SPC’s 2020 IP-Related Judicial Interpretation Agenda

On March 19, 2020, the Supreme People’s Court’s Judicial Interpretation Agenda for 2020 (“2020 Judicial Interpretation Agenda”) 最高人民法院2020年度司法解释立项计划 was discussed and adopted by the SPC Trial Committee at its 1795th meeting on March 9, 2020. In 2020, there are 49 judicial interpretation (JI) projects, divided into two categories: 38 in the Class I Projects, which are required to be completed by the end of 2020; 11 in the Class II Projects, which are required to be completed in the first half of 2021. Generally speaking, the complete catalogue covers various fields such as the enforcement, security, pre-litigation property preservation, civil code, criminal cases, administrative cases and judicial appraisal. There are a number of  IP-related projects, all of which involve the recently established national Intellectual Property Court as a drafting and research partner with other SPC divisions or tribunals, and suggest an increasingly important role for this specialized court in IP policy making:   

Class I Projects (to be completed before the end of 2020) 

  1. Several Provisions on Evidence in Civil Procedures of Intellectual Property 关于知识产权民事诉讼证据的若干规定 [ As previously noted, this draft was discussed at a conference hosted by the SPC in Hangzhou in 2018. As Chinese courts experiment with more expanded discovery, evidence preservation and burden of proof reversals, clearer rules regarding the obligations of parties to produce evidence are becoming more critical. ]

 Organizers: Civil Adjudication Tribunal No.3, Civil Adjudication Tribunal No.1, Research Office, Intellectual Property Court 

  1. Interpretation of Several Issues concerning the Application of Law in the Trial of Administrative Cases for Patent Validity 关于审理专利授权确权行政案件适用法律若干问题的解释 [Note: A draft was issued for public comment in the summer of 2018; see the earlier blog].

 Organizers: Civil Adjudication Tribunal No.3, Intellectual Property Court 

  1. Interpretations of Several Issues concerning the Application of Law in the Trial of Trade Secret Secret Infringement Cases 关于审理侵犯商业秘密纠纷案件适用法律若干问题的解释 [Note: Regarding the Interpretations of Several Issues concerning the Application of Law in the Trial of Trade Secret Infringement Cases, it was also on SPC’s 2019 JI Agenda. As mentioned in Susan Finder’s November 26, 2019, blogpost, this judicial interpretation is flagged in the Party/State Council document (November, 2019) on improving intellectual property rights protection with a goal to “explore and strengthen effective protection of trade secrets, confidential business information and its source code etc. Strengthen criminal justice protection and promote the revision and the amendment and improvement of criminal law and judicial interpretations 探索加强对商业秘密、保密商务信息及其源代码等的有效保护。加强刑事司法保护,推进刑事法律和司法解释的修订完善.”]

Organizers: Civil Adjudication Tribunal No.3, Criminal Adjudication Tribunal No.1, Intellectual Property Court [Note the involvement of the Criminal Adjudication Tribunal is a positive sign for seeking an integrated civil/criminal/administrative enforcement approach] 

  1. Provisions on Several Issues concerning the Application of Law in the Trial of Pharmaceutical Patent Linkage Dispute Cases 关于审理药品专利链接纠纷案件适用法律若干问题的规定 [Note: this appears consistent with the requirement for adopting a patent linkage system in the Phase 1 IP AgreementAs we have discussed in a previous blog, the Pharmaceutical-Related Intellectual Property section of the Phase 1 IP 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]

(New Project)

Organizers: Civil Adjudication Tribunal No.3, Case Filing Tribunal, Intellectual Property Court  

  1. Provisions on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct () 关于审理因垄断行为引发的民事纠纷案件应用法律若干问题的规定() (New Project)

 Organizers: Intellectual Property Court, Civil Adjudication Tribunal No.3

 Class II Projects (to be completed in the first half of 2021)

  1. Provisions on Several Issues concerning the Specific Application of Law in the Trial of National Defense Patent Disputes 关于审理国防专利纠纷案件具体应用法律若干问题的规定 (New Project)

Organizers: Civil Adjudication Tribunal No.3, Intellectual Property Court 

  1. Interpretation of Several Issues concerning the Application of Punitive Compensation for Intellectual Property Infringement 关于知识产权侵权惩罚性赔偿适用法律若干问题的解释

Organizers: Civil Adjudication Tribunal No.3, Intellectual Property Court  

  1. Interpretation of Several Issues concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition 关于审理不正当竞争民事案件适用法律若干问题的解释 (New Project)

Organizers: Civil Adjudication Tribunal No.3, Intellectual Property Court 

  1. Provisions on Legal Issues concerning the Specific Application of Law in the Trial of New Plant Variety Right Infringement Cases 关于审理植物新品种权纠纷案件具体适用法律问题的规定 (New Project)

Organizers: Intellectual Property Court, Civil Adjudication Tribunal No.3

 Judicial interpretations that are not marked as the “New Projects” have already been on the SPC’s Judicial Interpretation Agenda for 2019 or 2018. Several of them, including Several Provisions on Evidence in Civil Procedures of Intellectual Property (2019) and Interpretation of Several Issues concerning the Application of Law in the Trial of Administrative Cases for Patent Authorization and Confirmation (2018 and 2019), were to have been completed by the end of 2019 or 2018. 

Class I Projects JI No. 37 and Class II Projects  Nos. 3 and 11 all have prior effective versions that were issued in 2012 or earlier.  It is likely that these “New Projects” will be in the form of amendments, perhaps significant, to the previous JI’s.

 

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

Catching up With The Literature on Forced Tech Transfer…

FTT
(from the OECD report, discussed below)

While President Trump has extended the truce on the trade war, academic and business debate around the nature of “forced technology transfer” (FTT) practices in China and appropriate business and legal strategies continues.

A  study last year by Dan Prud’homme and his team, discussed earlier in this blog, was one important empirical effort looking at the nature and consequences of FTT.  Their FTT Strategy & Risk Forecasting Matrix was intended to guide foreign firms to anticipate risks associated with FTT policies and serve as a starting point for understanding how to further quantify or mitigate these risks.  In January 2019, the OECD also released a study on International Technology Transfer policies which cites to the Prud’homme study and further describes FTT, as well as the various international agreements and practices that may constrain it.  Consistent with the approaches of the US and EU in the currently pending WTO case, the study highlights the importance of joint ventures for transfer of technology in China (para. 90), pointing to equity restrictions as one reason for such licensing arrangements.   Because of the high volume of multinational and governments in tech transfer, the OECD reports also underscores the importance of transparency in the tech transfer process to “distinguish[] voluntary  technology transfer from its more constraining variants.” [para. 92].  Predictably, the report also cites to the same provisions cited by the United States and Europe in the pending WTO case against China regarding its FTT polices [para 65].

A timely and business-oriented to FTT was presented by the IP consulting firm Rouse in a highly useful webinar of February 27, 2019, available here.  The speakers, Tim Smith and Chris Bailey, noted that due to the current trade dispute with the US, Chinese prospective JV and business partners are currently “falling over themselves” not to require tech transfer as a condition to a deal.   The speakers also noted that there had been a resurgence of joint ventures in tech-driven deals with China.  In addition, smaller companies have found that it has become more expensive to develop market share in China making a JV more attractive.  Even if a JV is not mandatory, the access to local capital and expertise can be a rationale for forming a JV.  The additional capital may also lead to higher valuations if an IPO exit is contemplated for the joint enterprise.

The speakers noted that Chinese companies are also increasingly more concerned about less traditional factors of a tech transfer such as whether they can scale up quickly using the technology, how they will handle IP infringements in China, and whether the technology can offer an immediate competitive advantage.

Amongst the newly emerging business structures, the speakers also noted that there have also been  an increasing number of offshore joint ventures formed outside of China that then reinvest China.  The Chinese party may also try to take a stake in a foreign party, and then license the technology into China. The Chinese party thereby may become a financial or strategic investor in the foreign partner.  Contrary to the common understanding, the Rouse speakers also underscored that state-owned enterprises are not as “untouchable” in IP or licensing disputes with foreign partners as private companies.  In some cases they may be better targets for litigation, as they may be more concerned about reputational risks from IP law suits than privately-owned companies.

The presenters also noted that there are deals where China is licensing out have become more common, particularly in new technologies such as AI, VR/AR, electric vehicles and battery technologies.  Western businesses are increasingly looking to Chinese businesses for these innovations.

As is evident from the above, the presenters’ viewed the current WTO dispute around the TIER and other concerns over FTT to be “yesterday’s issue” for practitioners and business people.  They also point to the data from recent surveys showing that a minority of US and European Companies have been asked to transfer technologies by their business partners, often as a condition of obtaining market access. However, they also note that companies have long utilized work arounds to the TIER, which has been on the books since 2002.

The Rouse webinar is particularly instructive in documenting the sophistication of Chinese licensees and future licensors.  Of course, the subsistence of a discriminatory provision as “yesterday’s issue” is also not justification for its continued existence.  If anything, it underscores how much of an unncessary, if not counterproductive,  impediment China’s Administration of Technology Import/Export Regulations (TIER) has become.  From a WTO perspective, even if the TIER is often irrelevant to current transactions, the key issue  in WTO jurisprudence is likely to be whether “expectations of the competitive relationship” offer less favorable treatment to a foreign licensor than a domestic Chinese licensor.   Further, the presence of “additional regulatory hurdles”, such as the necessity of using a domestic subsidiary or an offshore joint venture to sub-license a technology due to discriminatory provisions that exist for a foreign licensor,  does not afford a useful justification for a discriminatory provision.  Indeed such additional regulatory hurdles may constitute de jure discriminatory treatment, as was documented in the case the United States brought against the EU regarding its regime for Geographical Indications (See Para. 7.314, WTO Panel Report)  Due to the increasingly sophisticated experience of Chinese companies, including their willingness to contribute capital or participate in complex multinational licensing structures, the webinar ultimately proved to me that the TIER itself has also largely outlived its usefulness in protecting “vulnerable” Chinese licensees.

An important legislative development that also deals with FTT is China’s revised Foreign Investment Law.  The European Union Chamber of Commerce has released its comments on the draft law here. The comments were due February 24, 2019.  This draft law addresses some foreign concerns about FTT involving foreign investments in China.  The EU’s comments on the FTT provision are as follows:

“Article 22 explicitly prohibits administrative organs and their staff from using administrative means to force the transfer of technology, which echoes the language used in other high-profile policies that have been released in recent years, most notably State Council Document No. 19 (2018). However, this leaves open the possibility for any non-administrative body to use any other means to compel technology transfers. Instead, the Foreign Investment Law should simply prohibit forced technology transfer by any means.”

I personally believe that the language of the draft law, by itself, is insufficient. Other observers, such as Rouse in its webinar, have noted that other incentives to FTT remain, including restrictions arising from national security, foreign investment restrictions, Made in China 2025 incentives, data localization requirements, etc.  Moreover, the draft law does not present a clear pathway to present legal challenges to local authorities, and to minimize any possible retribution when a foreign company complains about extortionary practice.  Prior history shows that foreigners are also highly reluctant to bring law suits against the same local governments that may be involved in regulating their investments. One partial solution is for China’s new national appellate IP court to consider taking jurisdiction over these FTT disputes. The Chinese government might also consider other measures such as creating an ombudsman for foreign investors, fast track administrative reconsideration of investment reviews, improvements to trade secret protection and employee mobility rules, and other measures that constrain the ability of local governments or individuals to directly or indirectly encourage a foreign investor to relinquish its technology, whether through legal or illegal means.  As another example, if the Chinese government seriously wants to address the problem of FTT, the theft of trade secrets that is undertaken in “support” of national or local government technology policies might be subject to enhanced penalties.  Moreover, such cases should be adjudicated by courts other than ones located in the jurisdiction where the misappropriation occurred.

Update from February 28, 2019: A second draft of the Foreign Investment Law has been released and made available in English by the NPC observer.  It is available here.

 

 

 

 

 

 

How to Measure the Steps to a Binding Truce…

“The real question is so we do a memorandum of understanding, …. How long will that take to put into a final binding contract” (President Trump)

“From now on … we are going to use the term ‘trade agreement’” (Amb. Robert Lighthizer)

 

This week President Trump and Amb. Lighthizer debated whether the administration will be concluding an “Memorandum of Understanding” or a “Trade Agreement” with China to resolve the current trade dispute, as detailed in Bloomberg.   However, both countries cannot enter into treaties or agreements ratified by their legislatures in the short time available to them.  The more meaningful question is not whether an “agreement” is binding, but whether the underlying commitments require actions that are binding.

US-China trade agreements have often had the staying power of the dew on a summer’s rose.  One reason was that the underlying commitments did not require clear, binding legal action.  A good example of such a non-binding commitment was the 2010 JCCT agreement on government procurement of indigenously innovated products:

China and the United States will not adopt or maintain measures that make the location of the development or ownership of intellectual property a direct or indirect condition for eligibility for government procurement preferences for products and services. China and the United States will continue to discuss whether this principle applies to other government measures.

What was the “measure” that China was not supposed to adopt or maintain?  To someone unaware of its background,  it appears that the United States had a similar problem as China.  Furthermore, a US reader may think that we asked China to enact a “law” to address discriminatory government procurement.   Oxford defines “measure” as a “legislative bill.”  By contrast, Chinese legal scholars know the term “measure” as vague and not binding.  As an example: the word “measure” appears 32 times in China’s accession documents to the WTO in a descending hierarchical order as “law regulations and/or [other] measures. ” As an ambiguous term, it could mean either a  type of law or regulation (both of which or binding) or a non-binding administrative rule.

The 2010 commitment predictably  led to problems in implementation by localities who did not believe they were bound by this negative commitment.  As my colleague Stanley Lubman noted in a Wall Street Journal blog in July 2011:

[W]hile government policy on procurement has receded from the original position and “indigenous innovation” has been “delinked” from government procurement requirements, implementation of this shift is problematic because acceptance and commitment by sub-central (provincial and municipal) governments are needed to make it meaningful.

The 2016 JCCT Commitment on innovation of indigenous innovated products attempted to clean up the vague language from the 2010 JCCT by acknowledging issuance of a State Council document was required:

The General Affairs Office of the State Council issued a document recently, requiring all local regions and all agencies to further clean up related measures involving linking the indigenous innovation policy to the provision of government procurement preferences, so as to practically implement the commitment made by the Chinese side.  The U.S. side welcomes this development.

This commitment, in its legal terms, is a vast improvement over the 2010 JCCT commitment. It clarified that the obligation was not a bilateral one.  It also required the State Council, an authoritative agency with the power to bind inferior agencies, to issue a “document” (presumably a regulation in the heirarchy noted above).  Finally, it required local governments to “clean up” conflicting “measures” with an identified offending policy.  Using a high level document to address inferior legislative acts also made the commitment more easily verifiable.

This problem of binding commitments and conflicts with local policy is nearly identical to current issues of “forced technology transfer” where local governments may sense that there is currently no national law that doesn’t prohibit them from demanding that foreign technology owners relinquish their rights.  China’s proposed adoption of a Foreign Investment Law that prohibits forced technology transfer would be one positive step in the direction of addressing that issue.  However that law and its enforcers should specifically address contrary policies and incentives that exist throughout the country.  To further ensure enforcement, at a minimum the new national appellate IP court should have original jurisdiction over challenges brought by foreign businesses against these local practices.   The court could provide  transparent, verifiable, professional and fast resolution by accountable authorities independent of direct local influence.

A 2016 GAO report on clean energy cooperation with China provides another example of a meaningless trade commitment.  That reported stated:

The U.S. Patent and Trademark Office has identified a potential discrepancy between Chinese law and the bilateral U.S.-China Science and Technology Agreement upon which the IP Annex to the CERC [Clean Energy Research Center] Protocol is based, according to U.S. Patent and Trademark Office officials. These officials stated that the potential discrepancy is related to ownership of any improvements made to IP licensed between U.S. and Chinese entities.

This language underscores the problem that a bilateral MOU or “agreement” may have no legal significance when there is a contrary State Council regulation, namely China’s Administration of Technology Import-Export Regulations (TIER).  The TIER mandates that the Chinese side own any improvements to technology licensed in bilateral science cooperation projects, and is therefore at odds with the inferior negotiated agreement.  This text leaves the dispute open to future diplomacy, which is not a realistic approach for private business disputes.

There are numerous other examples of poor drafting or drafting of IPR commitments that at best would accomplish only short term goals.  USG and Chinese negotiators in their haste to resolve a difficult set of issues should not lose sight that the underlying commitments of any agreement that meaningfully address US concerns must be phrased in terms of legally binding actions.  These legally binding actions must also be durable, and should not be be countermanded by local measures. They should also be easily susceptible to USG verification.

On Avoiding “Rounding Up the Usual Suspects” In the Patent Law Amendments …

 

Although many of the proposed changes in China’s patent law amendments are welcome, the draft amendments also present a difficult  choice in two key areas: (a) patent administrative enforcement and (b) punitive civil damages.

(A)The draft, if enacted, would enhance patent administrative enforcement through national coordination of large cases (Art. 70), expanding authority of administrative enforcement for infringement (Art. 69), and enhanced fines of five times illegal earnings or up to 250,000 RMB (Art. 68).  These efforts should be seen against the background of a huge ramp up in administrative enforcement in patents,  that has now eclipsed administrative enforcement of trademarks (77,000 to 31,000 cases).    Moreover, there appears to be a continuing interest of the Chinese government in special campaigns to deal with patent infringement, such as in a recently announced MOU with NDRC, and in a proposed campaign to deal with infringement issues faced by foreigners at the beginning of the current 301 investigation.

How much will these efforts help foriegn business people? The record on special campaigns is that most improvements are short-lived and perhaps focus too much on “rounding up the usual suspects” by local enforcement agencies (Casablanca).  Enhancements in administrative patent enforcement are also an about-face from the prior dominant role that trademarks played in administrative IP enforcement and the relatively minor role that patent administrative enforcement traditionally played in China.  Also of concern is that administrative trademark enforcement had uniquely been frequently utilized by foreign entities as complainants/victims.  For example, there were 17,022 administrative trademark enforcement actions taken by SAIC on behalf of foreigners in 2011.  This was nearly 14 times the number of all foreign-related civil litigation involving all types of IP rights that were disposed of by the China courts in that year (1,321).    In addition, as the Apple design patent case demonstrated in Beijing, foreigners may easily end up on the defensive side in these administrative patent cases that are typically brought by local government officials.    It is therefore uncertain how much, if at all, enhanced administrative patent enforcement will benefit foreigners.

(B)  The proposed draft would also provide for punitive damages upon a judicial finding of  willful patent infringement (Art. 72), with a maximum of 5x damages.  To many this may appear to be a welcome improvement. Punishing willful IP infringement is currently a policy that both the US and Chinese leaders share.  On the US side, the term IP “theft” appears 119 times in the Section 301 Report, while civil damages and compensation appear hardly at all.  On April 9, 2018, President Trump tweeted that he is “Defiant” and that he “Will End …Massive I.P. Theft” by China. Premier Li Keqiang apparently shares some of this enthusiasm.  He had noted in his annual report on the work of the government, that China needs to “improve IP protection, and implement a system for punitive damages against infringement “加强知识产权保护,实行侵权惩罚性赔偿制度” .

While punishment is an important tool, the more pervasive problem is that basic civil remedies are too weak.  Actual damages are in fact rarely imposed by Chinese courts and, have been the outlier.  Courts impose statutory damages in over 90% of all patent cases as well as in other IP areas.  In the Beijing IP Court median damages awarded for patent infringement in 2016 were only 112,500 RMB, or less than 20,000 USD. Rather than unduly emphasizing punishment, a better structural place to start is in improving the civil system to achieve maximum compensatory deterrence.

Intellectual property is fundamentally a private right (TRIPS Agreement, preface), and adequate civil remedies should therefore be the priority.  Using remedies that are not at the core of a healthy IP system based on private rights (administrative remedies/punitive damages)  are not a substitute for predictable, compensatory private remedies. In fact, the administrative system affords no private compensation to victims.  Punitive and administrative remedies are also often left to the discretion of the enforcement agencies, which can result in unpredictable enforcement.  In 2017 for example, despite the pressure on China to address trade secret theft, criminal cases declined by 35%.

By focusing on deterrent civil remedies that are fairly administered, the US will find common cause with many Chinese officials.  The issue was addressed  by Justice Tao Kaiyuan of the Supreme People’s Court  who similarly believes that the civil patent system is the primary enforcement mechanism for private patent rightsJustice Luo Dongchuan, who is now in charge of China’s new appellate IP circuit court, also underscored the importance of the IP courts in advancing rule of law in a visit to the US.  In an article I wrote,  with former PTO Director David Kappos and Chief Judge  Rader (ret), we also underscored that China’s administrative system is fundamentally unlike the judicial mechanisms of the USITC, and that better recourse to improved patent enforcement can be had with the courts.

Moreover, these punitive and quasi-legal remedies could easily be turned against the foreign community.  Consider, for example, that due process for foreigners has been a long-standing concern  in Chinese IP matters, well before the current concerns over retaliation over the proposed extradition of Huawei’s CFO.  Moreover, several cases have demonstrated that   foreigners are often the test cases for “improved” enforcement mechanisms in IP, such as in Chint v. Schneider (high patent damages), Iwncomm v Sony (injunctive relief in a SEP case), AMEC v Veeco (preliminary injunctions in patent infringement matters), antitrust cases involving licensing  and even the first publicized criminal copyright case, in which the principal defendants were two Americans (Guthrie and Cody).

I believe that China needs to focus its patent enforcement resources on the courts, and especially to give the new national appellate IP court a try in providing balanced and fair enforcement of IP rights, both foreign and domestic.  Both the US and China might try to focus more on much delayed and long overdue improvements in the civil system, some of whic are contemplated by the patent law amendments.  A rhetoric based too much around punishment may in the end prove to be self-defeating in the absence of necessary legal guarantees such as improvements in awarding compensatory damages, greater procedural due process, and improved transparency in the courts and administrative agencies.

shenzhenstrictlyprotectip

Bottom photo of the author in front of a Nanshan District Shenzhen IP Office sign “Create the Most Strict IP Protection Pioneering District” (Jan. 2019).  The opinions expressed in this blog are the author’s own.  Please address any corrections or improvements to: chinaipr@yahoo.com

 

 

A Federal Circuit with Chinese Characteristics? – The Launch of China’s New National Appellate IP Court 中国特色的联邦巡回上诉法院?

wangchuang

On December 27, 2018, the Supreme People’s Court released the Provisions on Certain Issues of the IP Court  (the “Provisions”), and the Standing Committee of the NPC  announced a first round name list of judges of the new IP court. These decisions follow an earlier announcement by the NPC Standing Committee  on October 26, 2018 authorizing the establishing of this new division of the SPC (officially translated as IP  Court of the Supreme Court of SPCIP, with the Chinese name 最高人民法院知识产权法庭). There were also indications that such a court was in the works that were previously reported in this blog in 2017.  The newly established IP Court is intended to function very similarly to the US Court of Appeals for the Federal Circuit, with a national jurisdiction over technical civil IP cases as well as appeals of patent validity decisions. Trademark validity appeals are not currently specifically enumerated as being within the court’s jurisdiction (see photo below).

This is a much awaited, historic and potentially disruptive breakthrough in the China IP litigation system, that has been a focus of much discussion between US and Chinese experts over 20 or more years, notably between the SPC and former CAFC Chief Judge Rader, former USPTO Director Kappos, and others (including the author/owner of this blog).  The historic 2012 conference between the SPC and the CAFC at Renmin University was one such milestone event in these efforts.   China’s successful experiments in specialized IP courts in Beijing, Shanghai and Guangzhou was another such milestone, as well as the language in the third plenum that facilitated their establishment. However, the engagement preceded this decade.  For example, an important conference on specialized IP courts was held with former Chief Judge Jiang Zhipei, and other Chinese IP judges in Washington, DC on Specialized IP courts in 2002, which involved over 130 judicial experts.   SIPO also exerted an important leadership role as well, through the National IP Strategy and various studies and conferences over the years.

The Provisions came into effect January 1, and the new Court held a kick-off ceremony on that same day.   Almost like clockwork, Judge Wang Chuang, the new deputy chief judge of this new tribunal was at the second US-China IP Summit in Shenzhen on January 3, 2019 (the “Summit”) presenting a bilingual PowerPoint (picture above) explaining the role of the Court, along with several other current and former judges, including Judges Jin Kesheng, former Beijing IP Court President Su Chi, former Guangdong IP Tribunal judge Ou Xiuping, former Beijing High Court Judge Cheng Yongshun, and others.  Considering the high-stakes trade dispute and interaction between China and the US right now, it is fair to say that the setup of the SPC’s IP Court is part of the bona fide effort to enhance IP protection in China which in fact predates the trade dispute.

What will be the impact of this court on foreign-related litigation? We believe that the impact is likely to be positive.  US academics have suggested that the CAFC has had a modest effect of correcting any anti-foreign bias  and the elevation of patent appeals to the SPC level is certain to similarly help direct national attention to important cases and defuse local pressure.  Moreover, the jurisdictional mandate of this court includes appeals from the Beijing IP Court of administrative patent cases, where foreigners constitute a significant cohort, partiuclarly if trademark cases are included (which appears unlikely). The Court also includes at least one judge from the foreign civil (no. 4) division of the SPC.   The recent decision by the SPC to rehear the Huawei v Interdigital case, where Zhu Li was a judge, may also be another signal.  Judge Zhu has since transferred to this new IP Tribunal, and the court has also sent a clear signal that it will be seeking a consistent and fair determinations of cases independent of local influence.   Many of the judges on the roster are well known to the foreign IP and antitrust communities, have met with foreign visitors or traveled overseas, and enjoy the respect of the foreign and Chinese bar.

Here are some of the most significant things that we know about this new Court.

Status of the SPC’s IP Court: It is part of the SPC, which generates some confusion. Given that the judgments, rulings, mediations and decisions made by the SPC’s IP Court are in the name of the Supreme Court, it enjoys a similar status to that of CAFC, whose job is to function as a national appellate court and whose decisions. are typically final.  But there has been and still will be an IP Tribunal (also known as 3rd Civil Tribunal) of the SPC, and a decision made by the SPC’s IP Court, which in normal practice should be final, is capable of been filed for retrial before the said IP Tribunal of the SPC.  In addition, non-technical IP cases will still be appealed according to pre-existing procedures ultimately to the 3d Civil Tribunal.

The head of the new SPC’s IP Court, Mr. Luo Dongchuan, will at the same time continue to serve as Deputy Chief Justice of the Supreme Court of the SPC, a rank higher than the head of the 3rd Civil Tribunal, which previously heard all IP cases.  Justice Luo effectively oversees IP litigation in China with Justice Tao Kaiyuan, which is a further elevation of the importance of IP to China’s judicial system.

Staffing the Court:  IP tribunal judges are typically amongst the best educated judges in China’s court system.  Many young judges made their name in IP related trials. The judicial personnel list of the court suggests that the court has been viewed as career enhancing for SPC judges, judges from regional courts, and former patent office examiners who have been selected as judges (see the list below).  However, due to the rapid establishment and staffing of this new Court, many of the judges are likely on detail from their prior jobs to the new Court, pending permanent transfer

Staffing of the Court

Name Position Former position
Luo Dongchuan 罗东川  Vice-president of SPC, Head of the Intellectual Property Court of SPC Vice-president of SPC, member of the Adjudication Committee of SPC,
Wang Chuang王闯 Deputy Chief Judge Deputy Chief Judge of the Civil Division No.3 (IP Division) of SPC
Zhou Xiang 周翔 Deputy Chief Judge Deputy Director General of the Enforcement Bureau of SPC
Li Jian 李剑 Deputy Chief Judge Presiding Judge of the Civil Division No. 3 (IP Division) of SPC
Zhu Li 朱理 Judge Senior Judge of the Civil Division No.3 (IP Division) of SPC
Shen Hongyu 沈红雨 Judge Judge of the Civil Division No.4 of SPC (for foreign-related cases)
Luo Xia 罗霞 Judge Judge of the Administrative Division of SPC
Fu Lei 傅蕾 Judge Judge of the Civil Division No.3 (IP Division) of SPC
Wei Lei 魏磊 Judge Assistant Judge of the Civil Division No.3 (IP Division) of SPC
He Peng 何鹏 Judge Judge of the Civil Division No.3 (IP Division) of SPC
Jiao Yan 焦彦 Judge Deputy Chief Judge of the Civil Division No.3 (IP Division) of Beijing High People’s Court
Cen Hongyu 岑宏宇 Judge Assistant Judge and the Judge of the Civil Division No. 3 (IP Division) of BHPC
Liu Xiaojun 刘晓军 Judge Judge of the Civil Division No. 3 (IP Division) of Beijing High People’s Court
Cui Ning 崔 宁 Judge Judge of Beijing Intellectual Property Court
Deng Zhuo  邓 卓 Judge Judge of Beijing Intellectual Property Court
Ren Xiaolan 任晓兰 Judge Director of the No.1 Chemical Appeal Division of the Patent Reexamination Board of CNIPA
Gao Xue 高 雪 Judge Deputy Director of the Mobile Communicating Technology Appeal Department of the Patent Reexamination Board of CNIPA
Zhan Jingkang 詹靖康 Judge  Deputy Director of the Examination Guide Department of the Examination Management Division of the CNIPA
Xu Yanru 徐燕如 Judge Deputy Chief Judge of the Civil Division No.3 (IP Division) of ZHPC
Xu Zhuobin 徐卓斌 Judge Judge of the Civil Division No.3 (IP Division) of Shanghai High People’s Court
Ling Zongliang 凌宗亮 Judge Judge of the Intellectual Property Division No. 2 of Shanghai Intellectual Property Court
Zhang Xiaoyang 张晓阳 Judge Judge of the Civil Division No. 3 (IP Division) of Jiangsu High People’s Court
Zhang Hongwei 张宏伟 Judge  Judge of the Civil Division No. 3 (IP Division) of Fujian High People’s court
Liu Xiaomei 刘晓梅 Judge  Judge of the Civil Division No. 3 (IP Division) of Shandong High People’s Court
Tong Haichao 童海超 Judge Deputy Chief Judge of the Civil Division No.3 (IP Division) of Hubei High People’s Court
Tang Xiaomei 唐小妹 Judge Judge of the Civil Division No.3 (IP Division) of HHPC
She Zhaoyang 佘朝阳 Judge Judge of Guangzhou Intellectual Property Court

Internet Courts, Circuit Courts, Specialized IP Courts: The types of courts in China has expanded and is potentially confusing to those unfamiliar with the new experiments.  The SPC had already established Circuit Courts, which are arms of the Supreme Court itself, except that they are in cities other than Beijing.  An example of such a court is the Shenzhen Circuit court which hears retrial cases from Guangdong, Guangxi, Hunan, and Hainan as well as cases relating to Hong Kong, Macau and Taiwan.  The Specialized IP Courts, which will remain the same as before, are intermediate courts in Beijing, Shanghai and Jurisdiction, vested with jurisdiction over certain IP lawsuits. They will function all the same as before, but their decision will now be appealable to the SPC’s IP Court, rather than to High Court of the province where the Specialized Courts reside.  These IP Courts are in addition to other local IP tribunals and courts which localities have set up with the support of the SPC and have been experimenting in cross-district jurisdiction, and in combining civil, criminal and administrative adjudication.

The three Internet Courts, located in Beijing, Guangzhou and Hangzhou, will function as before.  Their decisions are not likely to be appealed to the SPC’s IP Court given that the latter only hear patent, mask works, variety of plants, computer software and anti-trust cases.

Standardization of Trial Rules: A mission of the SPC’s IP Court is to formulate judicial standards and trial rules based on their investigation and research of relevant practices, and such standards and rules shall be followed by the lower courts. This may suggest that the SPC’s IP Court will take over the responsibility of formulating certain judicial interpretations and selecting guiding cases. Wang Chuang noted at the Summit that the Court is considering judicial interpretations on such topics as technology assessors and trade secret protection.  Thus, we could expect a more consistent guidance, both procedural and substantive, from the Supreme Court over IP cases, especially when involving technical matters.  Judge Su Chi (retired) of the Beijing IP Court, also noted at the Summit that he expected that some of his work on development of a case law system would likely be taken over by this Court as well.

Extended Jurisdictional Scope of the Court:  The SPC’s IP Court is empowered to hear major and complicated cases of first instance on a national scale. This implies that some plaintiffs may bring high-profile lawsuits to the Supreme Court directly. This kind of arrangement is very rare in China’s judicial system. The only case we are aware of before this time is the trial of the Gang of Four in 1980. This could be good news for patentees facing difficult issues of local protectionism. It may also have profound impacts on society, and thereby raise the IP awareness of the public.  The Federal Circuit had a similar impact on US society when it decided major cases such as Polaroid v Kodak early in its tenure, which in the US signaled “a new period in which patents regained their importance as intellectual property protection for technology companies.”  The SPC’s IP Court will likely have discretion to determine whether a case belongs to a major and complicated one. There are various factors to be taken into consideration, such as the damages claimed, the nature of the subject matter, the parties concerned, the relevant technicality, the social impacts, and so on.  In addition to this area, the court will also retrial cases arising from application by any party of interest and protest by the Supreme Procuratorate as mentioned (Article 2(5) and Article 11 of the Provisions).

For Chinese IP practitioners and regional IP judges this is also a major game changer.  Chinese patent firms that were once focusing on establishing offices throughout China may now need to think about reinforcing their staff in Beijing.  Chinese judges from various localities may also wonder why certain appellate jurisdiction was removed from their courts.  The answer to that last issue likely lies in the desire of the SPC to establish greater uniformity and predictability throughout China in important technology-related IP cases, as was explained at the Summit.

At the Summit, Judge Wang Chuang noted that four goals of this new court are: boosting technological innovation; testing fields of judicial reform; being a bellwether for patent trials and becoming a preferred court for international patent litigation.  These goals are laudable, not surprising, consistent with the current directions of judicial reform and can help inspire confidence of the foreign business community.  In view of the goal of increasing China’s role as a center for international IP litigation, it is not surprising that so many judges attended the Summit.

In all, the establishment of the SPC’s IP Court is exciting news in Chinese IP community.

Written by Mark Cohen, Harry Fang 方春晖, Steve Song 宋献涛 and Jerry Liu 刘良勇attorneys with the Deheng law firm北京德和衡律师事务所.

Mark Cohen excercised final editorial control and is responsible for any errors. Photograph of Judge Wang Chuang  by Mark Cohen from the Summit.  All rights reserved.

Please write in with your observations on this important development!

flowchartofnewcourt
Updated January 8, 2019 to clarify uncertainty over jurisdiction over trademark administrative appeals, and on January 9 to add a photo of the flow chart for litigation from the Summit which does not include trademarks  (above).

Trade and Peace on Earth: Part 1

O ye who read this truthful rime From Flanders, kneel and say:
God speed the time when every day
Shall be as Christmas Day.

(Frederick Niven, “A Carol from Flanders”, regarding the WW I Xmas truce)

We are in the middle of the 90-day trade war truce, which was announced at the G-20 in Buenos Aires. Is there, however, an opportunity for a lasting trade peace?  Let’s look at developments to date…

Shortly after the Buenos Aires G-20 meeting on December 1, 2018 at which the 90 day truce was agreed to, USTR Robert Lighthizer gave an interview on Face the Nation where he  hinted at the pathway forward, noting: “We have had conversations ongoing.  We have had conversations ongoing for over a year.”  Lighthizer went on to say that we need structural changes and market opening “on this fundamental issue of non-economic technology transfer.”  Lighthizer’s focus was three-fold: forced technology transfer, cyber theft and state capitalism.  Lighthizer noted that tariffs will be raised in March unless a satisfactory solution is found.  In fact, USTR has announced on November 19 a deadline of March 2, at which time tariffs will be raised.  March 2 is 90 days after the December 1 meeting.

Notwithstanding LIghthizer’s assertions of on-going discussion, there have been several significant developments which suggest that there may not have been much real communication.  Typically, a new administration needs one to two years before adequately coming to terms with how China negotiates on IP and what may be the “low hanging fruit” in IP improvements that could have a durable impact.  This administration and China have not had anything approaching a “honeymoon” period.  It is not surprising, therefore, that some of the developments during this past year, as well as during the truce period appear, to be missing the mark.

If we dial back to the period when the 301 investigation was on-going, China failed to publicly disclose data on civil trade secret cases for 2018, and actually reduced its criminal trade secret prosecutions by approximately 35% to only 26 cases in that year. China’s revised trade secret law (Anti Unfair Competition Law) (eff. 1/1/18) also weakened trade secret protections by expanding the ambiguity around protections and procedures, where a non “business operator”, such as an employee, misappropriates trade secrets.

The United States also did not always engage comprehensively during this period. Although the United States filed a WTO case against China on March 23, 2018 (the day after the Section 301 Report was released) regarding compulsory licensing terms, the complaint does not specifically call out trade secrets (undisclosed information) as a form of technology licensing.  The European complaint, by contrast, more thoughtfully notes that “China imposes a different set of rules on the import of technology, including industrial property rights, other intellectual property rights and undisclosed information (“intellectual property rights”).”

Other recent efforts undertaken by China suggest that there may also have been some lack of understanding of US interests, including perhaps an undue emphasis on patent licensing.  NDRC, China’s powerful state planning agency,  announced a special Memorandum of Understanding/campaign mechanism involving 38 government agencies to address six types of “dishonest  conduct” by patenting enterprises and individuals.  The “MOU For Cooperation for Joint Disciplinary Actions Against Subjects of Serious Mistrust in the Field of Intellectual Property (patents).” 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  is dated November 21 (before the G-20), but  was published on December 2 (immediately after).

How effective will this MOU be?  For some time, the academic data has suggested that such special campaigns have rarely brought any durable progress.  In fact, China suggested a special campaign for three months at the beginning of the 301 investigation. My response on the record to that suggestion was:

“Many scholars think that these short campaigns have limited duration and effect . . .. So, I’d like to know why is this particular program any different from other ones before it? Why not extend it or make it permanent? Or perhaps should the focus be on judicial reform or other areas?”

The data also shows that foreigners rarely use the administrative patent system and, as I have pointed out, along with former Chief Judge Rader and former PTO Director Kappos, vesting the administrative agency in charge of granting patents with the ability to bring infringement actions and special campaigns may not be conducive to independent adjudication of rights.

Another “truce-responsive” legislative effort appears to be in the works from China’s National People’s Congress, where a first reading of a new “Foreign Investment Law” is reportedly  now under consideration. The law would combine existing laws regarding foreign investment into one statute and is intended to insure that foreigners are accorded national treatment and can participate in government procurement and standards setting, as well as insure that transfer technology is on voluntary terms.  It  hopefully may address some aspects of forced technology transfer that have been identified by USTR in its 301 Report.

There have also been two other significant developments that could affect the landscape for technology transfer and IP protection in China that have a longer history and could be helpful to foreigners facing IP issues in China.  One of these is China’s proposed draft patent law amendments which have also been submitted to the NPC and have gone through its first reading.  The draft offers some improvement on judicial procedures and remedies (including discovery for calculation of damages, and improved damage calculations).  This latest draft also strengthens administrative enforcement, and extends the term for design patents to 15 years (in anticipation of accession to the Hague Agreement on the International Registration of Industrial Designs), provides for enhanced protection of patents in e-commerce, extends patent term for innovative pharmaceutical patents by five years.  However, it may also have weakened protections for pharmaceutical patents, as press reports thus far omit any reference to patent linkage, continuing a trend since this past August.

In my estimation, the most positive development is the establishment of a new specialized appellate circuit IP  tribunal attached to China’s Supreme People’s Court and under the direction of long time IP judge, Luo Dongchuan, now Justice of the SPC.  The new circuit tribunal will have national jurisdiction over technologically complex IP cases and will open for business January 1, 2019.   This court could also have an important impact on technical trade secret cases, patent disputes in key areas, such as semiconductors and pharma cases, appeals from China’s patent office, in insuring consistency of decision making across various intermediate courts, and in other areas.

Interestingly, none of these changes address Lighthizer’s other goals of addressing cyber theft and state capitalism.

There have been other changes in how the US engages with China that suggest some modifications in the bilateral relationship are permanent.  US companies have now begun wondering how they can take advantage of US Customs rules regarding determinations of country of origin of products with Chinese content, to minimize the potential application of 25% punitive tariffs.   They are busy revisiting Customs doctrines regarding “substantial transformation, including the progeny of cases and rulings since the landmark decision in Anheuser Busch v. United States 207 U.S. 556 (1907), in order to see how they might restructure manufacturing in China through conducting more assembly or finishing outside of China.  For Customs lawyers this must be a boon period.  At the same time, the US Department of Commerce has published new, potentially restrictive rules on “foundational” and “emerging” technologies, which may be targeted towards China, and the Treasury Department/Committee on Foreign Investment in the United States is conducting a pilot program that could restrict “passive, non-controlling” foreign investments in technology.  Meanwhile, Huawei’s CFO was arrested pending extradition to the United States, and Fujian Jinhua is banned from acquiring US technology, as it has been determined to be a threat to US national security.  It is clear to me that even if this stage of the trade war were to end, a new normal in trade relations with China has emerged and significant steps will need to be taken to reestablish trust.

My next blog will offer some ideas for reducing the bilateral temperature.

Christmas Day, 2018 (rev. 5:00 PM).