Category Archives: State Council

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The Cart Before the Horse in China’s Patent Linkage Regime

Since China’s legislature amended the patent law on October 17, 2020 and China’s National Medical Products Administration (NMPA) and  its National IP Administration (CNIPA) published the Implementation Measures for the Early Resolution Procedures for Drug Patent Disputes (Trial) (Draft for Comment) ( 国家药监局综合司 国家知识产权局办公室公开征求《药品专利纠纷早期解决机制实施办法（试行）(征求意见稿）》意见) (the “Rule”) on September 11, 2020, several people have written to me who are bewildered about the sequence of rules being proposed on patent linkage in advance of the enactment of patent linkage into law.  This post analyzes whether this “cart before the horse” scenario should be a concern for US pharmaceutical companies, and what this counter-intuitive sequencing may suggest for China’s new patent linkage regime.  

This is indeed an unexpected circumstance.  There was no advance word that the Rule was being prepared for public release. CNIPA and NMPA’s parent agency, the State Administration for Market Regulation (SAMR), did not include a patent linkage rule in its 2020 legislative work plan.  CNIPA also had not included a patent linkage rule among its top 100 IP projects for 2020.  However both SAMR and CNIPA did include the more general Implementing Regulations for a revised patent law in their anticipated legislative work for 2020.   By contrast, the Beijing IP Court issued a research report on Patent Linkage (中国药品专利链接制度研究) in late September, which advocated judicial reforms to support a linkage regime.  In addition, the Supreme People’s Court in its 2020 annual plan announced its intention to draft a judicial interpretation (JI) for patent linkage cases.  They have not yet released their draft JI.

This “cart before the horse” Rule may trace part of its origins to the Phase 1 Trade Agreement (January 15, 2020) (the “Agreement”).  The Agreement did not explicitly require that the civil courts play the leading role for patent linkage disputes. The Agreement also failed to establish an “artificial infringement” regime for the Courts to rule that an application for marketing approval of a patent drug constitutes infringement. Instead, it required that China adopt “procedures for judicial or administrative proceedings and expeditious remedies”, and that China “may … provide” administrative remedies for resolution of linkage disputes (Art. 1.11).   In so doing, the Agreement left open the possibility that the administrative agencies would play the dominant role in a patent linkage regime.

More generally, the Agreement also authorized a leading role for administrative IP enforcement in a range of areas with its repeated references to campaign-style administrative enforcement.  The Agreement also did not acknowledge or seek improvements to China’s notable IP-related judicial reforms.   The Agreement was also immediately preceded by an important State Council/Party Central Committee plan that called for strengthening of administrative enforcement (Nov. 24, 2019), and that was considered in its time to be a high-level policy precursor to the Agreement. This policy evolution has also been accompanied by changes to all of China’s major IP laws including the Trademark law, the Patent Law, the Anti-Unfair Competition Law, as well as proposed Copyright Law Amendments, that all further commit China to strengthened administrative enforcement of IP.

CNIPA and NMPA took the next step of securing a key role for their agencies in patent linkage when they drafted and published the Rule.  I use the term “Rule” (規章) or “Departmental Rule” (部門規章) in this blog as a term of art, consistent with China’s Law on Legislation 立法法.  The nomenclature is also consistent with China’s own descriptions of its legal system  upon acceding to the WTO.  A Rule is a legislative document enacted by a departmental agency that is inferior to a Law （法律）that has been passed by the National People’s Congress or  a State Council-enacted Regulation （法規）.  As set forth in the hierarchy of the Law on Legislation, it is also inferior to many types of local legislation.  As with other Rules, NMPA/CNIPA does not use the word “rule” in its September 11 pronouncement.  It instead calls its legislation “procedures” (办法). However, do not be misled! The Law on Legislation does not use “Procedures”  as a term to categorize legislation, even if regulatory agencies use this term in their own enactments.  When a Departmental Agency enacts a legislative document it is typically a “Rule” under the Law on Legislation based on the enacting agency and the legislative process. The categorization of legislation is often not immediately clear from its own wording.  Moreover, the legal status can also become murkier if sui generis or inter-agency procedures not otherwise in the Law on Legislation are involved.

In amending the Patent Law, the NPC cemented the leading role of NMPA and CNIPA by declining to legislate on linkage in detail and delegating rule-making authority to these agencies. According to Article 76,  “procedures” (or a “Rule”) will be drafted by NMPA and CNIPA to govern “pharmaceutical approvals and applications for marketing approvals.” Article 76 further requires the “procedures” to be delivered to the State Council for its approval before implementation (国务院药品监督管理部门会同国务院专利行政部门制定药品上市许可审批与药品上市许可申请阶段专利权纠纷解决 接办法，报国务院同意后实施).  By delegating drafting authority to NMPA and CNIPA and legislating that the State Council will be the final arbiter of its contents, the Patent Law has likely placed the NMPA and CNIPA Rule within that murky class of sui generis enactments.   

In its final form the State-Council approved patent linkage Rule is unlikely to be in conflict with any explicit Patent Law Amendment provisions. The State Council approval mechanism also still leaves open the possibility for additional policy interventions that are consistent with the Patent Law.  One important modification that might be considered would be to authorize the Ministry of Justice (MOJ) take a more active role in the drafting of the Rule or craft the Rule as a Regulation promulgated by the State Council itself. Pursuant to the administrative restructuring of March 13, 2018, MOJ is required to perform the legislative functions formerly performed by the Legislative Affairs Office of the State Council  (《第十三届全国人民代表大会第一次会议 关于国务院机构改革方案的决定》，批准《国务院机构改革方案》, which previously prepared Regulations.   

If the State Council were to take a leading role in drafting on patent linkage, past practice would suggest it will ensure that all agencies concerned would have an opportunity to comment.  The agencies would not only include NMPA and CNIPA but could also include the courts, trade, health, science or industrial planning and development agencies, as well as authorities responsible for personnel and budgeting.   A Regulation or sui generis Rule which involves all relevant agencies might also obviate the  failures of a prior linkage rule in 2002 which relied exclusively on administrative rule making.  As the late Prof. Benjamin Liu wryly observed at that time: “the SFDA  [predecessor agency to NMPA] does not always succeed with its gate-keeping function.”  Deputy Director Ding Jianhua of SFDA also succinctly stated the problem:   “SFDA is not responsible for IPR.” [1]

Judicial involvement in this legislation is needed to harmonize the legal complexities of patent linkage which complex issues of patent law, civil law, administrative law, and pharmaceutical regulation.  A lack of judicial involvement confounded the implementation of the 2002 rule.  This 2002 Rule (and subsequent amendments) was further stymied by later legislative changes in the patent law when China added a “Bolar exemption” to exempt pre-marketing approval efforts by generic companies from claims of infringement.  In Prof. Liu’s words, this exemption  “swallowed the rule of patent linkage.”  Bolar exemptions are well-known in international practice, being an exemption from civil infringement claims and are within the purview of the courts.  Overly-broad Bolar exemptions can raise concerns over compliance with TRIPS and other international IP obligations.

China’s vast administrative system must surmount other challenges to lead a patent linkage regime. These challenges include: a lack of administrative enforcement transparency; uncertainty regarding coordination between judicial and administrative enforcement; differing legal appeal routes and standards for litigating infringement which may lead to undermining of one system over another; concern for the systemic impacts on China’s IP regime by relying on administrative interventions rather than the civil system; limited foreign utilization of the patent administrative enforcement system particularly for high value pharmaceutical rights; and the inherent “fox guarding the hen house” fear when the administrative agencies that grant patent rights and marketing authorizations are also tasked with enforcing these important rights. 

Long-term observers may also fret that CNIPA and NMPA are an “odd couple” to administer a linkage regime  Although they are housed in the same mega-agency, SAMR, NMPA in recent years has been a leading advocate for  patent linkage, while  CNIPA had been viewed as less supportive. There are also continuing concerns over CNIPA’s excessive invalidation of pharma patents.

At this stage, the most appropriate corrective to these various challenges would be to leverage the State Council’s authority to take a leadership role in implementing Article 76 of the Patent Law, as well insure that there is conforming language in the Patent Law Implementing Regulations which MOJ will likely be coordinating in the near future.  An effective linkage regime for China will not only need to balance the interests of generics and innovators in China’s linkage regime, but also between the courts and the range of concerned administrative agencies.

Where will China go next at this important juncture on patent linkage?  Berkeley Law will be convening a webinar on China’s patent linkage regime as part of a multi-part series on food and drug law.  I will be joined by He Jing from the GEN law firm, Cui Can from Morrison and Forster, Dr. Karen Guo from Novo Nordisk and Xuejiao Hu from Beigene.  The event will take place on November 17.  Registration information is available here

[1] Benjamin Liu, ”Fighting Poison with Poison? The Chinese Experience with Pharmaceutical Patent Linkage,” 11 J. Marshall Rev. Intell. Prop. L. 623 (2012).

Note: The Photo above by Unknown Author is licensed under CC BY-SA

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IMPACT OF RECENT AML LEGISLATION ON THE IPR/ANTITRUST INTERFACE

This blog provides an update on recent legislative developments involving the interface between IP and China’s Anti-Monopoly law. On November 28, 2019, SAMR published the Anti-Monopoly Compliance Guidelines for Undertakings (Draft for Public Comment) (“Draft Compliance Guidelines”) 经营者反垄断合规指南（公开征求意见稿）, which according to SAMR is specifically intended to “encourage undertakings’ compliance with China’s Anti-Monopoly Law” 鼓励经营者合规经营. Comments were due on February 12, 2019.  On January 2, 2020, SAMR issued the Draft Amendments to China’s AML (Draft for Public Comment) “反垄断法”修订草案 （公开征求意见稿) (“Draft AML Amendments”). Comments were due on January 31, 2020. These documents, along with the changes from the government reorganization coming China’s three antitrust agencies into one, may suggest new approaches to antitrust regulation and enforcement in the future in China. 

The ABA’s Antitrust Law and International Law Sections submitted comments to SAMR on the Draft Compliance Guidelines as well as the Draft AML Amendments. We welcome receiving comments that other organizations submitted on these proposed laws to publish or link on this blog.

According to the NPC Observer, the Draft AML Amendments are on the State Council’s calendar for the 13th NPC Standing Committee Legislative Plan. It is a priority Class II Project. According to the recent government reorganization, it would otherwise be expected that Ministry of Justice would prepare a draft of the AML revisions for consideration by the State Council which would then forward on to the NPC for three readings. This Draft AML Amendments appear to be an effort to ‘test the water’ or perhaps ‘jump start’ the revision process, as it is drafted at an earlier stage than the NPC calendar might otherwise require. China’s National Copyright Administration undertook a similar effort with the long-stalled copyright law amendments, by publishing its own draft for public comment, which eventually became a State Council draft for public comment in June of 2014.

From an IP perspective, there are several items that are worth noting: 

The first one is that Article 55 of AML (Article 62 of the Draft) stayed unchanged and there is no new IP-related content added to this draft amendment. This article provides:

“This Law does not govern the conduct of undertakings to exercise their intellectual property rights under laws and relevant administrative regulations on intellectual property rights; however, undertakings’ conduct to eliminate or restrict market competition by abusing (or misusing) their intellectual property rights are governed by this Law.”

Article 55 has been the subject of considerable discussion among academics and practitioners and is ambiguous in its scope, including the relationship between the legitimate exercise of an IP right and an anticompetitive act, the relationship with Contract Law and proposed Civil Code provisions on monopolization of technology, the difference between “IP abuse” and “misuse”, the impact of administrative rules 行政法规 and AML guidelines on Article 55, and ultimately whether the AML creates some kind of safe harbor against charges of monopolization.   

An example of the unsure relationship between the legitimate exercise of IP rights and competition law might be price-based claims for securing a license to a patent, which arguably restricts certain competition in the market but would otherwise constrain a patentee’s rights to license or charge prices as it sees fit (see, e.g., Art. 28 of the TRIPS Agreement, Arts. 65, 68 of Chinese Patent Law). Most high pricing cases to date in China have involved standards essential patents, where a FRAND commitment may be involved that arguably mitigates against letting market prices fully determine patent values. However, these cases may not take into account the lawful rights authorized by Chinese IP law including the right to charge market prices and to seek an injunction when a right is infringed, which is also arguably within the scope of AML Article 55/revision Article 62.

In a similar vein, the notion of essential facilities is not mentioned in both drafts, which means China may not be ready to fully support an essential facility doctrine in national legislation at this time. However, companies that manage IP assets, particularly in the standardization context, may still need to pay attention to this issue to minimize their IP risk related essential facilities claims/abuse of market dominance, particularly as the essential facilities doctrine continues to have an active influence in administrative enforcement and policy making, as well as in policy decisions involving SEP’s.

Article 20(6) of the Draft AML Amendments lists several types of abusive acts, including “discriminating among transacting parties on transaction conditions without justified reasons” (没有正当理由，对交易相对人在交易价格等交易条件上实行差别待遇).  The current AML additionally required that the discrimination arise from “identical circumstances” (or “an equal footing” in the MofCOM translation) as a condition to a claim of discriminatory pricing (Art. 17(6)). This may create additional uncertainty in IP licensing due to potential AML risks, because the reasons for removal of “identical circumstances” are unclear, the scope of what is a “justified reason” in a licensing transaction is also unclear, and IP licenses are typically not commodity or mass produced agreements but are custom-negotiated based on a range of factors including the role of any actual or threatened litigation, markets and market penetration, tax planning, any cross-licensing, etc. 

Article 14 of the Draft AML Amendments prohibits both horizontal and vertical agreements that “exclude or restrict competition” offers another possible distinction from the current AML.  Article 13 of the current AML requires a finding of “excluding or restricting competition” only with respect to horizontal monopoly agreements. While the courts have generally adopted a fact-based, rule of reason type approach to this issue, administrative agencies were more inclined to find such agreements vertical agreements illegal per se, subject to a few exceptions. This Draft AML Amendments clarify this issue, which could have an important impact on licensing transactions by requiring an analysis of competitive impact and would be more consistent with TRIPS Article 40, which regulates “licensing practices or conditions that … constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market.” (emphasis supplied).

Two other provisions worth noting are Articles 18 and 21 of the AML Draft Amendments. Article 18 would tighten the requirements for receiving an exemption from an otherwise offending monopolistic agreement by requiring that it gives rise to efficiencies such as improving technology or improving research and development, that are “necessary” for the claimed efficiencies to be realized. The ABA has suggested that this language would require a “hindsight” type of analysis and that Article 18 be revised to soften this condition by requiring only that the agreement be “reasonably necessary” to achieve the claimed efficiencies.  

Article 21 lists factors that may be used to determine whether an undertaking has a dominant market position, and adds new additional factors for the Internet sector including network effects, economies of scale, lock-in effects, and data control and handling capabilities. The ABA has suggested that it is inappropriate to have industry specific legislation for the Internet sector, that these factors may equally apply to other industrial sectors, and that requirements of this type are best reserved for “implementing regulations or guidelines.” 

The Draft Compliance Guidelines, like other administrative rule makings are not mandatory and have no binding legal force. The Guidelines provide general guidance on anti-monopoly compliance of business operators. Most of its contents have already been stipulated in the previous Anti-Monopoly Law and related guidelines.   

Neither the AML Draft or Draft Compliance guidelines offer any specific guidance regarding management of patent pools, obtaining clearance from SAMR for a pool, or operation of a licensing regime.

The absence of more detailed consideration of IP issues in these two documents is rather surprising considering discussion in other venues. Although the US government complained about antitrust enforcement in China in the Section 301 investigation, noting that “several submissions asserted that Chinese AML authorities use the AML as a tool to advance industrial policy rather than to protect competition”, there were also no references to the AML in the Phase 1 Trade Agreement. Chinese courts have also been addressing issues regarding abuse of dominance and standardization through documents such as the Trial Adjudication Guidance for Standard Essential Patent Dispute Cases promulgated by Guangdong High People’s Court, and the Beijing High Court’s Guidance for Patent Infringement Determination. In addition, IAM has also recently reported that there is a significant increase in SEP-related litigation in China, including foreign vs. foreign and foreign vs. Chinese cases. China has also recently become an important venue for resolution of international SEP licensing disputes. Perhaps the wiser approach is to let these contentious cases be resolved one by one, rather than risk over-legislating in an evolving area where there has been considerable political attention.

Prepared by Mark Cohen and Xu Xiaofan

 

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New CPC and State Council Opinions on Improving IP Protection

wordcloud

On November 24,  2019, the General Office of Communist Party of China and the State Council jointly released the Opinions Concerning Enhancing Intellectual Property Rights Protection (关于强化知识产权保护的意见).

It is often too easy to dismiss documents like these, that have typically delivered an ephemeral higher state of vigilance by the Chinese government.  Nonetheless, there are some useful statements in this document that may be an indicator of future durable improvements, including:

  1. It is jointly published by the CPC and the State Council and thus has high level political and executive branch support.
  2. It does address some long-standing concerns raised by industry, such as development of a patent linkage system, patent term extension and copyright protection for sports broadcasts.
  3. There continues to be a focus on punitive damages in litigation. However, this document does appropriately point out the need to increase actual damages.
  4. Improving criminal enforcement, including revising criminal judicial interpretations – is also addressed.  Along with revising the criminal code, revising criminal JI’s and their high criminal thresholds was a goal of the WTO case that the US filed against China over 10 years ago (DS362).  This task is long overdue.
  5. Improving coordination between administrative and criminal enforcement is once again highlighted. This is also a long-standing issue.  In light of numerous prior efforts and experiments, a more concrete explanation of how this might be accomplished to better enable prosecution of major criminal actors would be helpful in the future.
  6. Case guidance and public trial systems are highlighted. Hopefully, the case guidance system will add further momentum to successful case law experiments in IP at the Beijing IP Court.
  7. The introduction of technical assessors into administrative enforcement could suggest a continued enhanced role for patent administrative enforcement, which has been increasing even as trademark administrative enforcement has been declining. If so, it may not augur well for foreigners who have traditionally been heavy “consumers” of the administrative trademark system, but not the administrative patent system.
  8. Improvements in the “examination” of utility models and designs are noted as a goal. However, these rights are generally not examined for substance except in the case of “abnormal” applications.
  9. Continuing attention is paid to challenging markets, such as e-commerce platforms and trade fairs, as well as establishing faster protection mechanisms.
  10. There is a continuing focus on supporting Chinese rightsholders overseas.

This document arguably goes part-way in establishing an outline for addressing US concerns about IP theft.  However, it offers little to address such concerns as ensuring greater transparency in the courts, publishing foreign-related cases, or addressing certain trade-sensitive topics outlined in USTR’s Section 301 report, such as cyber intrusions or criminal trade secret misappropriation.

The word cloud, above, is drawn from a machine translation of this document.  The original Chinese language and my redlining of a machine translation are found here.

Addendum of November 26, 2019:

Susan Finder in her Supreme People’s Court Monitor blog, reported on Judicial Interpretation drafting by the SPC for next year, some of which are referenced in the recently released Opinions.  According to that blog, on 29 April 2019, the SPC’s General Office issued a document setting out a list of 47 judicial interpretation projects, 36  with an end of 2019 deadline.  Several of these involve IP-related issues, including issues addressed in the joint CPC and State Council Opinions, including:

  1. Interpretation Concerning the Application of Law in Cases of Disputes over the Infringement of Trade Secrets (关于审理侵犯商业秘密纠纷案件应用法律若干问题的解释). Responsibility of the #3 Civil (IP) Division.
  2. Interpretation on Several Issues Concerning Punitive Damages 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). Responsibility of the #3 Civil (IP) Division.
  3. Provisions on Issues Concerning the Application of the Foreign Investment Law of the People’s Republic of China (I) (关于适用《中华人民共和国外商投资法》若干问题的规定（一)). Responsibility of the #4 Civil Division. The Foreign Investment Law and the recently released draft implementing regulations contain provisions protecting the intellectual property of foreign investors, including prohibiting forced technology transfers and enhancing the availability of punitive damages.

These draft JI’s have a due date of the first half of 2020.  Susan Finder notes in her blog that given the worldwide attention on the issues set forth in these three judicial interpretations, she expects that they will be released for public comment.  I hasten to add that the IP Division of the Court has generally taken a positive attitude towards soliciting public comment on its draft judicial interpretations, and I hope that they maintain this tradition.

It was also noted by Susan Finder that certain JI’s were due by year-end 2019, including:

  1. Intellectual Property Rights Evidence Rules (关于知识产权民事诉讼证据的若干规定).  Responsibility of the #3 Civil (IPR) Division. 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.  A particular notable example of such a reversal is found in the recent amendments to the trade secret law (Article 32), whereby  a rights holder that has preliminarily proven that it  has taken reasonable confidentiality measures on the claimed trade secrets and has preliminary evidence reasonably demonstrating that its trade secrets have been infringed upon, can shift the burden of proof (BOP) to the infringer to prove that the trade secrets claimed by the right holder do not belong to those as prescribed in this law.
  2. Judicial interpretation on administrative cases involving patent authorization and confirmation (关于审理专利授权确权行政案件若干问题的解释). Responsibility of the #3 Civil IPR) Division. Another interpretation that previously had a 2018 year-end deadline.  A draft was issued for public comment in the summer of 2018; see my earlier blog.

Addendum of November 27, 2019:

Another China law blog, the NPC Observer also expects that some of the IP legislation flagged in the Opinions for revision may be considered as early as late December of 2019t.  According to the NPC Observer:

We expect the session to review a … draft amendment to the Patent Law [专利法] …The session may additionally consider the following bills: …

I have previously blogged about proposed revisions to the Patent and Copyright Law.

Addendum of January 9, 2020: Here is a translation of the Opinions from China Law translate.