SIPO/IP Agencies to Be Reorganized and Consolidated

Several Chinese news agencies have reported on by the State Council, the proposed reorganization now being presented to the National People’s Congress, which will significantly rearrange all Chinese agencies, including IP agencies.

According to the plan, after the reform, the number of state-level ministries and commissions will be reduced by 8 and vice-ministerial agencies were reduced by 7.  State Councilor Wang Yong(王勇), who was formerly a Minister at AQSIQ (Administration for Quality Supervision, Inspection and Quarantine, 2008-2010) where he addressed tainted milk amongst other issues,  noted in introducing the changes to SIPO that “SIPO would be newly organized.  The creation, protection, utilization of IP will be strengthened as an important measure to speed up the establishment of an innovative economy.” The proposal includes combining trademarks and patents which are separately managed and have “redundant” enforcement authority.   These authorities will be combined with ASQISQ’s authority over Geographical Indications to establish a national State Market Supervision Adminsitration (国家市场监督管理总局) (“SMSA” for purposes of this blog).

Wang Yong’s statement in Chinese:

(九)重新组建国家知识产权局。强化知识产权创造、保护、运用,是加快建设创新型国家的重要举措。为解决商标、专利分头管理和重复执法问题,完善知识产权管理体制,方案提出,将国家知识产权局的职责、国家工商行政管理总局的商标管理职责、国家质量监督检验检疫总局的原产地地理标志管理职责整合,重新组建国家知识产权局,由国家市场监督管理总局管理。其主要职责是,负责保护知识产权工作,推动知识产权保护体系建设,负责商标、专利、原产地地理标志的注册登记和行政裁决,指导商标、专利执法工作等。商标、专利执法职责交由市场监管综合执法队伍承担。 

The creation of SMSA suggests that SIPO’s once lofty goal/dream of serving as an integrated IP agency, which was initiated by Dr. Gao Lulin when he was Commissioner, may have come to a temporary end.  At one time a stumbling block to this proposal may have been integrating the vast trademark enforcement resources of SAIC.  It appears that such an integration would likely be accomplished under the new SMSA.  Another legacy issue that may need to be addressed involves SIPO’s legacy authority over international IP which often overlapped with MofCOM’s authority over trade-related IP, which became especially important after WTO accession by China and may be even more challenging by the integration of SIPO into a bigger agency.  Noticeably absent from this proposal, however, are the copyright authority (under the National Copyright Administration), as well as trade secret protection (under SAIC).  Plant variety protection, already divided between two agencies (Agriculture, Forestries) with SIPO helping to support international engagement, is is also absent.  One view of these changes is that voices within China that look at IP (including patents) as an instrument of market regulation, including consumer protection, may have won out.  This approach was evident in the work of the National Leading Group Fighting IP Infringement and Substandard Products (全国打击侵权假冒办公室), as well as the increased activity of SIPO over the years in conducting market supervision actions involving false marking and patent infringements.  Indeed the wisdom of keeping this Leading Group within MofCOM in light of a new SMSA may be questioned; however, the Leading Group consists of many more agencies than SIPO, SAIC and AQSIQ.   Nonetheless the State Council had previously called for reducing redundancies in enforcing the market order, and it was also part of the yet to be adopted patent law revisions.  In that State Council opinion, which may be a guiding part of this reorganization, there is a call for  “the elimination of duplicative multilayered enforcement”, including territorial and subject matter overlaps. See: https://chinaipr.com/2014/07/16/state-councils-new-opinion-on-market-order/. 

The approach of creating a SMSA to address enforcement challenges is also distinct from the technology-oriented reforms of China’s judicial system in recent years, which have led to the creation of technology oriented IP courts as well as the creation of more autonomous IP  tribunals.  The incorporation of sui generis GI protection into SMSA agency also pits two sometimes rivalrous agencies with different perspectives on utilization of the trademark (private rights) system with a sui generis (more public rights oriented) system to protect GI’s.  Finally, it would also likely have the effect of elevating SIPO to a General Administration in the State Council structure, which is just below a Ministry-level agency.   This is somewhat more similar to the structure of the USPTO which is within the Department of Commerce in the United States.

How do the other IP agencies shake out?  It is too soon to know.  The Ministry of Culture is merging with the Tourism Administration.  Will the National Copyright Administration remain within the General Administration of Press and Publications/State Administration for Radio Film and Television structure? Also, there are some reports that the Ministry of Science and Technology is also being reorganized to absorb the State Foreign Experts Bureau and the China National Science Foundation.  Finally, the Legislative Affairs Office of the State Council is reportedly moving to the Ministry of Justice.    The SCLAO has exercised a tremendously important role over the years in crafting IP legislation.  The impact of some of these changes will also likely depend on personnel shifts within the agencies.  In addition, it could impact or accelerate efforts already in place by these agencies.  For example, will the change in the SCLAO structure affect long-overdue proposed revisions to China’s copyright law, which reportedly are once again the subject of active discussion? Similarly, it is unclear to me at this stage what impact there will be on the China Food and Drug Administration (reorganized in 2013), in light of other changes to health-oriented agencies and SIPO, and if this will affect, or perhaps accelerate, efforts to reform IP administration by SFDA, such as through a patent linkage regime.  

These proposed changes elicit more questions than answers; we will need to see how they are enacted and implemented in the coming months.  We welcome corrections and additional information from readers!

Update of March 14: Fu Yiqin at Yale has put together a useful summary of proposed State Council reorganizations.  Here is the link: https://yiqinfu.github.io/posts/state-council-reform/.  Fu Yiqin notes that the State Food and Drug Administration and antitrust enforcement agencies will be combined in the State Market Supervision Administration (where SIPO, et al will also be located).  SARFT is maintained as a separate agency in this chart.  Other news has SARFT being restructured: http://deadline.com/2018/03/china-abolish-sapprft-media-authority-consequences-xi-jinping-1202336724/.  Clearly we need some more dust to settle on some of these issues. Hypothetically if antitrust and IP are combined into one agency (perhaps including copyright), and if IP enforcement also is combined into that agency, the problem of the inherent conflict of interests between IP grants, IP enforcement and controlling for IP abuse would be heightened.  However, if SFDA is also combined with SIPO/other IP agencies, there is also the possibility for greater coordination on pharma-related IP issues, such as linkage. I will be updating this as more information becomes available.  Note that in a prior blog, I abbreviated SMSA as GAMA – I am following the nomenclature of Fu Yiqin.

 

 

 

Comments on Draft Guidelines on Disgorgement and Fines in AML Matters

Attached are comments of the ABA Sections of Antitrust and International Law  (ABA) and the George Mason University Global Antitrust Institute (GAI) on the draft guidelines of the National Development and Reform Commission on Disgorgement and Fines in Antimonopoly Law matters. The ABA comments are bilingual and have the complete text of the draft guidelines included in the package that is being made available here.  The guidelines were published for public consultation on June 17, 2016.

The two sets of comments offer two slightly nuanced approaches in their understanding of the final drafting responsibilities for these guidelines.  The ABA comments are nominally  directed to the Antimonopoly Commission of the State Council, while the GAI’s Comments are more directed to the National Development and Reform Commission which released this draft for eventual adoption by the Antimonopoly Commission.  The relationship between these drafts and an official adoption by the AMC is not clear to me, as the NDRC announcement of the draft states that the drafting of the guidelines are in the work plan of the Antimonopoly Commission, and that NDRC undertook the research and drafting (根据国务院反垄断委员会的工作计划,我们研究起草了《关于认定经营者垄断行为违法所得和确定罚款的指南》(征求意见稿),现面向社会公开征求意见.). It does not explicitly say that this research and  drafting was undertaken on behalf of the AMC.  Moreover, comments are to be delivered to the Pricing Bureau of NDRC, not the NDRC itself, which may suggest that this is indeed a research project (发送到国家发展改革委(价监局).  It is my view that considering the continuing battle of drafting responsibility by Antimonopoly enforcement agencies + SIPO,  in the IP Abuse guidelines, which the State Council has recently said is the responsibility of these four agencies and the State Council Legislative Affairs Office, final drafting  responsibility for an interagency antimonopoly law guideline may not be easily assumed at this time.  If others in the antitrust community have more specific information, I welcome them posting it here.

Regardless of which agency is the lead, the sharing of drafts with this website and others helps to increase our understanding of the overall process through sharing of different commenters’ positions, for which I am grateful.  I hope that over time Chinese agencies will also make all non-confidential comments publicly available.

GAI’s recommendations include that the Draft Guidelines be revised to limit the application of disgorgement (or the confiscating of illegal gain) and punitive fines to matters in which: (1) the antitrust violation is clear (i.e., if measured at the time the conduct is undertaken, and based on existing laws, rules, and regulations, a reasonable party should expect that the conduct at issue would likely be found to be illegal) and without any plausible efficiency justifications; (2) it is feasible to articulate and calculate the harm caused by the violation; (3) the measure of harm calculated is the basis for any fines or penalties imposed; and (4) there are no alternative remedies that would adequately deter future violations of the law.  In the alternative, and at the very least, the NDRC should expand the circumstances under which the Anti-Monopoly Enforcement Agencies (AMEAs) will not seek punitive sanctions such as disgorgement or fines to include two conduct categories that are widely recognized as having efficiency justifications: unilateral conduct such as refusals to deal and discriminatory dealing and vertical restraints such as exclusive dealing, tying and bundling, and resale price maintenance.

GAI also urges the NDRC to clarify how the total penalty, including disgorgement and fines, relate to the specific harm at issue and the theoretical optimal penalty.  According to GAI, economic analysis should determine the total optimal penalties, which includes any disgorgement and fines.  When fines are calculated consistent with the optimal penalty framework, disgorgement should be a component of the total fine as opposed to an additional penalty on top of an optimal fine.  If disgorgement is an additional penalty, then any fines should be reduced relative to the optimal penalty.

Finally, GAI recommends that the Anti-Monopoly Enforcement Agencies (AMEAs) rely on economic analysis to determine the harm caused by any violation.  When using proxies for the harm caused by the violation, such as using the illegal gains from the violations as the basis for fines or disgorgement, such calculations should be limited to those costs and revenues that are directly attributable to a clear violation.  This should be done in order to ensure that the resulting fines or disgorgement track the harms caused by the violation.  To that end, GAI recommends that the Draft Guidelines explicitly state that the AMEAs will use economic analysis to determine the but-for world, and will rely wherever possible on relevant market data.  When the calculation of illegal gain is unclear due to lack of relevant information, GAI strongly recommends that the AMEAs refrain from seeking disgorgement.

These comments are broader than IP-related antitrust.  One common theme they share with IP damage issues is the low utilization of economic calculations to determine damages, and unclear sensibility of when damages are adequate, deterrent or punitive.

The comments also do not address the relationship, if any, between low IP damages and high antitrust damages for IP abuse, except in the broadest sense that excessive damages may create over deterrence.  The Chinese government and academics are also increasingly focused on the problem of low IP damages, including possibilities of providing for punitive damages and higher compensatory damages,  the availability of discovery for damage calculations, such as in the trademark law and with experiments in increasing statutory damages or relying on alternative calculations such as actual or implied royalties such as occurred last year in Jiangsu (See 江苏固丰管桩集团有限公司诉宿迁华顺建筑预制构件有限公司侵害发明)专利权纠纷一案[(2015)苏知民终字第00038]), where an implied royalty was used for perhaps the first time in a patent case. The issue is also actively being discussed by academics. See, e.g., 刘自钦 , 著作权惩罚性赔偿制度在中国大陆的具体运用, Macau Law Review, No. 10, at p. 123 (Liu Zichen, Substantial Application of the Punitive Compensation System for Copyright in Chinese Mainland – Based on American Experience and the Chinese Reality).

­The current reality is that IP damages remain too low and non-deterrent.  To me this suggests a possible issue of disproportionality between IP protection and antitrust enforcement for IP abuse, or as I have often said one cannot have IP ‘abuse’ without having IP ‘use.’   On June 7, 2016 I had the pleasure in my official capacity of testifying before the House Judiciary Committee, where I discussed the issue of the large disparity between high antitrust damages and low patent infringement damages.   My testimony is also on the PTO website.  I recently calculated that the current ratio of average patent damages as determined on the www.ciela.cn database and the Qualcomm damage imposed by NDRC is about 50,000 to 1 (18,000 USD to 975 million USD); it is only somewhat lower if other databases are used.  As I noted in my testimony, antitrust damages and patent damages address different issues and thus may not always be directly comparable.  However, if the ratio is wildly disproportionate the ecosystem for innovation and technology transfer could erode.  Many companies already do not want to transfer technology to China, for fear that their IP will not be adequately protected.  As I have noted, the data already suggests that China is an under-licensed market.  Some companies may also now be avoiding China because damages are too low and/or antitrust risks are too high.  If antitrust damages become be too high in relationship to the actual value of a patent, incentives to disclose patentable inventions may erode – which itself may erode competition in the long run.  Moreover, China will suffer as it may not be able to obtain leading-edge technology.  I personally believe that antitrust and IP damages should not be wildly disproportionate, which should be another factor in antitrust damages, IP damages and in China’s efforts to become an IP “strong country.”

This blog remains my academic, personal and non-official observations and should not be construed as the opinion of the US government, or any former client or third party or even any academic institution with which I am affiliated.  Corrects and comments in English or Chinese are most welcome!

 

 

 

 

New State Council Decision on Intellectual Property Strategy For China as a Strong IP Country

Statecouncilwordlcoud.PNG

On July 18, 2016, the State Council issued a new policy document,国务院关于新形势下加快知识产权强国建设的 若干意见-重点任务分工方案  — the “Opinion of the State Council on Accelerating the Construction of Intellectual Property Powers for China as an Intellectual Property Strong Country under the New Situation –Division of Tasks.”  Here’s a link to this action plan (docketed as State Council  Working Office No. 66)  , and a link to the machine translation, from which the world cloud above is drawn.   The action plan itself is drawn from a State Council document issued in 2015 on accelerating the establishment of a strong IP country in the context of a new situation.  This 2015 document identified such problems as China being a big country for IP, but not a strong country, protection was not adequately strict, infringement was easy and pervasive, and that these factors were affecting industry’s efforts to innovate.

As I discussed previously, the idea of China needing to become a strong IP country appears in the 2014-2020, National IPR Strategy Action Plan, which has the goal of “Striving to Build A Strong IPR Country”  (努力建设知识产权强国). While China indeed has become “big” on most scales: invention patent filings, trademark, utility models and design patents, intellectual property litigation, criminal IP litigation and administrative litigation, to name a few, “strong” suggests quality, which is much harder to judge.

Here are a few specific observations about this action plan:

  1. Much of the action plan repeats existing efforts, through the MofCOM IPR Leading Group and SIPO’s National IP Strategy Office, and their current efforts at analyzing and coordinating IP effort, as well as cooperative activities (Arts. 1, 3, 13, 15, 18, 21, 22, 25, 30, 44, 88, etc.).
  2. There are greater efforts to incorporate IP into macroeconomic strategies, such as in calculations regarding the national economy and national social welfare (Art. 9), as well as credit reporting (Art. 23).
  3. Increasing compensatory  and punitive damages are a focus (Arts. 14), which have also been an effort of China’s IP courts.  This is one of the key civil-law reform proposals in this plan.   There continues to be an undue emphasis on speed, which I assume is focused on patent administrative enforcement as a more rapid remedy (Art. 16).  China is already a fast moving IP environment.
  4. International cooperation in criminal enforcement is underscored (Arts. 19, 21, 22).
  5. Regarding trade secret protection, the focus is on revising trade secret laws, and protecting IP when employees change jobs (Art. 24).  Changes to China’s discovery regime and other appropriate measures which would greatly assist trade secret claimants, are not discussed.
  6. Geographical indications are a focus, including drafting a stand-alone GI law at “the appropriate time” (Art. 32), increasing the role of trademarks in promoting farmer prosperity (Art. 58), and promoting GI products (Art. 90).
  7. Regarding the long-delayed IP Abuse Guidelines, NDRC, MofCOM, SAIC and the State Council Legislative Affairs Office are all listed as being responsible for drafting “according to their responsibilities” (Art. 36).  Rules on standard essential patents that are based on FRAND licensing and “stopping infringement” are also noted (Art. 38), with the involvement of AQSIQ, SIPO, MIIT, and the Supreme People’s Court).  Encouraging standardization of Chinese patents also remains a priority (Arts. 61, 71).
  8. Service Invention Regulations, an area of some controversy are not specifically noted as a priority.  Encouragement is to be given to enterprises to set up appropriate invention recognition and reward programs in accordance with law (Art. 45), and research is to be undertaken in giving compensation for new scientific achievements (Art. 46).  The language may suggest that more flexibility will be given contractual arrangements and the market, as was agreed to bilaterally between China and the United States.   Relevant agencies involved in these efforts include SIPO, MoST, Ministry of Education, Ministry of Finance, Ministry of Agriculture, SASAC, Chinese Academy of Sciences, MIIT, Ministry of Defense, etc.
  9. Chinese universities are also encouraged to become more actively engaged in commercialization of technology, through establishment of technology transfer offices (Art. 53) and other efforts.
  10. The impact of US efforts to study IP-intensive industries in the US economy is also apparent in this plan in terms of the government’s efforts to investigate promoting IP intensive industries in the Chinese economy, government procurement of products from IP intensive industries, and developing model districts for IP intensive industries (Arts. 55-56).  Interestingly, there is no specific reference to engaging economists on any of these efforts, despite the role of foreign economists in similar efforts, some of who have also directly engaged China on how to determine IP-intensity in an economy.
  11. There is discussion of using tax and financial policies to promote IP creation in China (Arts. 98, 99).  There is no explicit discussion of harmonization with OECD guidelines regarding patent boxes and other forms of international tax avoidance.
  12. The report discusses a number of strategies and plans to reduce overseas IP risks facing Chinese companies, including assisting Chinese companies in strategic planning, patenting and licensing (Arts. 72-76), developing information resources on risks and cases (Arts. 78-79), and – rather ominously – developing policies for countering large intellectual property cases overseas (with the support of MofCOM, Customs, SAIC, AQSIQ, NCA, and the China Council for the Promotion of International Trade – “CCPIT”).   There is no discussion on any changes to current technology import regulations which impose onerous indemnity and non-grant back requirements on foreign licensors.
  13. The report directs research to be conducted of placing IP officials overseas in important countries, region and IP organizations.  Although China’s current IP attaché in the United States is a MofCOM employee, the responsible agencies for this effort include SIPO, NCA, SAIC, and CCPIT (Art. 85).  The first Chinese IP attaché was dispatched to the United States pursuant to a bilateral commitment of the  2005 Joint Commission on Commerce and Trade.
  14. The report notes that China will become more involved in promoting a more “fair and reasonable” international IP regime, through support of the Doha amendments to the TRIPS Agreement, the Convention on Biodiversity and various IP conventions.  The Hague Convention on Industrial Designs is noted, but not UPOV 1991.  Promotion of intangible heritage and folklore are also noted (Arts. 59. 87).
  15. IP talent creation and training are also key elements of the plan (103-105).

 

Often in looking at plans like these, it is also equally important to ask what is not being covered.   The plan does not focus enough on a China where there is greater scientific collaboration with foreign scientists and engineers, which are also result in an increasingly large number of co-invented patents.  Similarly, increasing Chinese investment in IP-intensive industries in the United States means that many Chinese companies will own substantial IP interests and may be less inclined to view IP issues as “us” vs “them.”  The relative under-emphasis on civil remedies for IP issues in this plan is also troubling, as the availability of adequate civil remedies is what drives IP commercialization.

The report also does not suggest increasing the role of economists in IP and antitrust agencies, despite a clear focus on increasing the IP-intensity of the Chinese economy. Gaps in Chinese law, such as denial of copyright protection for sports broadcasting, weak protection for trade dress, and “circular” litigation between the patent and trademark offices and the courts which may delay final adjudication on matters, controlling trademark squatting and subsidies for unexamined patents are not discussed.

Although there are many positive aspects of this plan, I believe that focusing on issues like compulsory licensing, the Doha Declaration and folklore, or what appears to be political solutions to overseas infringement may also not deliver as much value to the Chinese economy and China’s scientists, engineers, artists and entrepreneurs, as returning to core IP concepts which let the market govern IP creation and enforcement through such measures as improving the scope of rights that are protected under Chinese law, limiting government intervention, increasing the role of the civil judicial system, and promoting increased collaboration.

Beginning the Journey for Trade Secret Reform: the Recent AUCL Draft

A much awaited, proposed public draft revision to the Antiunfair Competition Law was released by the State Council Legislative Affairs Office on February 25, 2016. Comments are due by March 25, 2016.  An open source translation is available here.

This is not an easy law to comment on, as the law combines a range of various issues to varying degrees: competition and fair trade law, trade secrets law, trade dress law, cybersquatting and enterprise name infringements, advertising regulation, bidding law, compliance/anti-bribery, network management and other areas.  Strictly speaking it is not an IP law which focuses on giving individuals private rights.  Rather, it is geared towards ensuring that there is fair competition in the market, as its title suggests.

A key focus for me has been on the trade secret provisions of the draft.  Pertinent provisions are discussed and copied below:

“Article 9: A business operator must not carry out the following acts infringing on trade secrets:

(1) Obtaining rights holders’ trade secrets by theft, enticement, intimidation, fraud, or other improper tactics;

(2) Disclosing, using, or allowing others to use a rights holders’ trade secrets acquired by tactics provided for in the previous item;

(3) Disclosing, using, or allow others to use trade secrets in their possession, in violation of agreements or the rights holders’ demands for preserving trade secrets.

Where a third party clearly knows or should know of unlawful acts listed in the preceding paragraph, but obtains, discloses, uses or allows others to use a rights holders trade secrets, it is viewed as infringements of trade secrets.

(一)以盗窃、利诱、胁迫、欺诈或者其他不正当手段获取权利人的商业秘密;

(二)披露、使用或者允许他人使用以前项手段获取的权利人的商业秘密;

(三)违反约定或者违反权利人有关保守商业秘密的要求,披露、使用或者允许他人使用其所掌握的商业秘密。

“Trade secrets” as used in this Law refers to technological information and business information that are not publicly known, have commercial value, and are subject to corresponding secrecy measures taken by the rights holder.”

Importantly, the draft drops the earlier statutory requirement that trade secrets had to have practical applicability, a “TRIPS-minus” provision which may have had the effect of denying trade secret protection to experimental failures.  The distinction between technical information and business information in this draft may also reflect other laws and government agencies some of which, like the Ministry of Science and Technology and SIPO have expressed interest in “technical trade secrets” or “service invention” compensation for trade secrets. Chinas IP courts similarly have jurisdiction over technical trade secrets, but not business confidential information.

The law also expands the scope of a covered business operator, to include natural persons, which is a positive step:

“‘Business operators’ as used in this Law refers to natural persons, legal persons or other organizations engaged in the production or trade of goods, or the provision of services. (“goods” hereinafter includes services). “(Art. 2)

The draft offers very little in the way of improving procedures for trade secret litigation.  There are improvements to trade secret administrative enforcement.

“Chapter III: Supervision and Inspection

Article 15: When supervision and inspection departments investigate acts of unfair competition, they have the right to exercise the following powers of office:

(1) Enter business premises or other venues related to the conduct under investigation to conduct inspections;

(2) Question business operators under investigation, interested parties, or other entities or individuals, and request supporting materials, data, technical support or other materials relating to the acts of unfair competition;

(3) Make inquiries about, or reproduce, agreements, account books, invoices, documents, records, business correspondence, audio-visual materials or other materials relating to the acts of unfair competition;

(4) Order business operators under investigation to suspend suspected unlawful acts, to explain the source and quantity of property related to the conduct under investigation, and to not transfer, conceal or destroy that property;

(5) Carry out the sealing or seizing of property suspected to be involved with acts of unfair competition;

(6) Make inquiries into the bank accounts of business operators suspected of acts of unfair competition as well as accounting vouchers, books, statements and so forth relating to deposits;

(7) Where there is evidence of the transfer or concealment of unlawful funds, an application may be made to the judicial organs to have them frozen.

Article 16: When supervision and inspection departments are investigating acts of unfair competition, business operators under inspection, interested parties or other relevant units or individuals shall truthfully provide relevant materials or circumstances, shall cooperate with supervision and inspection departments performing duties according to law, and must not refuse or obstruct supervision and inspection.”

Although I believe most right holders seek improvements in trade secret enforcement, including more deterrent remedies, I am uncertain how much those desires extend to administrative enforcement.  Transferring of relevant confidential material to an SAIC official tasked with trade secret enforcement will raise concerns of further trade secret leakage, which are probably not of equal concern in the case of administrative enforcement of, for example, trade dress infringements covered under this draft law.    Moreover, the State Council has elsewhere stated that all administrative cases should be conducted ex-officio.  To me administrative ex-officio enforcement of trade secrets, with authority to enter business premises to inspect and conduct investigations, is problematic.

The draft law also seeks to increase administrative fines for trade secret theft, and improve burden of proof issues:

“Article 22: Where business operators violate the provisions of Article 9 of this law, the supervision and inspection departments shall order them to cease the unlawful acts, and shall impose a fine between 100,000 and 3,000,000 RMB depending on the circumstances; where the act constitutes a crime, criminal responsibility is pursued in accordance with law.

Where the rights holders of trade secrets can prove that information used by others is substantially the same as their trade secrets and that those others had the capacity to obtain their trade secrets, those others shall bear the burden of proof to show that the information they used came from lawful sources.”

It is unclear to me from Article 22, that this “burden of proof” reversal in the second paragraph above applies to administrative enforcement or civil enforcement, or even criminal process.  Moreover, the requirement of substantial similarity of the technology for the shifting to take effect, is probably too high a threshold, having been an impediment for plaintiffs in trade secret litigation in China to date.

Does this law go far enough in addressing trade secret issues in China?

Although SAIC has historically conducted many administrative trademark cases on behalf of foreigners, historically trade secret administrative enforcement has not significantly benefitted foreign companies or small enterprises.  As I previously blogged:

That there were 174 trade secret cases [for 2008-2010] out of 110,896 cases involving the Law to Counter Unfair Competition, or about 0.2% of the total. In addition, the data shows that average fines were 11,624 Yuan, and only 7 cases or about 4 % of the trade secret case were referred to criminal enforcement.  Like the civil system, the administrative system also appears to be frequently used to address employee theft of confidential information.  Precisely one third, or 58 of these 174 cases involved individual respondents; 24 involved private companies  (14%) and 23 cases involved individual businesses (13%).   There were no cases where a state owned enterprise or publicly held company was named as a defendant in an administrative action.  

One may question, therefore, whether this draft revision of the AUCL addresses the full range of substantive and procedural improvements that need to be made to improve trade secret enforcement in China, much of which may be more uniquely linked to trade secret protection compared to other IP rights.  Moreover, many of the problems are amplified by comparison with trade dress or other provisions of this draft law.

Much of the problem with trade secret protection has been in the lack of discovery in the civil system.  One significant advantage of improved trade secret administrative enforcement however could be in facilitating the transfer of information obtained in administrative investigations to civil courts or law enforcement authorities, consistent with State Council guidance on facilitating case transfers.  Improving civil procedures for trade secret cases could also greatly help in civil prosecution of trade secret cases, including by making necessary changes in evidence collection, burden of proof reversals, and other areas.

The current draft appears unduly oriented to instances where trade secret theft has actually occurred.  One critical area concerns the availability of relief for threatened misappropriation of trade secrets including preliminary injunctions, adoption of “inevitable disclosure” type doctrines, and evidence or asset preservation measures.  Such measures can be especially important as the harm that may be caused by a misappropriation may be incapable of being compensated for by the misappropriator or beneficiary of the theft. Although revisions to China’s Civil Procedure Law now permit preliminary injunctions for trade secret theft (Eli Lilly vs. Huang Mengwei),  China may wish to consider specific provisions in this law to facilitate more liberal dispensation of provisional remedies.  China had specifically provided for preliminary injunctive relief in other IP laws, before the most recent Civil Procedure law amendments, and may want to consider appropriate provisions for trade secrets.

Regarding threat of trade secret law, the current law also only addresses “disclosing, using, or allowing others” to use the secret information.   This deficiency could easily be remedies by including language on threat or imminent trade secret theft.    The Uniform Trade Secrets Act in the United States, by comparison, specifically addresses “actual or threatened misappropriation” which may be enjoined, and also provides a remedy for trade secret inducement.  The TRIPS Agreement itself clarifies that a key focus of WTO member trade secret obligations is “preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices.” (emphasis added).  The need for preventative measures is also reflected in TRIPS Article 41, which requires WTO members to have “expeditious remedies to prevent infringements.”  In addition, inducement liability is being considered in other China IP laws (patent/copyright) and does not appear to be part of this draft.  A clear definition of inducement liability may be helpful in limiting losses due to third party misappropriation of trade secrets.

China’s trade secret regime also has several other challenges, including difficult criminal thresholds; unclear relationships with labor law, labor mobility regulations, and employee non-competes; difficulties in gathering evidence; unclear divisions among the appropriate role of civil, criminal and administrative remedies;  and even an emphasis on trade secret protection as an aspect of market regulation, rather than as a civil IP right, as is under consideration.    Some of these deficiencies may be cured by judicial interpretation and guidance, as was previously addressed by the Supreme Peoples Court in an earlier Judicial Interpretation.

The focus on market regulation denies trade secret holders in China the ability to address infringement based on where a product that benefits from a trade secret misappropriation is sold, but instead may require litigation where the misappropriation occurred.  See Siwei v. Avery Dennison (Min San Zhong Zi No. 10/2007) (Sup. People’s Ct. 2009) (China).   This may also encourage foreign litigants, concerned about  local protectionism or undue influence of local companies on local courts, to seek remedies elsewhere (such as through Section 337 remedies in the United States).  In addition, the lack of discovery can also lead to the “exporting” of such litigation.  Making these necessary procedural improvements, including improving “success rates” for domestic trade secret cases and improving procedures for gathering evidence, may also enhance China’s position that Chinese judgements in trade secret cases are entitled to res judicata effect in other jurisdictions.

Former SPC Vice President, now Chief Procurator  Cao Jianming 曹建明, noted in 2005,  trade secret enforcement was the area with the “greatest difficulties” for the courts Industry has also raised concerns about many of these deficiencies.  While many of the changes in the AUCL on trade secret protection are positive, a more comprehensive approach could require reforms in other areas, including the practices of law enforcement and the courts, administrative law reform, civil law reform, and/or a stand-alone trade secret law.

My personal estimation: the AUCL draft is a beginning and not an end in the trade secret reform process.

GAI’S Comments on NDRC’s IP Abuse Guidelines

 “[T]he code is more what you’d call “guidelines” than actual rules” (Barbossa, Pirates of the Carribean, The Curse of the Black Pearl).

Attached find the comments of the Global Antitrust Institute of George Mason University (GAI) on the recently released public comment draft of NDRC’s IP Abuse Guidelines.

GAI’s excellent comments suggest that NDRC adopt a more compliance-based approach to ensure predictability to commercial actors.  In its view, the Draft Guidelines do not explain the significance of each of four factors enumerated by NDRC or how they will be weighed in Anti-Monopoly Law (AML) agencies’ overall decision-making process.  This approach allows the AML agencies broad discretion in enforcement decision-making without providing the guidance stakeholders need to protect incentives to innovate and transfer technology that could be subject to AML jurisdiction.  GAI also recommends that the NDRC include throughout the Guidelines examples similar to those found in the U.S. antitrust agencies’ 1995 Antitrust Guidelines for the Licensing of Intellectual Property to illustrate how the AML agencies will apply the basic principles.  GAI also provided specific line-edit proposed edits on four provisions: general analysis, charging “unfairly high” royalties, discriminatory treatment, and injunctive relief.

Anyone keeping a list of all the legislative activity in this area is likely to be bewildered.  I have previously released other comments of the GAI, including their recent comments on SAIC’s draft of the IP Abuse Guidelines, and an earlier draft of the NDRC IP Abuse Guidelines.  I also commented on NDRC’s questionnaire regarding the guidelines, and published the ABA’s comment on the questionnaire.  Activity on IP Abuse guidelines now stretches back several years.  Indeed. there were already SAIC several drafts when I helped author a chapter on IP and China’s antimonopoly region in Antimonopoly Law and Practice in China  (2011).   Additionally, the AML itself is reportedly under consideration for revision by the NPC, and related legislation, a draft of the Anti-Unfair Competition Law, has reportedly recently been submitted to the State Council for its consideration (it was listed for preparatory work in the State Council’s 2015 legislation plan).

One saving grace: the final guidelines would likely need to be adopted by the Antimonopoly Commission which, according to the AML itself, is in charge of “organizing, coordinating, and guiding anti-monopoly work.” In the interim, the large number of drafts by different administrative agencies, lack of clear legislative or judicial guidance, the overhang of active enforcement activities and large damage/international administrative and judicial decisions (such as Qualcomm and Interdigital), the “exporting” of AML cases overseas (such as in Huawei vs. ZTE), SIPO’s effort to address standardization issues in the patent law revision, etc., all suggest that a situation where agencies could be using rulemaking to both address voids in legislation but also enhance their position in a multi-agency turf battle.

During my trip to China last week, I also repeatedly heard concerns expressed about current practice of Chinese agencies drafting legislation that may be used to enhance their administrative power or enhance their influence, with calls for greater direct legislation by the State Council or National People’s Congress (here’s one article on this topic involving educational legislative work).  Despite the heavy work load of the State Council, it seems to me that the IP Abuse Guidelines are increasingly becoming more ripe for the already planned consideration by the Antimonopoly Commission or the State Council Legislative Affairs Office itself.

(Updated Jan. 21, 2016)

Translation of Draft Patent Law Amendment

Further to my blog earlier this month, attached are unofficial translations of the draft Patent Law Amendments, as well as the SIPO Explanations about Draft Amendment to the Patent Law.  Comments on the draft are due at the State Council Legislative Affairs Office by January 1.  The drafts are provided by the USPTO office in Beijing, should be compared against the Chinese original for any important concerns.

This draft may generally be said to elicit several different types of concerns. These include positive changes from the earlier draft in areas of concern.  An example of this might be limitations on proposed enhancement of patent administrative enforcement.  Another area of concern is negative changes from the earlier draft.  An example of this might be inclusion of antimonopoly law concepts regarding IP abuse into the patent law amendments. Another type of amendment is a positive change in an already positive direction.   An example of this might be improvements in civil enforcement and conduct of utility model appraisal reports.  Finally, there are issues that are not under consideration for revision in the patent law, which might be useful for Chinese law makes to consider.  Examples of these might include a more robust and longer grace period, and a longer statute of limitations.  There are also issues involving pharmaceutical regulatory procedures and patent protection that also implicate pharmaceutical regulatory procedures, such as patent linkage or patent term restoration which affected companies may wish to comment on.

Also importantly, the State Council Legislative Affairs Office website describes this draft as a SIPO draft , not an SCLAO draft to support further research by the State Council: “The Legislative Affairs Office of the State Council decided to publish the State Intellectual Property Office submission for consideration by the State Council of The Chinese Patent Law Amendment Bill (draft) and its Explanation, in order to solicit views of all sectors of society to conduct further research, and after modification to submit for consideration by the State Council.” “国务院法制办公室决定,将国家知识产权局报请国务院审议的《中华人民共和国专利法修订草案(送审稿)》(以下简称送审稿)及其说明公布,征求社会各界意见,以便进一步研究、修改后报请国务院审议。”

Also for reference, attached is the link to a translation of the prior draft, and comments of the ABA on that prior draft.

Draft of Patent Law Revision Published for Comment

The State Council Legislative Affairs Office has published on December 2, 2015 the draft of the Chinese Patent Law revisions for public comment《中华人民共和国专利法修订草案(送审稿)》, along with an explanation prepared by SIPO. Comments are due January 1, 2016.