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.

Updates of July 4 and 18, 2020: Here are the February 3, 2019 comments of the AIPLA on this draft of the patent law revisions, and the February 5, 2019 comments of the American Bar Association’s Sections on Antitrust Law and International Law.

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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

 

 

Of Trade Secrets, Section 337, AUCL Reform and Evidence Production

When faced with trade secret misappropriation, the United States International Trade Commission can provide a forum for U.S. companies faced with unfair competition resulting from the misappropriation, even if the “theft” occurs entirely in China and/or a misappropriated process is used in China to manufacture a product imported into the United States.  In Certain Cast Steel Railway Wheels, Certain Processes for Manufacturing Or Relating To Same and Certain Products Containing Same, 337-TA-655, Amsted Industries Inc. which licensed certain confidential manufacturing technology to two Chinese companies, Datong ABC Castings Co. (DACC), and Xinyang Amsted Tonghe Wheels Company Limited (Tonghe), claimed the respondent, TianRui Group Co. Ltd., had poached employees from DACC and Tonghe and stolen their materials and other proprietary information sufficient to establish an identical, competing manufacturing line.  The ITC found a violation of Section 337 and issued a ten-year exclusion order.  On appeal of this landmark case, the U.S. Court of Appeals for the Federal Circuit held that the ITC has jurisdiction to reach trade secret misappropriation that occurs entirely abroad, so long as there is a nexus between the misappropriated trade secrets and the imported product.  Tianrui Group Co. v. ITC, 661 F.3d 1322, 1337 (Fed. Cir. 2011).  Interestingly, in that instance, the Chinese domestic authorities aligned with the United States.  Because railway wheels must be certified for use in China (as is the case in the U.S.), the Chinese Ministry of Railways declined to certify the Tianrui wheels until the U.S. matter was concluded.  The willingness of the Ministry of Railways to decertify Tianrui’s wheels while an ITC action was pending. This case stands as an important contra-factual that suggests the relationship between trade secret theft in China and Chinese domestic industrial policy may be overstated.

More recently, in Certain Rubber Resins and Processes for Manufacturing Same, 337-TA-849, the ITC found a violation of Section 337 based on trade secret misappropriation that occurred entirely in China.  In that case, the Chinese authorities had ruled that there was no trade secret misappropriation in both civil and criminal proceedings.  In Sino Legend Chemical Co. v. International Trade Commission, 623 F. App’x 1016 (Fed. Cir. 2015), the Chinese respondents sought to overturn the legal doctrines in Tianrui, arguing that the ITC does not have jurisdiction to reach misappropriation taking place entirely abroad and that the ITC should have deferred to the Chinese authorities as a matter of comity.  In a nonprecedential judgment, the Federal Circuit affirmed the Commission’s finding.  On September 30, 2016, the respondent in the ITC case, Sino Legend, filed a petition for certiorari asking the U.S. Supreme Court to overrule Tianrui, arguing that Section 337(a)(1)(A) contains no clear indication that it should apply extraterritorially and barring the importation of goods made using trade secrets misappropriated in China constitutes the impermissible regulation of conduct occurring overseas.  As an indication of how important this matter is to the Chinese government, in a rare filing, the Ministry of Commerce submitted an amicus brief supporting certiorari.  On January 9, 2017, the Supreme Court denied the certiorari petition.  Thus, U.S.-based companies can continue to turn to the ITC as a viable alternative for relief from trade secret misappropriation taking place in China.  Equally problematic, however, was the willingness of China’s judiciary to misconstrue the 337 decision as a victory for the Chinese defendants and to deem a lower court case as a model case while a related case was still pending on appeal to the court.  This case has also been an important counter-contra-factual indication regarding the relationship between trade secret theft in China and independence of the courts is not as rosy as the cooperation that the Tianrui decision might suggest.

How does this relate to legislative reform of the Anti-Unfair Competition Law in China?

China is currently revising its AntiUnfair Competition Law, which is the foundational law for trade secrets.  An important first step in addressing trade secret theft in China was the recognition that trade secret protection is a proper subject of the civil code in recent amendments to the civil code; i.e., that is not simply a matter of market regulation but of theft of a private property rightThe inclusion of trade secrets in the revisions to China’s general principles of the civil code was advocated in this blog, and also noted as appearing in an earlier draft.  The SPC, including Madame Tao Kaiyuan, were also involved in providing expert opinions on the draft.  The comments of the National Peoples Congress on  the recent proposed revisions of the AUCL specifically calls out the important role of the SPC in revising the most recent draft of the AUCL, and note that civil compensation should assume a primary role in enforcing the anti-unfair competition law generally (善民事赔偿责任优先、与行政处罚并行的法律责任体系。不正当竞争违法行为首先损害了其他经营者的合法权益,需要民事赔偿优先,调动其他经营者制止不正当竞争行为的积极性。)  The primacy of civil enforcement is also found in Article 20 of the draft law itself with a clarification that a business operator who violates the law shall “bear civil liability” and that civil liability shall take priority over fines (Article 30).  I believe these efforts reflect some of the momentum generated by the SPC’s highly useful recent report on civil enforcement of trade secrets.  Also of note is that at about the same time as that report, the US China Business Council outlined a number of the evidentiary problems in trade secret cases in its proposals for Chinese trade secret reform (2013), including burdensome notarization procedures, procedures which risk further disclosure of confidential information, difficulties in cooperation with the police, etc

The inclusion of trade secrets as a civil right was accomplished with civil code revisions adopted on March 15, 2017, with an implementation date of October 1, 2017.  (中华人民共和国民法总则)。  Article 63(5) includes trade secrets as a subject of intellectual property rights protection:

第一百二十三条 民事主体依法享有知识产权。知识产权是权利人依法就下列客体享有的专有的权利:    (一)作品;    (二)发明、实用新型、外观设计;    (三)商标;    (四)地理标志;    (五)商业秘密;    (六)集成电路布图设计;    (七)植物新品种;    (八)法律规定的其他客体。

Section 337 and the New Trade Secret Regime?

How do these reforms in trade secret litigation interact with US Section 337 procedures? Issues involving the production of evidence between the US and China can be at the heart of many IP cases but are especially critical in trade secret cases.   While some reforms have already been made in China, such as availability of preliminary evidence preservation measures in trade secret cases, the removal in the recent draft of the AUCL of a provision in an earlier draft that would have provided for a modest burden of proof reversal in trade secret matters is also troubling:

“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.” (proposed Art. 22)

As the co-author of this blog, Jay Reiziss, points out in his attached presentation to my recent class at Fordham, difficulties in gathering evidence have often been critical to use of Section 337 proceedings.  US Administrative Law Judges have granted motions to use the Hague Convention, such as where a foreign government formally weighs in (Switzerland indicated that it would cooperate with such a request (Certain Sintered Rare Earth Magnets, Inv. No. 337-TA855, Order No. 8). However other cases have determined that Hague Convention procedures would not be timely due to compressed ITC schedules (Certain Hardware Logic Emulation Systems, Inv. No. 337TA-383, Order No. 65).  Because of the threat of adverse inferences, there have also been several instances where Chinese respondents have reluctantly permitted plant tours to accommodate discovery requests (Certain R-134a Coolant, Inv. No. 337-TA-623.  FlexsysAmerica v. KumhoTire U.S.A., 5:05-cv-156 (N.D. Ohio)  Issues involving obtaining timely production of evidence have also appeared in other civil cases, notably the Gucci/Tiffany cases in the Second Circuit.

Even if the AUCL may not provide enough support for evidence production in China, the SPC has identified several bottlenecks in cross-border adjudication of disputes, including “hearing cross-border cases–service of process to overseas parties; obtaining evidence crossborder; determining facts that have occurred abroad; determining and applying foreign law”, which suggest that future cooperation with US courts may also improve.   Hopefully, as China improves its mechanisms to obtain foreign evidence and if it takes more proactive stances towards cross border cases, towards allowing production of evidence China, and as it improves its civil system, foreigners will be less reluctant to bring IP cases, especially trade secret cases, in China. In the meantime, it appears that the ITC and U.S. civil actions will continue to play a very important role in driving evidence-based decisions on trade secret infringement involving China.

Coauthored by Mark A. Cohen and Jay Reiziss.  This blog represents the authors’ personal views only and should not be attributable to any client, employer or any third party.  Revised March 14, 2019 by Mark A. Cohen to improve style and clarity.

 

Spring Time for IPR Case Law in China?

Guidingcase.jpgRecently, there have been two important developments involving IP-related guiding cases and precedent that shed light on these different approaches of the Supreme People’s Court, which is in charge of guiding cases, and the Beijing IP Court, which is looking at the role of precedent in China’s court system.  But first some background:

One of the most important continuing efforts on guiding cases is the Stanford Guiding Cases Project (SGCP), which is under the able, enthusiastic and collaborative leadership of Dr. Mei Gechlik.  The SGCP recently hosted a lively seminar at American University to discuss the latest developments, with a keynote by Judge Sidney Stein of the Southern District of New York (picture above).  In addition to the Stanford project, Susan Finder has written about guiding cases in her excellent blog and other postings, Jeremy Daum wrote an excellent recent article on the actual use of guiding cases, and of course there is this blog and others, in addition to  academic articles and recent  SGCP research.

Another significant development in exploring a system of case precedent is the research base established with the approval of the Supreme People’s Court at the Beijing IP Court.  The ecosystem evolving around that research base appears to me to be more practice oriented than theoretical.  As an example of this practice-oriented approach, the IP court is looking at the role of amicus briefs to ensure the interests of non-parties are heard, or en banc rehearings to reverse prior precedent.  A small, but important step in soliciting third party opinions has already been undertaken by the Beijing IP Court in a case involving trademark agents.

Among the two contrasting recent developments  Regarding the guiding cases project, on March 9, the Supreme People’s Court released 10 IP-specific guiding cases; nine of these are civil and one is criminal. The cases span all relevant IP laws, including copyright, trademarks,patents, plant varieties and antitrust.  Here is a link to a Chinese summary of the cases, and a  machine translation of these summaries (source: IPRdaily.cn, google translate).  I assume that the SGCP will do a professional translation of these in due course.  According to the SPC press conference, IPR-related guiding cases now constitute 23% of the total number of guiding cases.

Nonetheless, recent citation data  suggest that there has been little uptake of guiding cases in actual case decisions, as Jeremy Daum’s article points out in his posting:

“Guiding Cases are almost never referenced: Over a five-year period, Stanford found a total of 181 subsequent cases, and PKU found 241. To provide a frame of reference, Chinese courts complete trial of well upwards of 10,000,000 cases per year…

50% of the guiding cases were never referred to at all

Almost half of the references found were to a single case; GC #24. …That case concerns traffic  accidents,…”

If one compared the nationwide references to guiding cases using, as an example, the 561 opinions referencing a guiding case out of 8,723,182 cases on the China Judgments Online website for 2016 (using a simple keyword search to “guiding case”), the citation rate would be about  0.0006%.

These developments on IP related case law at the SPC might be compared to the data in the January 10, 2017 report of Beijing IP Court.  The Beijing IP court cited 279 case precedents in 168 cases since the time the precedent base was established in 2016 until October 2016.  Cases were cited 121 times by parties, and judges undertook their own effort to cite cases in 47 instances.  In total, 117 cases relied on precedent in their decisions.  Of the 168 cases, there were 51 instances where cases were not relied upon due to a difference in facts.  There was no instance where a reversal was obtained of an earlier precedent.  Of the cases cited, 31 were from the SPC, 132 from High Courts (including 117 from Beijing), and others were from local courts.  If this data was further compared to the 8,111 cases concluded by the Beijing IP Court in calendar year 2016, the citation rate was a minimum of 2.1% based on the data provided through October, which is considerably higher than the guiding cases effort.

My impressions: the data from the Beijing IP Court suggests that the bar is using cases in its briefs, and the court is looking at these cases and exploring how to handle them as part of an overall system including amicus briefs, en banc review and other mechanisms.  The SPC’s guiding cases project is a more intensely curated project that also addresses a much larger national challenge in introducing a new way of developing law to civil law educated judges and the bar.  The comparisons between the two experiments are inexact as the Beijing IP court sits in one of China’s wealthiest cities, with a well-educated bench and bar, a sophisticated IP environment and considerable foreign (including American) interaction.  It is not surprising that nationwide uptake of a precedent system using a limited number of  guiding cases for a vast judicial system is more theoretical and slower than the one taking place at the Beijing IP Court using the 100,000 plus IPR cases that are adjudicated nationwide each year.

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