THE TIER IS REVISED…

After nearly twenty years of advocacy, China has finally revoked certain offensive provisions of the Administration of Technology Import/Export Regulations (“TIER”), effective March 18, 2019.   The decision was made by State Council decision no. 709, paragraph 38 of March 2, 2019,  which provides as follows:

三十八、删去《中华人民共和国技术进出口管理条例》第二十四条第三款、第二十七条、第二十九条。

第四十一条改为第三十九条,修改为:国务院外经贸主管部门应当自收到本条例第三十八条规定的文件之日起3个工作日内,对技术出口合同进行登记,颁发技术出口合同登记证。

A rough translation is:

38. Delete Article 24, Section 3, Article 27 and Article 29 of the Regulations of the People’s Republic of China on the Administration of Import and Export of Technology.

Article 41 shall be changed to Article 39 and revised as follows: “The competent foreign economic and trade department of the State Council shall, within 3 working days from the date of receipt of the documents stipulated by this Article 38  register a technology export contract and issue a technology export contract registration certificate.

The relevant provisions being modified of the TIER, as translated on the WIPO website, are as follows:

24 (3): Where the receiving party to a technology import contract infringes another person’s lawful rights and interests by using the technology supplied by the supplying party, the supplying party shall bear the liability therefore.

27: Within the term of validity of a contract for technology import, an achievement made in improving the technology concerned belongs to the party making the improvement.

Article 29 A technology import contract shall not contain any of the following restrictive clauses:

(1) requiring the receiving party to accept any additional condition unnecessary for the technology import, including buying any unnecessary technology, raw material, product, equipment or service;

(2) requiring the receiving party to pay exploitation fee for a technology when the term of validity of the patent right in which has expired or the patent right of which has been invalidated, or to undertake other relevant obligations;

(3) restricting the receiving party from improving the technology supplied by the supplying party, or restricting the receiving party from using the improved technology;

(4) restricting the receiving party from obtaining technology similar to that supplied by the supplying party from other sources or from obtaining a competing technology;

(5) unduly restricting the receiving party from purchasing raw material, parts and components, products or equipment from other channels or sources;

(6) unduly restricting the quantity, variety, or sales price of the products the receiving party produces; or

(7) unduly restricting the receiving party from utilizing the channel for exporting products manufactured using the imported technology.

This is one of 49 separate legislative provisions being modified by notice 709 of the State Council.

The TIER was itself part of ongoing WTO disputes (DS542, and DS549).  In addition, it was called out by USTR in its 301 Report on China’s forced technology transfer regime .  A panel had recently been composed in the US case against China (DS542).  The State Council has now addressed the most onerous provisions of the TIER by removing those provisions that had most obviously violated China’s National Treatment obligations under TRIPS Article 3, including footnote 3, which addresses discrimination in “the availability, acquisition, scope, maintenance and enforcement of intellectual property rights as well as those matters affecting the use of intellectual property rights.”

The legislation is immediately effective.  However, it does not address contracts that had previously been negotiated under the prior TIER.  Article 84 of China’s Law on Legislation does provide for the possibility of retroactive effect where the new legislation is made in order to better protect the rights of citizens, legal persons and other organizations, and may apply in this circumstance.  It will be up to the courts and/or the State Council to issue necessary interpretative guidance.

Interestingly, China did not take a “phased” or “limited” approach to revoking these terms, such as providing for limiting the application of mandatory provisions to protect smaller businesses or creating a default provision that could be waived in writing.  The Chinese government, to its credit, thus intended to rely solely upon the market and any other general provisions of the Contract Law.  China also did not seek to clarify the relationship between the TIER and China’s Contract Law or Antimonopoly Law, which had overlapping provisions with the TIER, and which should now apply more clearly and equally to foreign and domestic licensors.  However, the TIER provision regarding non-profit oriented technical cooperation, including government to government science and technology cooperation also continues to be in effect.  Specifically, article 2 of the TIER states that the legislation governs “technical cooperation” including “technical services and transfer of technology by other means.” (Art. 2).

It will be interesting to determine if the changes in the TIER have any impact on the manner in which technology is transferred by foreign companies to China, including use of affiliated/subsidiary companies of foreign companies in China to import foreign technology to avoid application of the TIER to technology imports.  The majority of US licensing transactions to China had been through such intermediated/affiliated entities.  After the affiliated licensee takes over the licensing activity of the licensor, any subsequent sub-license was believed to be governed by China’s Contract Law.

The amendment also comes shortly after China passed a new Foreign Investment Law on March 15, 2019, which also purports to address the forced technology transfer problem identified in the Section 301 report.  These legislative efforts thus appear to be part of a package intended to address US concerns.

Blog post by Mark Cohen.  Thanks to Jill Ge of Clifford Chance, Shanghai for pointing out this legislative development to me.  Thanks as well to the many lawyers, companies, officials, judges, and business people over the years who have advocated for revising the TIER and to the State Council for finally undertaking these revisions.

Catching up With The Literature on Forced Tech Transfer…

FTT
(from the OECD report, discussed below)

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

 

 

 

How to Measure the Steps to a Binding Truce…

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Towards a Better Understanding of “Forced Technology Transfer” Policies in China and Their Strategic Implications

In August 2017, President Trump issued an executive order setting in motion an investigation of China’s trade policies including IP, technology transfer, and investment policies. The “Section 301” report on this investigation came out earlier this year. The Report itself uses the word “force” or “forced” 47 times and identifies a range of practices that result in “forced technology transfer.” However, there is a significant amount we still do not know regarding how these controversial Chinese policies actually work and the degree to which a technology owner’s behavior has in fact been compelled by state actors. A new paper by Dan Prud’homme, Max von Zedtwitz, Joachim Jan Thraen, and Martin Bader published in Technological Forecasting & Social Change explores this important issue.

The authors evaluate the ability of “forced technology transfer” (FTT) policies – which they define as policies meant to increase foreign-domestic technology transfer that simultaneously weaken appropriability of foreign innovations – to contribute to technology transfer. They draw on a survey of foreign firms, interviews with foreign firms, and case studies of Chinese firms.

The authors identify three categories of FTT policies that have significantly impacted foreign-Sino technology transfer in recent years:

(1) Policies which risk market loss (including market access preconditioned on meeting technology transfer requirements),

(2)  Policies that offer no choice regarding compliance (including unfair court rulings in IP civil litigation), and

(3) Policies that are based on legal obligations (including provisions in the technology import-export regulations; and certain policies related to the intersection of anti-trust and IP, and IP and technical standards).

Several other controversial policies were also identified, including disclosure of confidential business information through regulatory approvals, pharma patent issues, and certain tax schemes and subsidies.

The authors find that, with the exception of no-choice policies, foreign firms are allowed some flexibility to decide whether or not they want to comply with China’s FTT policies. Therefore, even though non-compliance with the policies is always met with consequences, the technology is not actually “forced” against a party’s will. After noting this limitation of the term, the authors explain that they retain the term “FTT policies” in their research for readability and because it is part of well-established lingo, but only use it to the extent that it meets their aforementioned definition.

Much of the research focuses on foreign-Sino transfer of frontier technology, i.e. the most advanced technology emerging from research and development which is generally not at the point of mass commercial adoption. According to the authors, not only the design of FTT policies per se helps determine if they exert substantial leverage over (i.e., force) frontier technology transfer, but the environment in which they are deployed is equally important. The authors find that FTT policies appear to exert the most leverage over frontier technology transfer when accompanied by seven conditions: (1) strong state support for industrial growth; (2) oligopoly competition; (3) other policies closely complementing FTT policies; (4) high technological uncertainty; (5) policy mode of operation offering basic appropriability and tailored to industrial  structure; (6) reform avoidance by the state, and (7) stringent policy compliance mechanisms.

Based on each of these conditions, the authors developed an FTT Strategy & Risk Forecasting Matrix with corresponding strategies the state may adopt to fully exploit, i.e. maximize the leverage of, FTT policies.

The authors’ analysis has several possible implications for technology transfer policymaking. In the authors’ view, Chinese FTT policies may enable domestic acquisition of frontier foreign technology if all seven conditions determining policy leverage are fully exploited by the state. However, if the state does not fully exploit all seven conditions, the FTT policies have less leverage. Moreover, if the state exploits none or only a few of the conditions, the FTT policies may result in a lose-lose game where foreign firms are discouraged from transferring valuable technology and domestic firms’ acquisition of new technology is made more difficult.

With this analysis, the authors provide evidence that can be used to appeal to the Chinese authorities to change some of their FTT policies: some of the policies are actually counterproductive in meeting their aims. The risks of loss of technology acquisition posed by Chinese policies is an important phenomenon which this blog has also identified, particularly as an unintended consequence of China’s Technology Import/Export Regulations (especially for start-ups and litigation-prone technologies, but also for technological collaboration) and which has been mentioned by the US Chamber of Commerce in its IP Index and its report on licensing.

The authors argue that in order to increase the chance that FTT policies will spur sustained transfer of frontier technology, Chinese regulators should not deprive foreign firms of  minimum level of appropriability. The policies should also allow foreign firms to benefit in at least minor ways from technology transfer arrangements.

The research also has important implications for technology strategy formulation and risk management. The authors’ FTT Strategy & Risk Forecasting Matrix can guide foreign firms to anticipate risks associated with FTT policies and serve as a starting point for understanding how to further quantify or mitigate these risks. The risks are of course compounded by potential trade secret theft, cyber intrusions, and less formal pressure points on foreign licensors to assign or transfer their technology in China. And these risks must be considered alongside major rising challenges to doing business in China, which Prud’homme and Zedtwitz have also discussed (in MIT Sloan Management Review), including: problematic areas of regulation in China and rising competition from Chinese rivals in terms of their recruiting and retaining top talent, more large-scale and strategic use of intellectual property, and ever faster time-to-market of products and services. Mitigating these many risks requires carefully integrated intellectual property, innovation, non-market, and human capital strategies, alongside yet other responses.

Edited of June 23, 2018:  An interview with Prof. Liu Chuntian of Renmin U. Law School on this same topic of forced technology transfer is found on page 2 of the People’s Daily (June 22, 2018, 2nd edition) (reporter Wang Yu)   A machine translation by Google is found here.  Liu focuses primarily on market access as a separate discpline from intellectual property under the WTO and as being essentially voluntary; he does not support formal and informal incentives in place (including the Technology Import/Export Regulations as noted in the article by Dan Prud’homme).

Edit of July 15, 2018: Here’s a link to Prof Prud’homme’s article outside of a paywall.  It may only be available for a short period of time.

US-China Security Commission – Readout of Hearing on June 8, 2018

On June 8, 2018, I testified before the US-China Economic and Security Review Commission on “U.S. Tools to Address Chinese Market Distortions.” This was my second time testifying in the past three years.  My written submission is available here.  The written submissions of other speakers, including a video of the proceedings is available through this link.  The presentations of my colleagues were all excellent.

I suggested several non-tariff alternatives for dealing with IP-related concerns with China, and underscored the necessity of developing appropriate domestic government structures to engage China on technology and innovation issues.  For example, the Commission seemed generally supportive of raising the diplomatic rank of USPTO attaches overseas.   I also discussed the importance of data-driven analysis, including use of the case database to look at how foreigners actually fare in the courts.  The Commission seemed skeptical that the data captured some of the more egregious judicial cases of foreign mistreatment, which they viewed as undercutting the credibility of the data that is being generated.  In my written submission, I encouraged the Commission to consider a hearing devoted solely to transparency in the courts.

The President’s recent decision to impose tariffs on Chinese imports in response to Chinese IP practices may render many of suggestions superfluous for now.  Nonetheless, I believe the increasing complexity of China’s IP and innovation environment are issues that cannot be ignored.  As I noted in my written testimony:

“The US experience suggests that innovation flourishes in open ecosystems where there is a free flow of capital, talent and technology. At the same time, the US needs to address mercantilistic practices which not only pose competitive threats to the United States but can also undermine the innovative ecosystems that have driven growth in the US economy, such as exist in Silicon Valley. Any steps taken to reduce collaboration with China or any other country needs to be carefully evaluated about its potential impact on our own technological competitiveness.”

In a separate, but nonetheless related matter, I spoke at the IPBC Global 2018 Conference in San Francisco on June 12 regarding developments in IP monetization in China.  Here’s a good summary of my presentation.  I thought one of the more telling moments in the panel I participated in involved China’s Technology Import/Export Regulations.   One lawyer acknowledged that “the regulations are stupid” and that “what we try to do is have parties to a technology transaction acknowledge that the regulations exist and agree not to enforce them.”  I discussed the regulations as potential “landmines” which could be invoked at a later time by a licensee.  Many licensors appeared to be unaware of these regulations.

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

IMAG0300

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

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

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

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

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

The EU complaint (WT/DS549/1), cites several Chinese measures in addition to those identified in the United States’ consultation request, and invokes more expansive WTO principles and procedures. The additionally cited measures include the “Working Measures [sic] for Outbound Transfer of Intellectual Property Rights (For Trial Implementation), (State Council, Guo Ban Fa [2018] No. 19)” (知识产权对外转让有关工作办法(试行)) which was previously discussed here.  The Chinese promulgation of these interim Regulations only five days after the US filed its consultation request, looks to some like another act of synchronized trade diplomacy — in this case as a possible retaliatory act for the 301 report and the WTO case.  My guess is that the EU, by referring to these new largely untested regulations is however seeking to address the legality of controls China has additionally imposed on foreigners’ transferring IP out of China.

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

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

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

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

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

 

IMAG0352

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

 

Updates for March 27 – April 2, 2018 – China steps up control over technology exports

China steps up scrutiny of IP transfers to foreign firms on national security grounds Under new regulations issued by the State Council on Thursday, technology transfers include IP transfers that are part of acquisitions made by foreign firms involving patents, integrated circuit layout design, computer software copyright and plant varieties. Such transfers will be assessed in terms of their impact on national security and the country’s “key technology innovation capability in key areas,” said the document.

This move is not intended to “upset foreign investors” but rather to formulate “concrete measures to secure a better business environment,” said Zhang Zhicheng, director of the Protection and Coordination Department at SIPO. Zhang also noted the importance for China to strictly review core IP transfers.
Our preliminary observations: Some observers believe the measures are drafted in retaliation to the Section 301 report of the US government which addresses Chinese investment in the United States as well as the US request of China for consultations of China over the Technology Import / Export Regulations, which are also referred to in these regulations. We are also unclear at this point if these regulations were previously “in the works” or otherwise accelerated in response to the Section 301 investigation.
Companies should consider consulting counsel on the impact of these regulations. First, it appears likely that a foreign-invested company’s acquisition of Chinese technology is an IP ‘transfer’ for purposes of these regulations. Under US law, these might be considered a “deemed export if a foreign national obtains technology while in the United States These regulations do not use this terminology. The regulations may impact foreign companies based on their source of capital rather than the presence of foreign nationals. For example, the regulation’s scope appears to include transfers that occur wholly within China, as they refer to transfers “to foreigners” of Chinese IP, and earlier regulations, by contrast, focused on transfers to enterprises overseas. .(本办法所述知识产权对外转让,是指中国单位或者个人将其境内知识产权转让给外国企业、个人或者其他组织.)    Compare with the Provisional Regulations on the Administration of Technology Exports 技术出口管理·暂行办法 (对外经贸部/国家科委) (June 26, 1990) (本办法所称的技术出口是中国境内的 公司, 企业, 研究机构以及其·他组织或者个人(不包括外商投资企业, 外国在中国公司。。。。)向境外的公司。。。。).  Further clarification on this important issue would be helpful.

Another issue requiring clarification is the difference between technology transfer from an assignment or licensing of a patent. This has been a subject of confusion under Chinese law for some time, and these regulations appear to carry that forward. The earlier 1990 regulations also regulated the transfer of patents, as well as registered trademarks (!) as a form of “technology transfer” (Art. 2).  However, in most cases, any “leakage” of technology arising from a patent application occurred at the time of the publication of the patent application or grant. An added complication is that China already has procedures in place for regulating foreign filings of patents for national security purposes. Article 20.1 of the Chinese Patent Law provides for confidentiality examination of these applications. These measures be redundant with these procedures, particularly in regulating the transfer of patent applications to foreigners.
Until further clarity is established by implementing rules, these regulations could therefor have an impact of disrupting existing foreign invested R&D or cooperation across national borders. Two questions come immediately to mind: if, for example, a Chinese national is under contract to conduct R&D for a foreign invested company, or is an employee of that company, is the transfer in ownership of the patent application, from the employee to employer a “transfer of technology” for purposes of these regulations? Another question is what is the standard that applies to determine whether an invention created by individuals in China and overseas was “created in China” and is transfer is subject to these regulations? It is also worth noting that the 1990 regulations specifically exempted bilateral scientific cooperation (Article 2). These do not.
In a separate development, the State Council  released measures this week to strengthen security management of scientific data. The measures, which prioritize data security and focus on data sharing, order strengthening supervision of the use and sharing of scientific data with both domestic and foreign parties.

Finally, this blog, and its preliminary observations, is not a substitute for legal counsel and serious research that is necessary on these and other issues arising under China’s texport control regime.

Please advise of any necessary corrections.