basic Principles The Preamble to the TRIPS Agreement provides that IP is a “private right.”  Although many countries incorporate IP into their economic strategies, China often strongly supports IP as a government license or public utility.  The structural issue manifests itself in China in various forms, including: the role of industrial planning in intellectual property; aggressive use of antitrust laws; historical dominance of public enforcement mechanisms; and a relatively weak civil system.  Katherine Tai’s background in Chinese industrial policy involving the rare earth dispute should be well suited to looking at the complex IPR environment in China.  Although this “private right” language in the TRIPS preamble does not create a specific obligation, it does provide “colour, texture and shading”  to other WTO obligations.   This language might be used to inform other, more specific industrial policy related claims. It can also be used at such time as the WTO authorizes “non-violation” cases under TRIPS (discussed below under Section V). The United States might also urge a “private right” and/or “non-violation” case against China as part of a package of conditions towards reviving the WTO and its dispute settlement mechanisms. (**)

B. Art 3:  “National Treatment”:  Although the US government routinely claims that foreigners are being discriminated against by the courts or IP agencies in China, the evidence thus far is weak.  Moreover, foreign governments have been reluctant demand greater transparency from China to support such a claim.  Based on academic research, the strongest cases for discriminatory treatment appear to be in patent prosecution in sector-specific areas  and might be supported by a “private right” claim of the Preamble, i.e., that Chinese industrial policy is guiding action of the patent office.  It might also be supported by TRIPS Art. 27, which provides that patents should be available without discrimination as to the place of invention, field of technology transfer and whether products are imported or locally produced.   A case might be brought after acquiring enough data, including comparisons to other markets.  A highly data-dependent case has the added advantage of mitigating the risks of retaliation against specific companies. Among the technology areas of concern, the following might be of particular focus: the high invalidity rate of foreign pharmaceutical patents at the Patent Reexamination Board; the possibility of discriminatory treatment in the handling of Standards Essential Patents; and discriminatory treatment in technologies identified as core to state industrial policy interests such as those identified in Made in China 2025 or China’s Strategic and Emerging Industries.  These claims must also be benchmarked against the extent of discrimination by most patent offices against foreign technology  (**).

C. Article 3/fn. 3: National treatment in the “enforcement of IP rights:”  There are likely limited  claims of discrimination in enforcement of IP rights under China’s IP regime.  In fact, in many sectors foreigners seem to do better than the average Chinese litigant.  De jure claims may exist in terms of China’s current trade secret regime where administrative enforcement has long been not available as a matter of law for a foreigner victim or, more recently, a foreign trade secret (****).  In addition, there may be de facto discrimination in the availability of certain remedies.  Administrative enforcement of copyrights for foreigners had historically been low, and data has not been made available in recent years (**).  Some types of remedies, such as administrative trademark enforcement, have been disproportionately used on behalf of foreigners while others such as patent enforcement may be underutilized.  A general de facto national treatment administrative enforcement claim, however, likely lacks adequate evidence and may present a poor risk/benefit calculation (*).

D. Article 3/fn.3: National treatment in the “use of IP rights”: The strongest recent de jure claims involving national treatment in the “use of IP rights” were likely the cases that the United States and Europe separately brought against China’s Administration of Technology Import/Export Regulations (DS542 and DS549), which have resulted in statutory changes in China.  The Biden administration will inherit DS542 as an ongoing case.  There are other possible national treatment “use” claims.  China has long argued that “high priced” payment of royalties to foreigners are oppressive and that prices need to be determined according to Chinese standards, including for global rate settings.  For an early version of this narrative see: “Multinationals’ Anti-Competition Behavior in China and Counter-Measures Therefore,” State Administration for Industry and Commerce, Section (1)D, Issued by the Anti- Monopoly Division, Fair Trade Bureau, (March 1, 2004).  Occasionally Chinese judges have also expressed their antipathy to foreign demands for royalty payments, and encouraged Chinese companies to aggressively use antitrust lawsuits.  Policies may be set forth in a range of documents, including court decisions, judicial guidance, regulations and rules, and interviews with senior officials. The setting of prices to limit foreign royalty payments also implicates state intervention in the market of “private rights”(above).  This case might be a de jure (“as such”) or de facto (an “as applied”) case. 

E. Other “national treatment use” claims might involve forced technology transfer  in China’s foreign investment regime.  To the extent such practices have not been fully addressed, there is a TRIPS National Treatment claim, as well as potential violations of China’s protocols of accession, the Phase 1 Trade Agreement, and the TRIPS preamble “private right” provision. The Phase 1 Trade Agreement may offer an alternative mechanism for resolution of these claims.  Finally, there are extensive subsidies, preferences and  support given to domestic innovative companies that may be actionable including subsidization for participation in standards setting bodies, subsidies for domestic and overseas patent filings, domestic technical standards that require purchasing of domestically innovated products, and other forms of assistance to purchase domestically innovated products that may constitute violation of “national treatment use” obligations (***).

II. Standards Concerning the Availability, Scope and Use of IP Rights

F. I believe that China is generally in compliance with most of the provisions regarding substantive IP rights in the TRIPS Agreement.   At the time of the first WTO case filed against China (DS362), the United States filed only one claim involving China’s standard for protection of IP, which involved copyright protection for un-approved/not yet censored works.  As time passes and all countries better understand their obligations in light of emerging trends, it can be expected that other technical corrections can appear. For example, the recently amended Copyright Law, removes numerous references to “citizens” as subjects of copyright protection and replaces it with the more TRIPS-compliant “natural persons.”

Among the remaining areas of concern is TRIPS Art. 30: “Exception to Rights Conferred” for patents.  China’s experimental use exception and its Bolar exemption for infringement of pharmaceuticals raise concerns over whether these practices “unreasonably conflict with a normal exploitation of the patent, taking account of the legitimate interests of third parties.”  Given the developing world hostility to pharmaceutical patents and IP rights and China’s increasing interest in innovation in this sector, I believe that pharmaceutical issues are probably better addressed bilaterally, as they were in the Phase 1 Trade Agreement (**).

G. Art. 39: “Members shall protect undisclosed information.”  This unique phraseology requires WTO members to actively “protect” trade secrets.  It occurs three times in Article 39.  It is not found with respect to any other IP rights in the TRIPS Agreement.  By contrast,  TRIPS requires civil remedies for all IP rights and has relatively limited requirements for ex officio action.  Even Article 61 regarding criminal enforcement of IP rights does not explicitly require public prosecution of IP crimes.  This affirmative obligation of members in Art. 39 to “protect” trade secrets also applies to undisclosed pharmaceutical test data, which is often called “regulatory data protection” (RDP).  

A case around “Members shall protect” assumes added importance as the Phase 1 Trade Agreement addresses civil and criminal trade secret misappropriation.  It does little to address claims of Chinese state involvement in trade secret misappropriation.  If the United States could prove Chinese government involvement in economic espionage and there were limited defensive risks, a case might be filed claiming the failure of China, as a member of the WTO, to “protect undisclosed information.”  (***).  A case might also be brought regarding lack of effective RDP, which was not actively addressed in the Phase 1 Trade Agreement, but which has been under active consideration for reform and was noted by USTR in its Fact Sheet on the Phase 1 Trade Agreement as a topic for Phase 2 negotiations (**).

H. Art. 40:  “Control of Anti-Competitive Practices in Contractual Licenses.” No WTO case has been heard under Art. 40, which is the principal provision addressing the intersection of antitrust and IP.   Due to the lack of cases, the failure of WTO members to agree to take up antitrust more broadly, and the increasing importance of licensing of technology for technologies such as 5G, AI, pharmaceuticals, and clean energy, a better understanding of the use and limits of Art. 40 would be helpful to licensors and licensees alike.  Importantly, Article 40(2) also sets forth the conditions of antitrust claims in licensing, which may also serve as guard rails to China and other countries thinking of invoking aggressive antitrust measures against foreign licensors.  It states that WTO members may: (a) specify in their legislation, (b) licensing practices or conditions, (c) that may in particular conditions, (d) constitute an abuse of intellectual property, (e) having an adverse effect on competition, (f) in the relevant market. As applied, the legislation may be implemented by (g) appropriate measures to (h) prevent or control such practices.  The legislation would appear to prohibit member states legislating in general terms.  Rather, the IP regime must be “particular’ and implemented “appropriate[ly]”.  For example, a failure to indicate what constitutes IP “abuse” may constitute a lack of adequate particularity.  The provision also prohibits per se violations of “abuse” of IP rights, without demonstrating an anticompetitive “effect” in the “relevant market.”  Article 40 evinces an intent of the drafters of the TRIPS Agreement to limit antitrust claims that might otherwise undercut the basic protections of IP rights.

Article 40 opens the possibility for additional WTO oversight of antitrust-related activity in the field of intellectual property at least three different ways.  First de jure and de facto claims might be made through the review of “legislation” and “appropriate measures”  to see if they demonstrate an “adverse effect” on “competition”.  I believe that Article 40 ultimately requires some form of economic analysis to support an antitrust action.  Second, Article 40 binds WTO members through footnote 3 to not discriminate against foreigners, and through the preamble it could limit the role of antitrust in domestic technology policy.  Third, Article 40 may be used to balance the  conflicts that exist between intellectual property and antitrust.  Such balancing might include: the pro-competitive effect of intellectual property to “promot[e] innovation” with the need to promote the “dissemination of technology” (TRIPS, Art. 7);  the balance between the extent to which harsh antitrust penalties may be imposed in a relatively weak Chinese IP regime; and the balance between territorial concepts of intellectual property in the TRIPS Agreement and its incorporated treaties, such as the Paris Convention, with the power of antitrust regulators and courts to look at actions that affect domestic markets which may arise from ownership of rights overseas and to issue remedies that could affect the value of rights held overseas (***).

I. Art. 40 / Due Process: Another outstanding issue under Article 40 is the extent to which due process considerations that attach to the general enforcement of IP rights in Art 41 et seq of the TRIPS Agreement also govern antitrust investigations.   If they do attach, China’s antitrust authorities would be subject to a host of TRIPS procedural requirements in IP-related antitrust matters, including “fair and equitable” procedures; timely “written notice,” (an issue that has appeared in Chinese antitrust and licensing cases as well in service of process in civil cases generally): the right to representation by “independent legal counsel,”  the right to “substantiate…claims and to present all relevant evidence,”  the protection of “confidential information,” decisions made “preferably in writing,” “based on evidence”  and “made available to the parties,” an opportunity for meaningful “judicial review” of administrative decisions,  etc.  China has made  antitrust “due process” type commitments in the past to the United States, which the US obtained outside of the WTO context.  These commitments should be monitored and if violated could form part of a WTO dispute (**).

III. Enforcement

J. General – “Independent Legal Counsel,” damages that are  “adequate to compensate,” etc.  The enforcement provisions of the TRIPS Agreement are both vague and weighty. Concepts such as “fair and equitable” procedures (Art. 42) can reasonably admit of several conflicting interpretations and may be limited to the standards of a given legal system.  The TRIPS enforcement provisions uniquely establish a right to be represented by “independent legal counsel” (Art. 42).  It is unclear what constitutes such “independent legal counsel.”  In its most common definition, it likely means counsel that does not have a conflict of interest.  More broadly, it could be interpreted as counsel that is independent of the Communist Party or other political supervisory authority.  This is one of the of the few IP claims in the TRIPS Agreement that significantly overlaps with rule of law concerns.  The various procedural requirements for enforcement taken together may make a strong basis for an IP enforcement complaint (**). 

K. Another concern is that Chinese damages remain too low (Art. 45), notwithstanding the availability of other remedies such as injunctive relief and recent improvements to increase the availability of actual damages rather than statutory damages.  A claim of inadequate damages for patent infringement may also be posited with a claim of abuse of the competition remedy for licensing practice (Art. 40) to demonstrate that China’s claims of abusive foreign licensing practices in China are not generally supported by the ability of foreigners to protect their rights or monetize their assets in China’s legal system.  It is hard to conceive of abuse of IP rights unless there are deterrent remedies, including adequate compensation, for IP infringement. Low civil damages may also suggest a weak civil system, and weak protection for IP as a “private right” (**).

L. Arts. 42/49/ 61 – Civil Procedures, Administrative Procedures and Criminal Procedures.  The TRIPS Agreement has a relatively simple approach to understanding what the procedural requirements are for civil, criminal or administrative remedies which is that civil, criminal and administrative remedies need to follow the civil, criminal and administrative procedures.  Civil remedies also need to follow “fair and equitable” civil procedures (Art. 42).  Administrative procedures involving a civil remedy “shall conform to principles equivalent in substance to” civil procedures (Art. 49).  Criminal penalties need  to made available according to criminal process (Art. 61).  One of the outstanding deficiencies in China’s IP regime is that China’s administrative enforcement is quasi-penal in nature but does not use criminal process.  Moreover, when a civil remedy, such as an administrative injunction is issued, the TRIPS Agreement requires use of civil-type procedures.  Different appellate review and transparency standards also attach to administrative investigations in China compared to civil proceedings.  While this “procedural” argument has technical merit, it is unclear to me what the precise benefit would be to foreign companies.  Many foreign companies routinely rely on China’s administrative system These companies may be opposed to any effort to undermine a system that works well in their favor for particular rights.  Moreover the administrative enforcement system remains non-transparent and a  case might involve difficult efforts to obtain supporting evidence.  Some evidence, however, might be obtained through other mechanisms, such as the Phase 1 Trade Agreement dispute resolution procedures in order to determine the impact of the special campaigns launched by the Phase 1 Trade Agreement (*).

M. “Effective and appropriate” enforcement:  the obligation to provide effective and appropriate enforcement is at the heart of the TRIPS Agreement (Preamble, et seq.).  The language is vague.  Moreover, TRIPS provides member states with considerable flexibility in implementing its terms “taking into account differences in national systems” (Preamble).  Unless there is clear evidence of an area where China’s IP enforcement environment is clearly “inadequate” or not “appropriate,” the language by itself may be too vague and flexible to be enforced (*).

N. Art. 61: Determining the commercial scale for “criminal procedures and penalties” involving “wilful trademark counterfeiting or copyright piracy” remains an ongoing concern with China.  In the WTO case that the US previously filed (DS362) the United States unsuccessfully claimed that China’s high criminal IP thresholds decriminalized certain commercial scale activities in violation of Art. 61.  The WTO did not determine that Members have unfettered discretion in determining what are appropriate criminal thresholds.  The recently signed Regional Comprehensive Economic Partnership free trade agreement (RCEP) attempts to advance China’s position in DS362 in footnote 61 of the RCEP IP chapter, which recognizes “sovereign jurisdiction over police powers” and flexibility in determining what constitutes “commercial scale.”  Left unaddressed, this alternative approach to Trips Art. 61 could undermine over a decade of work by USTR and others to help establish a common consensus over best practices for criminal IP enforcement.   Article 26 of the Vienna Convention on the Law of Treaties might be invoked to claim that RCEP fn. 61 violates the Vienne Convention obligation to implement treaties in “good faith.”  On the negative side, any WTO case brought against member states on the basis that RCEP violates the TRIPS Agreement, could also implicate US allies that signed RCEP.     Moreover, RCEP signatories will claim that the TRIPS Agreement continues to govern IP-related obligations under RCEP.  A claim might also be made that the Paris Convention, which is incorporated by reference in the TRIPS Agreement  requires WTO members to assure “effective protection” against unfair competition.  As a first step, and In lieu of a WTO case, the United States may also seek to block acceptance of RCEP at the WTO due to the “more restrictive” obligations it imposes on member states by reason of TRIPS minus provisions, including its flexible approach to criminal IP infringements.  See GATT Art. XXIV, and the Understanding on the Interpretation of Article XXIV of the GATT 1994 (****).

V.  Dispute Prevention and Settlement

O.  Article 63: “final judicial decisions and administrative rulings of general application… shall be published.”   This Article has a long history in FTA and WTO jurisprudence.  Most WTO members likely view it as only applicable to common law countries due to their tradition of precedent  However, China  – – along with many other civil law jurisdictions — has an evolving system of precedent.  China should publish cases that have “general application” whether or not they are strictly binding because of their “general application” beyond the facts in suit.  These would include cases that are considered “guiding” cases, “model” cases or other cases that are intended to instruct or guide judges, lawyers, rightsholders or the public.  While most of the influential cases are already publicly available, there are some that are not. Often these unpublished cases are known to the public due to securities commission filings based on their material impact on a publicly held company.  Preliminary injunctions or other provisional measures should also not be exempt from Article 63, provided that the decision is final. China seems to take the view that only when a case is final is there an obligation to publish.  An example of such a case is Eli Lilly vs. Huang case, which involved the first preliminary injunction for a trade secret infringement and effectively settled that dispute.  As many of the important cases involving new or unsettled law may involve foreigners and may therefore be unpublished, there may be a disparate impact on foreign rights holders which could also implicate national treatment obligations in publication of cases.  The decline in publication of foreign-related IP cases is another example of how transparency can be a form of political discourse in China.  For more information on the relationship between transparency and politics in IP case publication see my powerpoint from 2019 at p. 9, as well as my blog on Nationalism, Transparency and Rule of Law  (****). 

P. Article 63.3/Article 40.3: These provisions require WTO members to respond to requests regarding specific cases by providing relevant information.  As China does not necessarily publish important cases, these requests should be made frequently.  The United States sought to compel China to make available all of the IP cases it had statistically reported in an Article 63 request before filing the China IP enforcement WTO case against China.  Although that request was overly broad, the United States might consider a more limited request in the context of any other WTO dispute that specifically addresses the need for additional cases to better support a claim as well as the difficulties in otherwise obtaining information about a claim.  This could be especially critical if a claim is made on the basis of overall data rather than on specific cases (****).

Q. Article 64(2) provides for a moratorium on “non-violation” TRIPS cases.  This moratorium has been repeatedly extended over the objections of the United States.  Non-violation cases are generally available if one government can show that it has been deprived of a reasonably expected benefit because of another government’s action, or because of any other “situation” that exists.   One condition for the United States to only consider approving appointments to the Appellate Body and reinstitute full WTO dispute resolution procedures could be the removal of the moratorium of the non-violation procedures for IP-related disputes (**). 

Actions Under Other WTO Agreements

R. The WTO Dispute Settlement Understanding, Art. 10  provides that dispute settlement procedures “should not be considered or intended as contentious acts.” This provision  constrains the ability of member states to retaliate against the filing of WTO cases.  During the DS362 dispute China did engage in range of retaliatory activities, mostly in the form of threats and the ceasing all forms of IP-related cooperation.  The US should be prepared to file  complaints if US interests are the subject of significant retaliation by reason of the filing of a  WTO case. (***).

S. There are claims under other WTO agreements that also have a direct bearing on China’s IP regime.  For example, China’s subsidization of IP-intensive, information technology products, might be the subject of a “Non-Violation” case under the Information Technology Agreement.  The CATO Institute advocated  for such actions in 2018 (****).  The United States may also wish to open up legal services markets or IP-related legal services markets, particularly due to increasing inequities and gaps in China’s original service commitments which failed to account for the presence of foreign lawyers in Chinese law firms, or that US-admitted lawyers from China in Chinese law firms that would enjoy competitive tax treatment in China as well as preferential market access (***).  Alternatively, the US could also seek to impose reciprocal market access provisions on Chinese lawyers and companies.  The USPTO has already curtailed pro- se filing of US trademarks by Chinese companies legal services offered by US-admitted lawyers practicing in Chinese law firms.

Litigation of any kind involves balancing risks and rewards.  Remedies may be inadequate.  There may be higher priorities for a company or government.  There may be alternative means of resolving disputes. Litigation can also greatly harm relations with your adversary.  China also has many pro-IP policies, that are “TRIPS plus” that should not be negatively impacted.  A negative precedent that could harm one in other contexts might also be established. There is also the possibility of retaliatory measures, including retaliatory litigation.  On the positive site, a helpful precedent might be established, specific claims may be better understood by the trade community, a spotlight may be shown on areas where legal reform is necessary, informal dispute resolution is never necessarily precluded, and the dispute may also help convince China that a particular reform would be helpful to its economy.  As an example of a helpful impact, DS62, which the United States lost, nonetheless had enhanced China’s understanding of criminal IP enforcement, helping to increase filings of criminal cases in China from 904 to 15,121 in the five years subsequent to the case.

The Phase 1 Trade Agreement established an important bilateral IPR dispute resolution mechanism (Chapter 7) in addition to WTO mechanisms.  The Deputy USTR is the sole designated agency on the US side to lead these disputes, whereas the Chinese side authorizes the Vice Premier to designate a Vice Minister. This situation perpetuates the possibilities of ill-informed negotiations on complex issues on the US side as the full range of trade-related issues may escape the mastery of any one individual or agency. WTO dispute mechanisms have an advantage of generally being run by subject matter experts, with some degree of transparency and accessibility to other WTO members and civil society.  The Phase 1 Mechanism may also be sub-optimal for disputes which require support from other member countries.

To be clear, I am not suggesting that the United States should actively pursue any of these WTO claims.  Additional research would be required on every single one of them.  I am also refuting the arguments that: the United States somehow exhausted all possible WTO remedies with the two IP cases it brought over a 20-year period; the WTO is irrelevant and out of date;  and that the United States was fully entitled to unilaterally impose sanctions and leave the WTO dispute resolution mechanism.   On IP, the United States has historically been hyper-cautious in using WTO mechanisms against China.  If the United States wants to “build back better” in the trade context and establish collaborative relations with our allies regarding China, President-elect Biden and USTR-designate Tai may wish to consider a different approach to IP-related disputes at the WTO.  Any approach should  be multi-disciplinary and forward looking, which are strengths that Katherine Tai brought to a prior rare earths dispute.  A dispute should also recognize that the China of today is vastly more sophisticated in its approach towards IP than when China acceded to the WTO in 2001.  Any strategy should  be based on solid information and not hyperbole.  It should also not be limited to the TRIPS Agreement alone.  Such an undertaking will need to draw on a range of legal and trade disciplines.  

Consider this blog as a set of suggestions  — a  “whiteboard” in essay form.  I look forward to your comments.  

Upcoming China Pharma IP Program

The Berkeley Center for Law and Technology will be launching a five-part webinar series on “Innovation, Regulation in the Life Sciences” on November 17 from 4:30-6:00 PM.   The launch program is devoted to “China’s Emerging Regime for IP In the Life Sciences”. 

Joining me for the program will be He Jing from the Gen Law firm, Dr. Karen Guo from Novo Nordisk, Xuejiao Hu from Beigene, Prof. Guobin Cui from Tsinghua Law School and Dr. Can Cui from Morrison & Foerster.  CLE credit will be provided. 

Students and media are free of charge, BCLT sponsors are half-price. We expect to cover the full range of issues in this first session: patent linkage, regulatory data protection, patent prosecution, the recent SAMR rule and SPC judicial interpretation, etc.  A package of English language reading materials is also available for attendees. The programs costs $75.00 for the session and $300.00 for the series. 

Other sessions in the series include: FDA Innovation, Food Innovation, Drug Pricing and Sharing Data for Research and Development.

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 of the Agreement (“Intellectual Property”) and Chapter 2 (“Technology Transfer”).  Chapter 1 is divided into the following 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 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).  There are also several provisions that appear to break new ground, such as in consularization of court documents by foreigners and enforcement of civil judgments.

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, bringing to mind the Chinese expression of “building a chariot while the door is closed (without consulting others)” (闭门造车).  The administrative and Customs enforcement provisions were dismissed by many as out of date or just for 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 the SPC (and likely the Supreme People’s Procuratorate [SPP]) provided input to the Chinese 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, except – as a stretch – insofar as US discovery proceedings provide an opportunity to compel production of evidence from an adverse party.  This view was also shared by others I had spoken to.

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 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).  It appears likely that the current test for preliminary injunctions are unaffected by this provision, and the provision just memorializes current Chinese law –  notwithstanding that is unclear about the standards and scope of action preservation procedures in China

The Agreement also uses inconsistent nomenclature to describe preliminary injunctions.  As noted, the Chinese text does not refer to preliminary injunctions but refers to an overlapping concept of “action preservation.” Other provisions of the English language text 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 not 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 Agreement also does not account for the fact that provisional measures serve a different function in the Chinese system compared to the United States.  China 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 (SAMR) 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  (a) company has a confidential regulatory data package on file with China’s regulatory authorities,  and (b) where a third party, such as a generic pharmaceutical company, seeks to rely upon safety and efficacy information of the innovator.  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).

This linkage regime, if properly implemented, with be an important step for Chian’s struggling innovative pharmaceutical sector.  China’s proposed linkage regime also extends to biologics (Art 1.11).  Taiwan has also recently introduced a linkage regime.

In order to implement the 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 company’s infringement of a patent held by the innovator  As drafted, the Agreement 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 especially difficult to implement a civil linkage regime in China.  The US Chamber of Commerce and the Beijing Intellectual Property Institute (BIPI) had previously 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.  Implementation of a linkage regime by China’s National Medical Products Administration (NMPA) may be possible in the alternative, as a matter of its regulation of pharmaceutical products, however, there may be concerns that NMPA lacks the necessary expertise and independence to properly adjudicate pharmaceutical patent disputes.

The Agreement also does not reference regulatory data protection, 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.  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 patented 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.

There are no provisions in this Agreement addressing non-pharmaceutical patent concerns.   Companies that may have concerns about such issues as:  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, expanding the scope of 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 (Art. 1.13) seeks to clarify and update the E-Commerce Law by “eliminat[ing] liability for erroneous takedown notices submitted [presumably by rightsholders] in good faith,”  extending mandating a time period of 20 days for rightsholders to file an administrative or judicial response to a counter-notification, and penalizing counter-notifications taken in bad faith.  Joe Simone (SIPS) has told me this Article’s 20 day period may require an amendment to the E-Commerce law, which currently requires a 10 day period.

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 auch as a general 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 be able to circumvent the license revocation, perhaps by transferring businesses to another platform  In the past, companies also evaded enforcement obligations by establishing a new business incorporated or operated under their name or that of a relative or friend.  This provision, similar to other IP provisions of the Agreement, rehashes earlier JCCT commitments with apparent disregard to lessons previously learned or developments in Chinese law and its economy.

Article 1.14  notes, unlike other Articles which note that the United States has equivalent procedures, tellingly states 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 requires 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.  This Section arguably is intended primarily to show political support for American companies that manufacture or distribute generic food and other products that compete with GI-intensive products such as wine and cheese.  It is also likely intended to support US advocacy around these issues at the WTO, WIPO and bilaterally.

Section G requires China to act against counterfeit pharmaceuticals and related products, including active pharmaceutical ingredients (API) and bulk chemicals (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 contribute to the manufacturing of counterfeit goods.  The issue of API’s and bulk chemicals 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.  Providing API’s to counterfeiters is already a crime and civil violation.  It can also give rise to administrative liability, although administrative agencies have often not prioritized contributory liability.  Thanks to Joe Simone again, for providing me with the benefit of his experiences in this area.

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 belongs to trademark enforcers, rather than enforcement officials involved in product quality or consumer protection violations.  However, the NMPA 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 administrative and law enforcement 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  Due to the growth of e-commerce and B2C exports from China via online platforms, container-sized seizures have become rarer, and the practical consequences of this provision may be limited.  Moreover, rightsholders have not often complained of Customs’ destruction procedures.  A WTO case brought by the United States involving Chinese customs destruction procedures also failed to identify losses to the United States by reason of China’s not disposing of seized goods outside of the channels of commerce consistent with its WTO obligations to seize goods on import  (DS362) (see 0% auctioned on imports, below).  At that time, when containerized shipment seizure was more common, only 3.7% of imported and exported goods were auctioned by value and 1.9% by shipments.   7.351ds362

My former colleague, Tim Trainer,  has identified what is new in the Agreement in Customs as seizures in transit.

The Article does not define what is a “counterfeit” good, or whether manufacturing a product for export may constitute an infringement of the rights of a third party that holds the right in China, which is the so-called OEM problem.  In a typical OEM scenario, the importer in a foreign country owns the relevant rights in the importing country, but not 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, presumably when goods are seized.  It is unclear to me why the Agreement does not address the critical issue of affording adequate civil damages generally, why it is limited to the Customs context, and why the Agreement does not generally address the overuse of low statutory damages in IP-related civil disputes generally.

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.  IP owners may wish to consider using judicial asset preservation measures by the courts in order to address issues involving the seizure of goods that are also used for legitimate manufacturing purposes.

Destruction of counterfeit goods by Market Supervision Bureaus in administrative trademark enforcement proceedings is not discussed in this Agreement and has been an area of concern by rightsholders in the past.  This omission is concerning as China’s administrative enforcement of trademarks has historically been a highly active area of IP enforcement on behalf of foreign rightsholders.

Section H addresses the bad-faith registration of trademarks.  No specific action is required by China in the text.  I have previously discussed the importance of expanding concepts of “good faith” in IP protection in China with hopes that it would be addressed in resolving the trade war and had specifically noted two issues addressed in the Agreement: bad-faith registration of trademarks, and ensuring that employees were covered objects of China’s trade secret law.  Certain steps have already been undertaken by relevant agencies to address the important issue of bad faith trademark registrations, including:  supporting oppositions/invalidation against marks filed in bad faith and with no intention to use (Article 4 of the Trademark Law);  addressing the problem of trademark agencies that knowingly facilitate those bad faith trademark filings under Article 4, and imposing administrative fines against bad faith trademark applicants for a purpose other than use or judicial punishments against pirates that bring trademark infringement lawsuits against brand owners victimized by bad-faith registrations.

Given the lack of identified concrete next steps in this important area, China may not be planning to do little more legislation in this area in the near future, and/or waiting to better evaluate the impact of recently implemented measures and policies, including provisions allowing fines to be imposed against trademark pirates. Joe Simone has suggested that one helpful measure to consider in the future might be for courts to award compensation for legal and investigation fees in bad faith cases, ideally by the same courts handling invalidation and opposition appeals.

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 and thorny 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 to the Public Security Bureau or Procuratorate, it will have little impact unless these agencies accept the case and initiate prosecutions.  A loophole in this text may be that it does not mandate that a case is accepted after it has been referred by administrative agencies, thereby risking non-action by prosecutors.  As administrative agencies have more limited investigative powers, the evidence provided by administrative authorities may also often be insufficient to initiate a criminal investigation.

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 English language text of 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 also provide broader social deterrence (威慑 as in nuclear “deterrence”, which is found in the Chinese version of the Agreement).  This paragraph and the Agreement more generally do not underscore the important role of compensatory civil damages in providing deterrence.

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 trademark and copyright criminal thresholds  (DS362).  However, the lost lesson from that case is that criminal thresholds are not as important as other factors in creating deterrence. Prosecutors may still decline in fact to prosecute cases, even if they are required by law to accept 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.  The civil system also needs to play a robust role in creating respect for IP.  The proof of the limited impact of lowering criminal thresholds is that criminal IP cases significantly increased in China after it lost the WTO case.  After the United States “lost” that WTO case, the number of criminal IPR cases rapidly increased to a high of approximately 13,000 in 2013.  Whether the Chinese data  of 2013 was calculated to include only IPR-specific crimes or crimes that may encompass IPR-infringing products (such as involving substandard products), this was a dramatic increase from approximately 2,684 criminal IP cases or 907 IPR infringement crimes from 2007.  The bottom line is that simply increasing criminal cases through lower thresholds may not be enough to create a healthy IP environment.

Another issue of concern is that foreigners have often been 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).  According to Susan Finder, the SPC already lists judgment debtors in its database.  This is a welcome area of engagement and should also be supported by continuing 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 some 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, photos 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’s ability to implement “penalty of perjury” submissions is limited by China generally lacking a concept of authenticating a document under penalty of perjury, which also hampers lawyer’s ability to represent clients by powers of attorney.  The implementation and impact of this provision is unclear.

Article 1.31 permits expert witness testimony.  Expert witnesses are already permitted under existing Chinese law, although the trend appears to favor greater use of them.  Moreover, Chinese courts have been expanding the role of expert technology assessors to provide support for technologically complex cases.  Once again the implementation and impact of this provision is uncertain, although we can expect further developments from the courts in this area, 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.  In an additional welcome development, 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.

Some additional hope for IP commercialization is afforded by the commitments by China in the Agreement to increase its purchases of services by $37.9 billion from the United States during the next two years, which include purchases of IP rights as well as business travel and tourism, financial services and insurance, other services and cloud and related services.  Considering the central role played by forced technology transfer in this trade war, it was to be hoped that a specific commitment on purchases of IP rights might have been secured.

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 due to technological and economic changes.   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 Agreement already contains commitments for China to increase its share of cloud-based services.  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, pollution, and taxation) that campaigns result in “short term improvements, but no lasting change.”  Moreover, the focus of these campaigns, including Customs enforcement and physical markets appears outdated due to the growth of e-commerce platforms.

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 the use of licensed software within seven months, and annually thereafter (Art. 1.23).

Also, a quarterly report is required regarding the 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, to make court dockets more available to the public, and to generally improve transparency in administrative or court cases, which might have made the Agreement more self-enforcing.  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 administrative agencies 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, and in many cases appear more focused on yesterday’s problems.  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 that also address the challenges of the future

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

Please send in any comments or corrections!

Revised 1/23/2020, 1/27/2020