Trade Wars: A New Beginning?

Why is this year’s  Special 301 Report (the “Report”) from USTR (April 29, 2019) different from prior reports?  In prior years, this report often repeated materials found elsewhere, such as in the  National Trade Estimate Report (March 2020).  This year’s Report reflects the Phase 1 Trade Agreement (January 15, 2020) (the “Agreement”) and the subsequent Chinese Action Plan (April 20, 2020). More importantly, it also suggests how the US might wish to see the implementation of the Agreement and negotiate a Phase 2 Agreement. There are a number of welcome surprises that suggest a new beginning.

Most importantly, the Report demonstrates a renewed commitment to the rule of law and the role of markets in protecting IP.  As noted in many of the postings of this blog, these were areas that I found seriously deficient in the Agreement.  The Agreement revitalized administrative campaigns and enforcement mechanisms and encouraged punitive mechanisms.  It generally underemphasized compensatory damages and other civil remedies, including appropriate civil procedures, and did not adequately emphasize the need to let market mechanisms govern IP creation and commercialization.

The Report addresses issues that the Phase 1 Agreement war did not, such as “poor quality patents”, “the presence of competition law concepts in the patent law” and challenges faced in trademark prosecution.  The Report also notes that  there are “obstacles in establishing actual damages in civil proceedings,” including a lack of “preliminary injunctive relief.”  These are useful statements, but even more important are the references to judicial procedures.

The Report states that “Chinese judicial authorities continue to demonstrate a lack of transparency”, including publishing only “selected decisions rather than all preliminary injunctions and final decisions.”  In addition, “administrative enforcement authorities fail to provide rights holders with information.” The issue of transparency has been repeatedly reported on in this blog as key to effective oversight of the Agreement.  The Report also notes that “[a] truly independent judiciary is critical to promote the rule of law and to protect IP rights.”  The Report mentions the need for transparency in China’s IP system five separate times.  By comparison, Chapter 1 of the Agreement mentions transparency once (with respect to Geographical Indications),  and not once with respect to judicial or administrative proceedings.

The Report comes down particularly hard in favor of legal process in its discussion on the social credit system, particularly the CNIPA/NDRC  et al, Memorandum of Cooperation on Joint Disciplinary Actions for Seriously Dishonest Subjects in the Field of Intellectual Property (Patent) 关于对知识产权(专利)领域严重失信主体开展联合惩戒的合作备忘录》(the “Dishonesty Measures”) (December 5, 2018) by noting that “these measure lack critical procedural safeguards, such as notice to the targeted entity, clear factors for determinations, or opportunities for appeal.” The Report further concludes that “The United States objects to any attempt to expand the ‘social credit system’ in the field of IP.”

This statement suggests a further distancing of the administration from rhetoric and outcomes of December 2018-May 2019 when the primary goal appeared to be strong legal commitments to punish IP infringement without explicit consideration of due process.  The Dishonesty Measures were likely enacted to appease US concerns on IP on the margins of the G-20 summit (November 30- December 1, 2018).  The concern then appeared to be that they were not sufficiently well-codified, not that they lacked due process.  Larry Kudlow said after the G-20 in 2019, that IP-related provisions (most likely the Dishonesty Measures) need to be “codified by law in China” and should not just be a “state council announcement.”

I am personally gratified to see the reintroduction of concerns over due process and rule of law into the Administration’s discourse of IP, although I believe the complexity of the relationship between IP protection and the social credit system may require further study.  I suspect that it may be difficult for rightsholders commercializing their rights or seeking to enforce judgments to completely distance themselves from the social credit system.

The Report also notes that the US had initiated dispute resolution proceedings against China at the WTO regarding China’s technology licensing regime and that China revised the measures the US had challenged in March 2019. The Report concludes that “[t]he significance of these revisions is under review.”  The Report does not note that the US had agreed to suspend the WTO case due to these legislative revisions, until May 1, 2020, at which time (the date of writing of this blog) it needs to decide whether or not to reinstate this case.  Perhaps USTR did not want to show its hand regarding what it would do effective May 1, 2020 – two days after the Report was issued.  Presumably, the United States will seek an extension of time in light of the continuing “review.”

Whatever decision is made at the WTO, the US team deserves credit for the legislative changes in licensing, forced tech transfer and trademarks that were made in the spring of 2019 and for re-emphasizing due process, the market, and rule of law, in the Report and in United States advocacy for better IP protection in China.

What the EU and US WTO IP Disputes Reveal About Trade Diplomacy

IMAG0300

Two contrasting approaches to using the WTO for China-related IP issues involving technology licensing and forced technology transfer are now pending at the WTO.

The United States initiated a WTO dispute on China’s licensing practices by filing a  consultation request on March 23, 2018.  Shortly after the filing of that case, Japan, the European Union, Ukraine, Saudi Arabia and Chinese Taipei requested to join the consultations.  The European Union additionally filed its own parallel WTO consultation request on June 1, 2018, with a broader scope. It is too soon to tell which countries will join the EU request.

Both countries timed their requests in conjunction with other trade actions. The WTO case was filed by the United States one day after the Section 301 report  was released. The European Union simultaneously filed its case against China with a WTO case against the United States regarding US tariffs on steel and aluminum imports.

The EU’s approach to this IP case is markedly different from the last time the US filed a WTO dispute involving China’s IP practices (DS/362).   At the time that the US filed a request for IP-related cases from China, the EU declined to make a similar transparency request.  It also did not join the US as a co-complainant in the ensuing WTO case, nor did it file a parallel complaint, but it did participate as a third-party.  By contrast, the EU approach in the current dispute is to both support the US and dig deeper.

The US consultation request was portrayed by USTR as addressing “technology licensing requirements.”  The thrust of the complaint involves China  “denying foreign patent holders, including U.S. companies, basic patent rights to stop a Chinese entity from using the technology after a licensing contract ends.”  The consultation request is therefor somewhat narrow.  The US complaint does not specifically address other technology-oriented rights, such as trade secret protection or undisclosed data, nor does it take on the topics set forth in the Section 301 report involving “IP theft.”   The consultation request is now numbered WT/DS542/1.

The EU complaint (WT/DS549/1), cites several Chinese measures in addition to those identified in the United States’ consultation request, and invokes more expansive WTO principles and procedures. The additionally cited measures include 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.  The Chinese promulgation of these interim Regulations only five days after the US filed its consultation request, looks to some like another act of synchronized trade diplomacy — in this case as a possible retaliatory act for the 301 report and the WTO case.  My guess is that the EU, by referring to these new largely untested regulations is however seeking to address the legality of controls China has additionally imposed on foreigners’ transferring IP out of China.

The EU has also swept in other measures into its complaint, including China’s trade secret law (the Anti-Unfair Competition Law), the Anti-Monopoly Law, the Regulations [sic] of State Administration for Industry and Commerce Administrations on the Prohibition of Abuse of Dominant Market Position, and the Regulation [sic] on the Prohibition of Conduct Eliminating or Restricting Competition by Abusing Intellectual Property Rights.  The nomenclature the EU uses for these various legal documents appears imprecise.  The March 2018 “measures” may properly be classified as “regulations” 法规 issued by the State Council. The SAIC “regulations” should properly be classified as “rules” 部门规章 issued by an administrative agency. This is the nomenclature China set forth in the Report of the Working Party on the Accession of China (WT/ACC/CHN/49), paragraph 66 ( the “Protocols of Accession“).  The Working Party Report nomenclature establishes clear legislative hierarchies pursuant to China’s Law on Legislation.

The EU also argues that China’s appears to directly or indirectly “nullifying or impairing” the benefits accruing to the European Union and its Member States that were expected by China’s WTO accession, thereby opening the door to broader arguments regarding how China may deprive WTO members of the benefits they legitimately expected while at the same time not violating the literal language of any commitment (See, e.g., Art. 64 of the TRIPS Agreement).  These arguments have been subject to a moratorium and have historically been difficult to assert, but in my estimation have some relevance to the current situation in China.  The EU is also seeking to utilize provisions in the WTO that address the “impartial and reasonable application and administration of its laws, regulations and other measures” (Article X.3(a) of the GATT 1994 and Paragraph 2(A)2 of the Protocol on the Accession of the People’s Republic of China to the WTO).  The “impartial administration” requirement, as found in the Protocols of Accession requires China to “apply and administer in a uniform, impartial and reasonable manner all its laws, regulations and other measures … pertaining to or affecting …  trade-related aspects of intellectual property rights (“TRIPS”)” (p. 74).

Contrasting the actions of the US and the EU, the EU complaint urges a legalistic and multilateral resolution of trade disputes, using doctrine that has proven difficult to assert.  The approach also appears to reflect a waning confidence by some that China today in fact has an effective and independent legal and political system which “impartially administers its laws”.   My former colleague at Fordham, Prof. Carl Minzner describes some of these political reversals in his recent book  End of an Era: How China’s Authoritarian Revival is Undermining Its Rise (2018).

The US approach, by contrast, uses the 301 report to point to perceived technological threats, manifested through industrial plans, vague laws, industrial espionage and unfairly adjudicated cases, to make the point that the WTO might be inappropriate to resolve its concerns. In a sense, the US assumed in the Section 301 report that in the party- and plan-controlled China of today, with a resurgent state sector, there aren’t many “laws, regulations and other measures” to administer impartially.  The United States therefor pays scant attention in the 301 to the numerous legal reforms and civil adjudication in intellectual property that have taken place in recent years.  The United States approach is also more broadly consistent with the perspectives of Prof. Mark Wu at Harvard Law School who prophetically pointed out in his article “The ‘China, Inc.’ Challenge to Global Trade Governance”  that “the WTO faces a challenge: can the institution craft a predictable and fair set of legal rules to address new trade-distortive behavior arising out of China, Inc.? If not, key countries may turn away from the WTO to address these issues.”

While the EU and the US likely have common goals with respect to China’s IP regime, I believe that they likely could also learn something from each other in their strategies and perhaps they will as these cases progress.

 

IMAG0352

Bottom photo by Mark Cohen of Charleston, SC United States Custom House.

 

Justice Tao Kaiyuan and the Role of the Judiciary

MadameTaoMichelleLee

Justice Tao Kaiyuan of the Supreme People’s Court, who had been to the United States in 2015 delivering important speeches on rule of law, has recently published an article on “Giving Full Play to the Leading Role of Judicial Protection of IP Rights“ 充分发挥司法保护知识产权的主导作用”(Dec. 31, 2015).  The article is receiving considerable attention in China, as it was published by Qiu Shi, 求是(“Seeking Truth”), a bimonthly political theory published by the Central Party School and the Central Committee of the Communist Party of China.  The publication of the article appears to be timed with the release of the recent draft of the Patent Law Amendments, comments for which were due the day after publication (January 1).  The proposed patent amendments would strengthen the role of administrative agencies in IP enforcement, to the possible detriment of the judiciary.

The author of the article is no less important than its contents.  Madame Tao knows patents.  She was the former Director General of the Guangdong Patent Office and therefor once had “vertical” reporting responsibility to SIPO (see picture above taken by me of Madame Tao [on the right] with USPTO Director Michelle Lee taken in 2015).  Although the article was authored in her name, many in China were speculating that the article was approved by higher authorities – perhaps Zhou Qiang, the President of the Supreme People’s Court, with Madame Tao serving as an appropriate messenger.

The concerns about this draft on patent law enforcement are not that different from those in the earlier (2012) draft when I blogged in “Why the Proposed Amendments to the Patent Law Really Matter … and Maybe Not Just For Patents” that “the changes strike me as a rather sudden about face in China’s march towards better civil protection of IP.” Madame Tao takes this several steps further.

Madame Tao’s article is divided into three parts: (1) The important meaning of giving full play to the leading role of the judicial protection of IP rights; (2) The key factors that constrain the leading use role of judicial protection of IP; and (3) Key measures in giving full play to the leading role of judicial protection of IP rights.   Here are some of the points she makes:

Madame Tao refers back to the National IP Strategy and related documents, such as the Third Plenum, the NPC’s decision to establish IP courts, and the Action Plan for the National IP Strategy to underscore the well-established, leading role of the courts in enforcing IP.

Her article compares certain key elements of judicial protection versus administrative protection.  In her view, judicial enforcement can curtail abuses of administrative enforcement.  It also has other advantages.  It has clear rules.  It is transparent.  It can help establish guidance for businesses by establishing clear standards for similar disputes (a possible nod to efforts at developing case law/guiding cases).  Moreover, civil enforcement comports with notions of private ownership and the development of markets and creation of a fair competitive environment in China.  Madame Tao especially underscores the role of the courts in supervising administrative agencies.  As I have noted, this is also an important part of the foreign IP docket in China.  Madame Tao states that the judiciary should also actively guide administrative law enforcement in investigation and review of evidence, and determination of infringements.

Madame Tao also calls for greater coordination in administrative and judicial roles in IP protection, noting that administrative enforcement played an important leading role in the beginning of China’s IP enforcement environment.  Administrative enforcement has “in a short time met the need for building effective IP protection.”  However, the “growing maturity” of the judicial system has caused increasing problems in the coordination process.

Madame Tao also calls for specific policy initiatives, many of which are already underway.  She calls for greater deterrent civil damages, including by revising patent, copyright and unfair competition laws based on experience of the trademark law revisions.   She also suggests that a discovery system should be considered.  Civil and criminal divisions in IP should be unified.  She suggests that a specialized national IP court should be researched and promoted, and she calls for the unification of technical appellate cases, perhaps like the CAFC.  She also notes that the division between infringement and validity determinations in the courts in patents and trademarks should be addressed, and calls for improvements in the availability of provisional measures.

She calls for greater improvements in judicial protective measures, including in obtaining evidence and the convenience and effectiveness of remedies.  Among other specific judicial reforms, she also suggests exploring intellectual property case law, improving judicial accountability and developing judicial professionalism.  Finally, Madame Tao also calls for expanding international awareness by IP judges to better protect national interests and to increase China’s IP influence.

Altogether, a tour de force.

Here’s what her speech looks like in a machine-translated wordcloud:taowordcloud