Category Archives: Trade Secrets

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The IP Theft Nexus in the Houston Consulate Closing

One of the purported reasons for closing the consulate were Vienna Convention violations/IP theft. According to various press reports, the spokesperson for the State Department, Morgan Ortagus, stated that “We have directed the closure of PRC Consulate General Houston in order to protect American intellectual property and American’s [sic] private information.”  Although the Trump Administration has rarely deserved the benefit of the doubt, this blog looks at the possibility that the consulate was involved in state-sponsored economic espionage.

This Administration (like Obama’s) has been very frustrated by the degree of state involvement in economic espionage matters coming from China and the lack of any effective traditional tools. For example, neither Obama nor Trump (nor any predecessors) took a WTO case pursuant to Article 39 of the TRIPS Agreement which obligates states to protect trade secrets, perhaps because the WTO is perceived as too weak, or that “everyone does it.”  Still, if the extent of state-sponsored trade secret misappropriation was as great as the Administration alleges, a WTO case may have helped gather multilateral support and air US concerns multilaterally.  In other displays of frustration, both Trump and Obama have pursued with some fanfare cases against state actors in absentia, often leading to good media coverage against actors such as the People’s Liberation Army, and pyrrhic ex parte convictions.

The Administration also faces another dilemma: criminal economic espionage cases have proven quite difficult since there needs to be a demonstrated state nexus. DOJ has increasingly appeared to be filing or plea bargaining to settle on  “easier” cases – such as traditional trade secret cases which do not require a state nexus or has filed cases involving government grant conflict of interests, fraud, money laundering, etc.   The Administration has also sought to address this through other means such as the Section 301 investigation and tariffs, trade negotiations, strengthening US export controls and CFIUS regulation, and even placing companies on the Commerce entity list where there have been allegations of overseas trade secret theft benefiting China (Fujian Jinhua/theft of Micron technology).

If an economic espionage matter were really the motivation for this sudden evacuation of the consulate and not election-year politics, a good place to look would be for a contemporaneous motivating event.  The closing of the consulate announcement may be timed with an indictment in Washington State 22 hours earlier – which did have one Texas victim nexus and does allege a fairly comprehensive international state-supported economic espionage and personal data theft scheme, including vaccine-related espionage. Two Chinese hackers who are alleged to have had support from the Ministry of State Security in Guangdong were indicted. The hackers were indicted in absentia, once again leaving the US with very limited recourse. However, no one individual in the Houston Consulate is mentioned – and I imagine that in the usual course of things if a consular official were identified he would have been “PNG’d”, that is, made persona non grata and asked to leave.

Another, more intriguing alternative is that it could also be related to two cases recently discussed by FBI Director Wray, which do have a clear Texas consulate nexus. As Wray mentioned in his July 7 speech before the Hudson Institute:

“Hongjin Tan, for example, [is] a Chinese national and American lawful permanent resident. He applied to China’s Thousand Talents Program and stole more than $1 billion—that’s with a “b”—worth of trade secrets from his former employer, an Oklahoma-based petroleum company, and got caught. A few months ago, he was convicted and sent to prison.

“Or there’s the case of Shan Shi, a Texas-based scientist, also sentenced to prison earlier this year. Shi stole trade secrets regarding syntactic foam, an important naval technology used in submarines. Shi, too, had applied to China’s Thousand Talents Program, and specifically pledged to “digest” and “absorb” the relevant technology in the United States. He did this on behalf of Chinese state-owned enterprises, which ultimately planned to put the American company out of business and take over the market.

“In one of the more galling and egregious aspects of the scheme, the conspirators actually patented in China the very manufacturing process they’d stolen, and then offered their victim American company a joint venture using its own stolen technology. We’re talking about an American company that spent years and millions of dollars developing that technology, and China couldn’t replicate it—so, instead, it paid to have it stolen.”

Notwithstanding these cases, election-year politics, a general decline in bilateral relations, and national security issues may be the dominant reasons.  The Administration may also have decided on an aggressive escalation at this time to also show support for countries like the UK and India as these countries have become more hawkish towards China, such as by not procuring Huawei equipment, limiting the use of Chinese social media platforms, by opposition to the National Security Law in Hong Kong, and/or by opposing Chinese maneuvers in the South China Sea.

We have limited information to even guess at the involvement of the Houston Consulate in any economic espionage activities, nor do I have any sense of the role of various Chinese intelligence agencies in this recent development, or what are the specific kinds of malfeasance that trigged this reaction by the Administration.  According to the New York Times, David Stilwell at the State Department has called the Houston consulate the “epicenter” of research theft.

In terms of Chinese ministry involvement, the US indictment in Washington State points to a key role of the Ministry of State Security in technology misappropriation.   If scientific research is the key focus, China’s  Ministry of Science and Technology is another important agency, which has knowledgeable officials overseas and is engaged in a range of open, legitimate, and highly important collaborative activities.  MoST is probably the diplomatic presence with the greatest depth on the technology involved in any of these accused technologies.  However,  MoST is rarely mentioned as an espionage actor by the Administration and is not even indexed as an espionage actor in recent books by Roger Faligot and Mattis/Brazil on “Chinese Spies” and “Chinese Communist Espionage”, respectively.  According to the Ministry of Science and Technology, there are 75 such MoST offices overseas, including one in Houston.

It is, of course, conceivable that some of MoST’s work may not be consistent with US ethics, expectations or laws despite its overall positive role and could have been some part of the decision to retaliate.  As one intriguing example of a role that could lead to conflict, by operation of Chinese law, Chinese science and technology departments in Chinese missions overseas are also in charge of vetting proposed patent prosecutions of Chinese students and patents derived from Chinese technology projects overseas, potentially placing the confidentiality of the patent disclosure at risk.  Moreover, the vague rule requires in certain circumstances that the Chinese inventor (or, presumably, co-inventor) own or apply for the patent if it is not a “service invention” thereby placing these inventors in potential conflict with their host institutions overseas. See the 1986 rule “Concerning Completion of Invention Patents Overseas by Chinese Students Studying Abroad”  关于我国学者在国外完成的发明创造申请专利的规定, promulgated by the Chinese Patent Office, the Ministry of Foreign Affairs and the State Science and Technology Commission (the predecessor of MoST). This 1986 rule outlines a scenario not altogether different from the facts involved in the Shan Shi conviction – applying for a patent in China for an invention made in the United States – notwithstanding the contribution or expectation of others.  Interestingly, Shan Shi was also convicted of trade secret theft by a Houston, Texas federal court.

Another possible factor in deciding how to retaliate is simply that since US consulates have been thinly staffed and the Wuhan consulate had been closed, there may be an element of consular placement politics which has occurred in the past with regard to China.  The United States has also been complaining about lack of reciprocity with China in access by our diplomats.  The State Department may have also calculated that even if China retaliates this was a lose-lose scenario, where China will lose more than the United States.  A similar calculation may have occurred with respect to these efforts regarding reciprocity or asking Chinese journalists to leave.

Election-year politics may have been an important part of the choice of how to retaliate, even if these political motivations were not the original factor in deciding that retaliation was necessary. Closing a US consulate in retaliation for IP theft should also lead observers to question whether the Phase 1 Trade Agreement, which was intended to address “IP theft” and lead to “structural changes” had achieved its core, motivating goals.  The Houston consulate closing could thus be seen as a crude acknowledgment that the Administration had failed in the primary motivations for its trade war with China.  The prospects for a Phase 2 Agreement are growing darker by the day.

We may never know all the motivations for the Houston closing.  Two things are clear: this type of consular politics has the potential to greatly damage bilateral relations, and we cannot anticipate all of its consequences including when this cycle of accusations and reactions will hopefully de-escalate.

Update of July 24, 2020:  Matt Peterson in a July 24 article in Barron’s quotes a former USTR official, Clete Willems, who took issue with this blog:

“The administration cited intellectual-property theft in its decision to close the consulate in Houston. Mark Cohen, a law professor who worked for the U.S. Patent and Trademark office in Beijing, wrote about that: “Closing a U.S. consulate in retaliation for IP theft should also lead observers to question whether the phase-one agreement, which was intended to address ‘IP theft’ and lead to ‘structural changes’ had achieved its core, motivating goals. The Houston consulate closing could thus be seen as a crude acknowledgment that the administration had failed in the primary motivations for its trade war with China.” What do you make of that?

My quick reply: Indeed, most of the accomplishments on IP in Phase 1 were in domestic Chinese reform and there was nothing as I recall on diplomats. That would have been highly unusual.  However, most of the significant IP reforms in fact occured before the Phase 1 Agreement, in the spring of 2019 or even in 2017 (on pharma).  One could argue there isn’t that much new IP in the Phase 1 Agreement.  As I have explained elsewhere, it “adds much less than its appearance would suggest.”  The focus of the Phase 1 Agreement had already migrated to other issues, such as market access. 
This does not mean that economic espionage or international issues were not at the core of the stated reasons for the trade war and to suggest otherwise is an exercise in historical revisionism.  The predecessor  301 investigation conducted by USTR and the subsequent Phase 1 Agreement explicitly sought to resolve “cyber-enabled theft” and “global espionage” in USTR’s own words.  See predecessor 301 Report Update at pp. 10-21. The incentives to steal trade secrets – whether due to Made in China 2025 or an array of other industrial policies and subsidies  – were not however discussed in the Phase 1 Agreement. Despite the imposition of punitive tariffs, these programs were not dismantled.  The “groundbreaking provisions in an area of critical importance to the United States: protecting intellectual property” that the President trumpeted in announcing the agreement, hardly addressed these core concerns.   There was also no improvement in transparency or other rule of law imperatives, no demends for cooperation between law enforcement authorities on criminal trade secret matters, etc.  that could have affected China’s handling of state-sponsored trade secret theft.  Some important laws were amended, but no sweeping “structural change” to back the state out of the extensive incentives that exist for IP misappropriation was accomplished. 
The Phase 1 Agreement wasalso not an agreement focused purely on domestic Chinese law.  For example, cross-border counterfeiting and Customs measures were part of the package, not simply “counterfeiting in China.” A perverse example of how much international IP theft, including state sponsored esiponage, was of core importance to the agreement and the messages we imparted to China:  Americans are being sued in China for trade secret infringement pursuant to the harsher laws that the US has encouraged China to implement, and Chinese criminal law is being amended to specifically impose harsher penalties when trade secrets are stolen on behalf of foreign parties, based on provisions that mimic our Economic Espionage Act. 
It is unclear to me if the Houston consulate closing was truly about these same issues or if the closing will have any impact on them.  The stated reason for closing was, indeed, trade secret theft and economic espionage.  This does suggest that the US might have felt that it had exhausted other remedies, and is a further indication of a failure to address key motivating reasons for the trade war in the Phase 1 Agreement.   Why else would we have discussed these IP theft issues at such great length, with such economic pain, and with such high expectations?  I agree that hopefully discussions will continue between our countries on trade – considering the volume of trade and investment, it is harder to dismantle those relationships than packing up a consulate.  Discussions should be conducted, however, via a plurality of engagements – not simply USTR – to ensure resiliency.
Further update of July 24, 2020: Here is an interview with me on KHOU on July 24, 2020 on the Houston consulate closing.

 

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Proposed Amendments to the Criminal Code on Trade Secrets

Amendments to the Criminal Law regarding trade secret theft have been announced by the NPC.   A new provision is proposed to be added to the end of  Article 219 of the Criminal Law:

“Whoever steals, spies, buys, or illegally provides commercial secrets to overseas institutions, organizations, and personnel shall be sentenced to fixed-term imprisonment of not more than five years or detention, in addition to being fined or with a single fine; if the circumstances are serious, the penalty shall be more than five years’ imprisonment with fines.”

This provision complements Article 20 of the Opinions on Increasing the Level of Sanctions for Intellectual Property Infringement (Consultation Draft),  as well as Article 10 of Interpretation on Several Issues Concerning the Specific Application of Law in Handling Criminal Cases of Infringement of Intellectual Property (3) (Draft for Comment)  which provide that “ Serial infringers of IP rights, as well as those who steal commercial secrets for foreign agencies, organizations or individuals, shall be subject to severe penalties according to law and generally no probation shall be applied” (为境外的机构、组织、人员侵犯商业秘密的情形，依法从重处罚，一般不得适用缓刑.  ).  The official explanation of the draft criminal code revision notes that the changes are intended to address “commercial spying”.

These changes have also been discussed in a blog by Aaron Wininger, and a recent article in the South China Morning Post, which called the proposed amendments a “tit for tat” provision in retaliation for US economic espionage cases.  Although this provision may have been drafted to retaliate against the United States, the structure and purpose is different from the Economic Espionage Act of 1996  (EEA)  18 USC Sec. 1831.  The EEA defines  “economic espionage” as the “theft or misappropriation of a trade secret with the intent or knowledge that the offense will benefit any foreign government, foreign instrumentality, or foreign agency.”  A casual reading may suggest that the EEA is similar to proposed amendments to Section 219 in that it covers any trade secret theft that would benefit a foreign “instrumentality” or “agency.” This is an incorrect reading.  The definitions of a foreign agent or foreign instrumentality leave no doubt that the individual or entity must be the agent of a foreign government, 18 USC Sec. 1839(1).  In addition, a second provision of the EEA criminalizes the more common commercial theft of trade secrets in foreign or instate commerce regardless of who benefits, 18 U.S.C. § 1832.

Importantly, the US Sentencing Guidelines do provide for an enhanced penalty if “ the offense involved misappropriation of a trade secret and the defendant knew or intended— that the trade secret would be transported or transmitted out of the United States,” or “ the offense would benefit a foreign government, foreign instrumentality, or foreign agent.”  The US Sentencing Commission has stated that enhanced penalties are needed to address “the transmission of stolen trade secrets outside of the United States [which] creates significant obstacles to effective investigation and prosecution and causes both increased harm to victims and more general harms to the nation. With respect to the victim, civil remedies may not be readily available or effective, and the transmission of a stolen trade secret outside of the United States substantially increases the risk that the trade secret will be exploited by a foreign competitor.”

The motivations for China’s enactment of this amendment does not appear to be issues of private international law.  As drafted, the provision retaliates against companies and individuals rather than foreign governments.  It is conceivable, as the SCMP article implies, that Chinese companies that have been targets of EEA actions may desire this tool to exact greater leverage in their US cases.   Nonetheless, it is worth discussing how private international law issues are not very germane to this amendment.  Individuals can be prosecuted overseas with greater ease than the government.  Hence, there is no need to target individuals.  Of course, if the basis of China’s adopting this provision were to address difficulties in bringing cases overseas, more effective judicial and law enforcement cooperation between our countries could help reduce the need for China’s enactment of this provision and strengthen mutual trust.   For example, the United States government has sought on numerous occasions for over a decade to solicit cooperation from Chinese law enforcement to address transborder IP crimes, with limited success through the Joint Liaison Group between law enforcement agencies, as well as through trade-related dialogues. See Tools to Address US-China Economic Challenges, at 98.  Moreover, the need to address judgment-proof defendants in trade secret cases that are located overseas is less pressing for Chinese plaintiffs.  Money judgments for trade secret cases are likely enforceable in the United States. US money judgments for a trade secret theft are not yet similarly enforceable in China.

The greatest risk presented by this provision may be that it could also have a further chilling effect on a range of commercial conduct by foreigners in China.  It may encourage domestic litigants to search for a foreign party in otherwise domestic litigation in order to exert additional leverage on the litigant.   As the crime is also now considered more serious, police and prosecutors may also commit more resources to the investigation and prosecution of foreigners.  Foreign companies investing or collaborating with Chinese counterparts may also now discover that an allegation of trade secret theft is more common in order to exact a commercial advantage in a commercial divorce from a foreign partner, such as when a prospective investment in a Chinese company is rejected, or there is a dispute over ownership of a patent or other technology.   If enacted as drafted, foreign companies may wish to consider adopting defensive measures, including revising their NDA’s and other agreements with Chinese parties, as well as implementing more stringent controls to minimize the risks of such allegations.

The United States has long sought revisions to China’s Criminal IP Laws.  In 2007, it filed a WTO case against China to lower existing criminal thresholds on copyright and trademark crimes.  Additional reforms are also contemplated by Section I of the IP Chapter of the Phase 1 Trade Agreement.

Comments on this provision are due by August 16, 2020.

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An Update on Data-Driven Reports on China’s IP Enforcement Environment

Several useful empirical reports on China’s IP environment have been released in the past few weeks.  I summarize four of them:

Trademark Litigation

Jerry Xia and his colleagues at the Anjie firm have written ”Trademark litigation Forum Shopping in China – What the Data Tells Us” (the “Trademark Report”) (July 8, 2020).

The Report looks at over 11,000 court judgments from 2019.  Only two of the top ten cities for hearing trademark matters were “Tier 1” jurisdictions, namely Shanghai and Shenzhen.  The authors argue that the experience of less well-known courts, including basic courts, is underestimated by many lawyers.  In some jurisdictions, such as in Zhejiang and Jiangsu, win rates for plaintiffs are as high as 100%.  These courts were also among the most efficient courts in adjudicating trademark disputes.   By comparison, the Beijing IP Court awarded fewer favorable decisions to plaintiffs and was slower, but it also awarded higher damages.

The Trademark Report argues that concerns about local protectionism in IP cases for foreign plaintiffs may be exaggerated.  The authors note that the probability of winning based on the available data is generally higher for foreign parties than domestic parties.  A similar argument is advanced in the Software Copyright Litigation Report (discussed below), as well as in other empirical studies.

The Trademark Report is available to subscribers of the World Trademark Review (issue 84).  It is behind a paywall for the next two months.  Registered non-subscribers may view two articles free per month.

SEP Litigation

LexField Law offices released a report by Zhao Qishan and Lu Zhen “Statistics of Chinese SEP Cases in 2011-2019” (the “SEP Report”).  The report is available here.

The SEP Report notes that from 2011 to December 2019, Chinese courts accepted 160 cases related to SEPs.  Not surprisingly, most of the cases involve foreign entities and relate to the telecommunication industry (96.25%).  Most of the cases were filed with the courts in Beijing, Guangdong, Shanghai, and Jiangsu.  Both practicing and non-practicing entities were plaintiffs.  Ten companies were responsible for 125 of the 160 cases reported, with practicing entities as the primary defendants.   Foreigners are the principal plaintiffs, but only by a slight margin.  The cases largely involved patent infringement disputes.  Cases asking the court to determine FRAND terms during license negotiations are also on the rise.  About 72% of the cases were withdrawn before final judgment.  The Huawei/Samsung settlement alone was responsible for the withdrawal of 28 cases.

The SEP Report provides a useful overview of the amount of litigation occurring over the past 9 years on SEPs, including understanding the role of foreign plaintiffs including NPE’s and China’s increasing importance in global SEP litigation.  As many SEP cases are not published, a major contribution of this article is in the description of various cases, as well as a collection of the docket numbers and case summaries.   A useful counterpart article on the foreign experience of SEP litigation in China is Gaetan de Rasenfosse’s article from 2017 on “Discrimination against foreigners in the patent system: Evidence from standard-essential patents on patent validity.”

 Software Copyright Litigation

Rouse published a China Software Litigation Report  (the “Software Report”) on July 7, 2020. The Software Report is based upon its proprietary CIELA database in conjunction with its network firm Lusheng and is available for free upon completion of this request form.  The Software Report aims to demonstrate how foreign litigants have fared in civil software piracy litigation in China and helps to delineate useful strategies in light of evolving judicial practices, the Phase 1 Trade Agreement commitments on software piracy as well as anticipated changes in the Copyright Law.

The Software Report reveals that out of 1,303 first instance cases reported in CIELA from 2006-2019, first instance cases brought by foreign plaintiffs numbered 285. In the authors’ view the key to success in software copyright infringement cases is proof of infringement.  In particular,  plaintiffs who secured evidence preservation orders were more likely to be successful.  The authors also suggest on-line usage tracking data as proof of copyright infringement.

One long-standing issue in software copyright enforcement has been concerns that governmental entities may have de facto immunity from successful lawsuits.  The data also does not support the assumption that State-Owned Enterprises may be immune to a successful lawsuit.  While the sample size of cases brought against SOEs is small, the win rate by foreign plaintiffs against different SOE’s is high as 85.7% (14 cases).  No data is presented on success rates in suing the government itself.   This issue also arose in a recent Berkeley Law webinar on copyright reform in China in response.  The panel observed that while there were successful cases against SOE’s in China for software copyright infringement, foreign companies are generally reluctant to sue foreign governments anywhere in the world.

Guangdong and Shanghai are the top venues for foreign and domestic litigants of software copyright disputes.  Forum shopping does not appear to be a useful strategy as software piracy choices are limited to suing where the infringing act is occurring. Unless the defendant has more than one location where piracy is taking place, action will need to be taken in the defendant’s home jurisdiction

The writers also note a high win rate for foreign plaintiffs in their sector (85.3%).  This average for foreigners is brought down by two of the most prolific plaintiffs in the dataset, who filed “bulk lawsuits” and received a markedly lower win rate.  Microsoft had an exemplary win rate according to the CIELA data – 63 cases filed and 63 wins.  The authors make out convincing arguments for greater use of civil remedies in the foreign software owners’ toolbox to address claims of rampant piracy.

Note that IAM did a short analysis of the Software Report, as did AsiaIP.

Trade Secret Cases         

Jerry Xia and Yulu Wang’s ”Analysis of Guiding Trade Secret Cases in China Published during the World IP Day in 2020” (the “Trade Secret Report”)  is available here in Chinese and machine translation.

Jerry Xia presented The Trade Secret Report at a recent Berkeley webinar on trade secret developments in China. According to the authors, of the more than 600 typical cases published in 2020, there were only 47 trade secret cases, accounting for less than 7.8% of the total.  By comparison, according to a Beijing Higher People’s Court study, from 2013 to 2017, a total of 338 cases of unfair competition involving trade secrets were concluded by judgment in the courts.  The typical case numbers may seem small; however, trade secret cases are a small cohort of China’s IP litigation docket. Earlier data, reported by CIELA also showed a low volume of trade secret litigation. I have also noted elsewhere on this blog that trade secrets are a small part of the criminal IP docket and of the AUCL docket.  The Trade Secret Report does not compare the data on typical trade secret cases with prior years’ reporting on typical cases, which could be a further indication of the interest of China’s courts in establishing clear rules regarding adjudication of trade secret disputes.

The Trade Secret Report notes that the number of cases in which trade secrets where plaintiffs won was 113, or about 35 percent of all cases.  Relatively low win rates have also been reported previously on this blog.  The cases equally involved both business information or technical information.  Zhejiang Province (10), Guangdong Province (9) and Shandong Province (7) announced the most cases. Of the 47 typical cases, there were no cases involving foreign parties and only one case involving Taiwan.

The authors additionally searched the public database for cases involving trade secrets from 2016 to the present.  The number of reported cases involving foreign parties was rare.  Only nine cases were retrieved, involving parties such as the United States, Japan, Germany and Australia, four of which were foreign vs. local, three cases were local vs. foreign, and two were foreign vs. foreign.  The relatively high percentage of local vs foreign cases in a limited cohort may nonetheless be concerning, particularly in light of proposed judicial interpretations regarding enhanced punishment when trade secrets are misappropriated on behalf of foreign actors.   Of the six cases in which foreign entities were plaintiffs, two were dismissed, two were voluntarily withdrawn and the results of the remaining two were not made public. Of the five cases in which foreign entities were defendants, the plaintiffs’ claims were rejected in four cases, and the outcome of the other case was not made public.

Among the published cases in 2020, there were two cases of punitive damages involving trade secrets.   These two typical cases do not give any clear criteria for the determination of “malice”. However, in determining the base and multiples of punitive damages, one typical case provides some guidance:  In a criminal case, a lost licensing fee was used as a calculation for assessing the severity of the punishment.  This is consistent with the proposed judicial interpretation of Criminal Cases Involving Trade Secrets, noted above.  The Trade Report also notes that although a shifting of the burden of proof is contemplated by the revised AUCL, there was no typical case on point.  However, there are two cases on point that came into effect after the new AUCL came into force

These typical cases help the public to understand how the courts are handling trade secret matters.  The relatively large cohort of trade secret typical cases so soon after legislation has been revised may also be seen as a political statement regarding judicial determination to handle these trade secret cases in accordance with the law.   As Susan Finder has noted in her article China’s Evolving Case Law System in Practice, these cases along with SPC guiding cases and other published instructional cases, may be important guides to the courts in determining how to rule on newly emerging issues.  In addition, at least in the case of IP issues, they may also provide assurances to foreign partners of the willingness of Chinese courts to comprehensively implement legislative reforms.

Improving Approaches to Using the Right Data

These reports all offer strategic guidance for companies and rightsholders and are part of a growing trend to use empirical tools in evaluating China’s IP environment.  The reports also effectively leverage recent or proposed changes in Chinese IP laws and judicial interpretations to provide a useful window into developing judicial practices.  While their utility for business strategic and policy purposes is easily recognized, concerns over case publication practices by the Chinese courts do limit their comprehensiveness.  The Software Report notes that most major jurisdictions are now publishing all their cases and it also notes that “the sample size of CIELA data is sufficient to be able to draw statistically valid conclusions.”  However, a consistent issue in looking at Chinese IP empirical studies is in determining how many cases are not being published throughout the country, particularly in less frequently utilized jurisdictions.

When cases are not published, some instructive messages can also be derived from the types of cases that are being published or actively promoted, such as the cases discussed in the Trade Secret Report.   Data on what is missing can be highly valuable data unto itself. One approach that is used in these reports is to rely upon a plurality of data sources to ensure that key judicial databases are comprehensive.  The SEP Report, for example, is based on “official announcements by the involved parties, information disclosed by the courts, and relevant news reports.”  Using a plurality of data sources may be necessary in analyzing trends in SEP cases as these cases are often not publicly available due to confidentiality concerns.  A pluralistic approach is also taken in the Trade Secret Report, which compares data and cases other than these typical cases in order to better help the reader to understand the nature of trade secret litigation in China as well as the role of the small cohort of typical cases in analyzing China’s developing IP jurisprudence.

A useful benchmark on the adequacy of a database of published cases is the SPC annual report on IP litigation, which generally reports on overall numbers of cases accepted or decided, rather than numbers of published cases.   In recent years, however, data on foreign-related cases has sometimes been missing or less comprehensively reported on in recent years. This may have been due to the trade war.  In the criminal IP context, comparisons among administrative referrals to police prosecution, police investigation data, procuratorate prosecution data, SPC case and conviction data and case publications (when they are available) can provide useful comparisons to evaluate trends.  For  examples of  typical SPC/published case discrepancies, the CIELA database includes 54,000 infringement cases of all types over a relatively longer period of time than the SPC database and the Trademark Report relies upon 11,056 judgments in 2019.  By comparison, the Supreme People’s Court reported that there were 65,209 trademark cases alone in 2019.   These discrepancies may be attributable in some part to delays between case publication, case decisions and case acceptance, lack of finality about the nature of reported cases (infringement/ownership/royalty or other disputes), the impact of settlement or preliminary relief in case publication, the confidentiality of decisions that may block publication, collection methodology used in supporting the analyses, and other factors.  These discrepancies and factors often make a selection of earlier years for analysis more attractive to scholars in reaching fully-informed decisions about judicial behavior, even if they may have less value for immediate strategic business purposes.

While I agree that the IP litigation environment for foreigners has been improving, foreigners nonetheless continue to underutilize China’s litigation system.  The Reports help underscore the importance of carefully crafted strategies which might help improve overall utilization and success rate.  In the future, I hope that reports will include such factors as the quality of the underlying right and the quality of the law firm representing the rightsholder. The relatively low level of foreign utilization of the Chinese judicial IP systems suggests that foreigners may also be selecting their strongest cases to litigate, which makes it difficult to compare with the more active docket of Chinese domestic rightsholders.  My guess is that assessing the impact of the law firm upon success rates will also show that the authors of these reports have contributed to a higher success rate for their clients.  In any event, legal analytics are becoming increasingly important tools for law firm and client success.

Interested in hearing more about Chinese legal analytics? Join us on Wednesday, July 15 4:30 Pacific Time for the final Berkeley China IP webinar, where we bring together David Kappos, Don Rosenberg, Mark Wu, Alex Capri, and Dan Prud’homme to discuss the future development of  China’s IP regime and its interactions with the United States.  The topic is certain to come up!

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New Draft JI on Enforcement on Criminal IP Laws, Especially Trade Secrets

China’s judicial organs (the Supreme People’s Court [“SPC”] and Supreme People’s Procuratorate [“SPP”]) continue to work on trade secret related judicial developments, with the release on June 17, 2020 of the “Interpretation on Several Issues Concerning the Specific Application of Law in Handling Criminal Cases of Infringement of Intellectual Property (3) (Draft for Comment)《关于办理侵犯知识产权刑事案件具体应用法律若干问题的解释（三）（征求意见稿）》.

This JI covers trademark, copyright, and trade secret-related crimes. Comments are due by August 2 2020 at the SPC (Third Civil or IP Division) and SPP. The focus on trade secrets is self-evident from this document.  The Chinese characters for “secret” 机密appear 36 times, trademarks 商标18 times, and a copyrighted “work”著作 8 times.

Among the major provisions that implicate trade secrets are: (a) clarification of how to satisfy criminal thresholds for trade secret enforcement, including use of illegal losses, gains and causing bankruptcy or major operational difficulties (Art. 4); how to calculate losses, including lost profits, lost sales, revenue and other benefits from the misappropriated trade secret (Art. 5); calculating the proportional value of a trade secret in combination with another  product or technology (Art. 6); use of research and development costs if the secret is lost to satisfy criminal thresholds (Art. 7); other compensatory remedial expenses (Art. 8); sanctions for violating protective orders (Art. 9); increases in penalties for entities that are mainly engaged in IP infringement or in the case of “infringement of commercial secrets for foreign institutions, organizations and personnel” (Art. 10, see my earlier blog); a reduction of penalty when the trade secret is disclosed to obtain an IP right, such as a patent, and the right is vested in the trade secret owner (Art. 11); and prohibition against engaging in certain occupations may be imposed for a period of time as a condition of a sentence (Art. 12).

Comment: trade secrets have often proven to be the subject of intense trade pressure.  However, the pressure is often not persistent, and the issues may therefore also receive inconsistent attention over long periods of time.  Recent trade pressure has contributed to such laudable developments as the revised trade secret law (AUCL), the Phase 1 Trade Agreement, the recent increase in legislative and policy work from the courts on trade secrets including work on JI’s and recent plans by SAMR to revise trade secret related rules.

If you are interested in learning more about how inconsistent trade pressure may have prolonged consideration of trade secret issues such as the definition of a “business operator”, limitations of protection to Chinese “citizens”, the availability of preliminary injunctions, and concerns over requiring “practical applicability” for trade secret protection for as long as 25 years, here is a pdf of a presentation that I gave last week at a Berkeley webinar.

July 4 update: Here is a translation of the draft JI.

July 20 update: Here are the comments of the American Bar Association’s Section on Intellectual Property Law and International Law on the six recent JI’s involving IP, including this JI, and others previously blogged about: Judicial Interpretation on Certain Issues Concerning the Application of Law in the Trial of Civil Cases Involving the Misappropriation of Trade Secrets (comments due July 27); Official SPC Reply on the Application of Law in Network-Related Intellectual Property Infringement Disputes (comments due July 27); Guiding Opinions on Hearing Intellectual Property Disputes; Involving E-Commerce Platforms (comments due July 27); Certain Provisions on Evidence in Civil IP Litigation (comments due July 31); Opinions on Increasing Punishment for Intellectual Property Infringement (comments due July 31); Judicial Interpretation Concerning Some Issues on the Specific Application of Law for Handling Criminal Cases of Infringement upon Intellectual Property Rights (comments due August 2).

Updated: June 30, 2020, July 4, 2020, July 20, 2020.

 

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More Encouraging News of Trade Secret Reform… But Is It Always Good for the Foreign Community?

James Pooley posted a great blog on IPwatchdog on the recently released draft judicial interpretation on trade secrets (the “Trade Secrets JI”).  In his blog, “Has China Finally Embraced Trade Secret Protection ”,  Mr. Pooley discusses aspects of the draft JI that embrace or expand upon US practices including: “combination secrets”, “reasonable efforts”, “indirect misappropriation”, “head start injunction” and apportionment of damages based on fault.   Mr. Pooley also notes that “this most recent pronouncement seems in some respects to go beyond what was required [from the Phase 1 Trade Agreement], and in those respects also seems to reflect an imprint of U.S. practices.“  I agree.

Individuals who expect all of China’s recent IP reforms to be in response to US pressure are, for the most part, likely to be pleasantly disappointed — for the most part.   As an example, the Trade Secrets JI also reflect China’s own evolving practices in trade secrets and other areas, including the availability of punitive damages, the emergence of a limited discovery regime, and implied obligations of confidentiality notwithstanding the non-existence of an NDA (see Contract law, Art. 43, now amended by the Civil Code).  Moreover, the evolving system in China for trade secrets will likely also benefit by the increasing competence of the IP tribunals and courts, including the “three in one” courts which combine civil, criminal and administrative IP jurisdiction.  As noted in another recent blog, China is also seeking to improve its criminal IP enforcement regime through more further development of the three-in-one system, and further development of evidentiary standards in criminal cases, as well as more active roles for prosecutors and police, among other measures.

While the ink is hardly dry on this Trade Secrets JI, China has since announced two other draft JI’s for public comment:  “Some Provisions on Evidence in Intellectual Property Litigation (Consultation Draft)” (the “Evidence JI”)  and the “Opinions on Increasing the Level of Sanctions for Intellectual Property Infringement (Consultation Draft)”(the “Sanctions JI”)《关于知识产权民事诉讼证据的若干规定（征求意见稿）》《关于加大知识产权侵权行为制裁力度的意见（征求意见稿）》(June 15, 2020)。 Comments are due by July 31, 2020.

Here is a quick summary of the trade-secret related provisions in the Evidence  JI:

Article 19 addresses granting protective order for evidence preservation purposes and provides that if a party is a subject of an evidence protection order and claims that a trade secret is involved, the party that requests the evidence protection order cannot participate in on-site evidence preservation procedures，but can engage an attorney, patent agent or another person with specialized IP knowledge (collectively “authorized representatives”) to sign the protective order.

Article 23 authorizes the appointment of expert appraisers to determine if a claimed trade secret consists of information in the public domain, or to determine the differences between the claimed trade secret and the alleged infringing technological information.

The third chapter of this JI regulates the exchange of evidence and includes several provisions regarding protective orders.  Article 31 grants the court authority to structure a protective order to limit access to authorized representatives.  Disclosure of information subject to protective orders shall be limited to the proceeding where the protective order was issued.  Sanctions may be imposed for unauthorized disclosure (Art. 32).  Consent to a protective order once given cannot be withdrawn.  The parties are also free not to engage in an exchange of information  (Art. 34).  Procedures are also established for challenging the secrecy of evidence, including providing rebuttal evidence and cross-examination of witnesses.  If a party succeeds in having the information considered as non-secret, it shall be considered as such during the proceeding (Art. 35).

Here are some provisions in the Sanctions JI:

Expedited proceedings are provided for serial infringers.  In addition, punitive damages should be imposed on serial infringers (Arts. 9, 20, 21). If actual damages are proven, they should be provided to the rights-holder (Art. 10).  Punitive damages should be imposed for their deterrent effect (Art. 13). Reasonable attorneys’ fees may be provided if there is a willful infringement and in a complex case (Art. 17). Attorneys’ fees and other expenses shall be compensated for in the case of malicious litigation where the right is unjustly obtained or there is not a substantial basis for its exercise (Art. 19).

Of particular note is Article 20: Serial infringers of IP rights, as well as those  who steal commercial secrets for foreign agencies, organizations or individuals, shall be subject to severe penalties according to law and generally no probation shall be applied 为境外的机构、组织、人员侵犯商业秘密的情形，依法从重处罚，一般不得适用缓刑.

One may ask: why is theft of trade secrets for foreigners being singled out? Article 20 may be China’s response to cases brought against foreigners under the US Economic Espionage Act or similar foreign laws.   However, the EEA requires action “benefit[ing] a foreign government, instrumentality or agent” in 18 USC Sec. 1831.  Article 20 does not, however, single out these security concerns arising from state-drive trade secret misappropriation.

Fairness suggests that those engaged in IP theft on behalf of foreigners should also be afforded the opportunity to avail themselves of defenses otherwise available if a Chinese party were the beneficiary of the trade secret misappropriation. This is also consistent with the requirement under the TRIPS Agreement that punishment is proportionate to crimes “of a corresponding gravity” (Art. 61), and that judicial procedures are “fair and equitable” (Arts. 41 and 42).  The TRIPS obligations to afford national treatment (Art. 1) should also equally apply to a defendant in a proceeding – that he or she should not be singled out because of having worked for a foreigner.  A similar logic applies to the cases brought against the United States involving national treatment under our Section 337 remedy; a heavier defense burden had been placed on foreign entities compared to domestic entities. The provision could also lead to a de facto denial of national treatment for a foreign investor in China who finds that police or prosecutors may be less likely to initiate a case unless there is a trade secret theft that benefits an overseas entity where a heavier sentence could be imposed.  Moreover, this provisions flips US concerns on their head: it does nothing to address the concerns that the United States has expressed regarding trade secret theft in China of US-origin trade secrets, since this law addresses  thefts that were undertaken on behalf of a US entity, not from the overseas entity.

Once any country advocates for more deterrent penalties, it should consider that such penalties may also be applied to non-Chinese defendants, including one’s own nationals, which this provision could easily encompass through its focus on actions on behalf of foreign entities.  To the extent this provision is used to target foreign actors as well as actors for foreign entities, the TRIPS Agreement provides little in the way of guard rails to ensure equality of treatment in IP enforcement proceedings.  Many foreigners are already concerned, as they fear being denied authorization to leave China arising from allegations of civil violations.  In addition, there have also been several precedential IP cases over the years where foreign parties may have served as “guinea pigs” for more deterrent sanctions,  including such cases as Chint v. Schneider Electric [utility model patent damages award]; Qualcomm AML investigation [high antitrust penalty]  Veeco and Micron [preliminary injunctions involving semiconductor patents and unpublished judicial opinions as well as unpublished Customs seizure decision], and PRC v. Guthrie [criminal copyright cases brought against foreigners].

I believe that this draft of Article 20 may be sending the wrong signal.  Actions undertaken for foreigners and Chinese should be treated equally, with equivalent penalties and opportunities for probation.  Moreover, the concept of equality generally applies equally to any right.  If there are concerns regarding national security or difficulties in apprehending a party engaged in trade secret theft on behalf of a foreigners, those can be addressed through other measures such as through bilateral criminal justice cooperation, including mutual extradition arrangements and cooperation in gathering evidence. Such measures would also help restore trust between participating countries.  By providing harsher penalties for trade secret infringement benefiting foreigners, a potential precedent might also be established for any other case benefiting an overseas actor, notwithstanding that the principal concerns appear to be infringement occuring within China.

Note: this post was revised June 30, 2020 to address a reader’s concerns that Article 20 is directed to actions on behalf of foreigners and not simply by foreigners.