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.

The Good Faith Elephant in the IP Trade War

elephant-in-the-room

It is impossible to talk about structural issues in China’s IP regime and its impact upon foreigners without addressing the lack of a comprehensive approach to “bad faith” activities in all its forms in China.  This issue has likely undermined more of  the credibility of the Chinese government than any other in IP, and it has affected the greatest number of US companies.  Chinese officials may not realize it, but every medium to large sized company I have met in the US has been affected by it.

Any lawyer who has counseled a US company on doing business in China knows the drill: before you enter the market there are likely to be trademark squatters, bad faith patent registrants, difficulties in protecting trade secrets used by trusted employees, amongst others.  Even the President has been a victim with squatting on the Trump mark.

China has generated its own vocabulary around bad faith activity.   “IP theft”, a term that has been promoted by the Trump administration, reflects an overarching concern about Chinese tolerance of state-sponsored or willful infringement.  Another similar concept is “forced technology transfer.”  The history of these terms goes back decades.   “Patent hijacking” refers to behavior before 2008 of misappropriating designs and other inventions based on China not requiring absolutely novelty as a condition for patent grants.   A “Naked Bolar” regime refers to a regime which grants an exemption from certain forms of patent infringement without providing a counterpart benefit to an innovator for the erosion of its patent rights (this may be corrected in the proposed patent law revisions).  “Ambush marketing” and “trademark squatting” may  not be new to China, but China remains a focus of these concerns.  China also has some vocabulary of its own which often do not make it into English, such as  “旁名牌” (saddling along famous brands) and patent “cockroaches” (instead of patent trolls).

China has also created global precedent over willful (bad faith) behavior in DS/362, the WTO case involving China’s criminal IP enforcement regime.  As the WTO panel indicated in that case:

“[T]he word “wilful” … precedes the words “trademark counterfeiting or copyright piracy”. This word functions as a qualifier indicating that trademark counterfeiting or copyright piracy is not subject to the obligation in the first sentence of Article 61 unless it is “wilful”. This word, focussing on the infringer’s intent, reflects the criminal nature of the enforcement procedures at issue.”

Good faith may be an underperforming concept in China, but it is also a low-hanging fruit for trade negotiators. It is in Article 4 of the General Principles of the Civil Code as well as Article 6 of the Contract Law.  It was incorporated into Article 7 of the revised Chinese Trademark law.  The Supreme People’s Court recently found that warehousing trademarks without intent to use is a basis for invalidating marks, albeit not under Article 7.  It is part of the Guangdong High Court Rules on SEP disputes in telecommunications (good faith in negotiations).  It is also part of the guidance from the Beijing High Court for handling of patent validity matters.

The problem isn’t that good faith doesn’t exist in China’s IP regime, but that it is selectively applied.  In addition to the examples already cited, it is under consideration in the proposed Patent Law revisions in terms but only for good faith litigation, and it is an underlying concept in punitive damage provisions in the Trademark Law and the proposed Patent Law Revision. The concept has not yet appeared in substantive copyright or trade secret law.  Companies like Taobao are using a determination of “good faith” in facilitating take-downs

Selective application of “good faith” concepts is evident from its inconsistent application across various IP laws.  Why must trademarks be prosecuted in good faith, but not patents? Why is bad faith patent litigation a concern in the proposed patent law revisions, but why not trademark, trade secret, copyright or other IP-related litigation? The concept needs to be utilized to address such difficult issues as the epidemic of low quality patents and bad faith trademarks.  It should not be used to resolve other, easier challenges such as extracting more rents from foreigners in patent litigation as in the Guangdong rules on SEP disputes.  In fact China back-slid in applying good faith concepts while this trade war was brewing.  The removal of “employee” as a covered party (经营者) in China’s revised trade secret law (Anti Unfair Competition Law) facilitates bad-faith employee behavior.

Adjudicating what constitutes good faith need not involve inquiries into subjective attitudes.  Courts and agencies can rely on objective indicia from China’s data-rich environment: companies that file multiple trademarks that they don’t use  them; trademark registrations than use others’ prior rights; on-line merchants  that routinely infringe IP rights; serial violators of injunctions; patents that are routinely invalidated and/or filed based on others’ designs; comprehensive data that shows foreigners that are being treated fairly drawn from China’s new judicial databases;  willful violators of non-compete agreements, and others.

Bringing good faith into full play would be a triple win: good for China’s IP system, good for US rights holders, and good to help re-establish trust between China and other countries.  Trade negotiators may wish to consider it being a part of any “structural” commitment from China in the current trade dispute  It can be implemented by China’s National People’s Congress as a legislative interpretation or as an amendment to China’s civil law, and in specific laws now under consideration (patent law, copyright law).  The SPC at an appropriate time might prepare a judicial interpretation articulating its application in specific circumstances.  It also has the added advantage of being easily monitored, as data analytics can be harnessed to determined if real progress is being made in a wide range of areas.

It is time to bring good faith more directly into China’s IP system.

 

A Federal Circuit with Chinese Characteristics? – The Launch of China’s New National Appellate IP Court 中国特色的联邦巡回上诉法院?

wangchuang

On December 27, 2018, the Supreme People’s Court released the Provisions on Certain Issues of the IP Court  (the “Provisions”), and the Standing Committee of the NPC  announced a first round name list of judges of the new IP court. These decisions follow an earlier announcement by the NPC Standing Committee  on October 26, 2018 authorizing the establishing of this new division of the SPC (officially translated as IP  Court of the Supreme Court of SPCIP, with the Chinese name 最高人民法院知识产权法庭). There were also indications that such a court was in the works that were previously reported in this blog in 2017.  The newly established IP Court is intended to function very similarly to the US Court of Appeals for the Federal Circuit, with a national jurisdiction over technical civil IP cases as well as appeals of patent validity decisions. Trademark validity appeals are not currently specifically enumerated as being within the court’s jurisdiction (see photo below).

This is a much awaited, historic and potentially disruptive breakthrough in the China IP litigation system, that has been a focus of much discussion between US and Chinese experts over 20 or more years, notably between the SPC and former CAFC Chief Judge Rader, former USPTO Director Kappos, and others (including the author/owner of this blog).  The historic 2012 conference between the SPC and the CAFC at Renmin University was one such milestone event in these efforts.   China’s successful experiments in specialized IP courts in Beijing, Shanghai and Guangzhou was another such milestone, as well as the language in the third plenum that facilitated their establishment. However, the engagement preceded this decade.  For example, an important conference on specialized IP courts was held with former Chief Judge Jiang Zhipei, and other Chinese IP judges in Washington, DC on Specialized IP courts in 2002, which involved over 130 judicial experts.   SIPO also exerted an important leadership role as well, through the National IP Strategy and various studies and conferences over the years.

The Provisions came into effect January 1, and the new Court held a kick-off ceremony on that same day.   Almost like clockwork, Judge Wang Chuang, the new deputy chief judge of this new tribunal was at the second US-China IP Summit in Shenzhen on January 3, 2019 (the “Summit”) presenting a bilingual PowerPoint (picture above) explaining the role of the Court, along with several other current and former judges, including Judges Jin Kesheng, former Beijing IP Court President Su Chi, former Guangdong IP Tribunal judge Ou Xiuping, former Beijing High Court Judge Cheng Yongshun, and others.  Considering the high-stakes trade dispute and interaction between China and the US right now, it is fair to say that the setup of the SPC’s IP Court is part of the bona fide effort to enhance IP protection in China which in fact predates the trade dispute.

What will be the impact of this court on foreign-related litigation? We believe that the impact is likely to be positive.  US academics have suggested that the CAFC has had a modest effect of correcting any anti-foreign bias  and the elevation of patent appeals to the SPC level is certain to similarly help direct national attention to important cases and defuse local pressure.  Moreover, the jurisdictional mandate of this court includes appeals from the Beijing IP Court of administrative patent cases, where foreigners constitute a significant cohort, partiuclarly if trademark cases are included (which appears unlikely). The Court also includes at least one judge from the foreign civil (no. 4) division of the SPC.   The recent decision by the SPC to rehear the Huawei v Interdigital case, where Zhu Li was a judge, may also be another signal.  Judge Zhu has since transferred to this new IP Tribunal, and the court has also sent a clear signal that it will be seeking a consistent and fair determinations of cases independent of local influence.   Many of the judges on the roster are well known to the foreign IP and antitrust communities, have met with foreign visitors or traveled overseas, and enjoy the respect of the foreign and Chinese bar.

Here are some of the most significant things that we know about this new Court.

Status of the SPC’s IP Court: It is part of the SPC, which generates some confusion. Given that the judgments, rulings, mediations and decisions made by the SPC’s IP Court are in the name of the Supreme Court, it enjoys a similar status to that of CAFC, whose job is to function as a national appellate court and whose decisions. are typically final.  But there has been and still will be an IP Tribunal (also known as 3rd Civil Tribunal) of the SPC, and a decision made by the SPC’s IP Court, which in normal practice should be final, is capable of been filed for retrial before the said IP Tribunal of the SPC.  In addition, non-technical IP cases will still be appealed according to pre-existing procedures ultimately to the 3d Civil Tribunal.

The head of the new SPC’s IP Court, Mr. Luo Dongchuan, will at the same time continue to serve as Deputy Chief Justice of the Supreme Court of the SPC, a rank higher than the head of the 3rd Civil Tribunal, which previously heard all IP cases.  Justice Luo effectively oversees IP litigation in China with Justice Tao Kaiyuan, which is a further elevation of the importance of IP to China’s judicial system.

Staffing the Court:  IP tribunal judges are typically amongst the best educated judges in China’s court system.  Many young judges made their name in IP related trials. The judicial personnel list of the court suggests that the court has been viewed as career enhancing for SPC judges, judges from regional courts, and former patent office examiners who have been selected as judges (see the list below).  However, due to the rapid establishment and staffing of this new Court, many of the judges are likely on detail from their prior jobs to the new Court, pending permanent transfer

Staffing of the Court

Name Position Former position
Luo Dongchuan 罗东川  Vice-president of SPC, Head of the Intellectual Property Court of SPC Vice-president of SPC, member of the Adjudication Committee of SPC,
Wang Chuang王闯 Deputy Chief Judge Deputy Chief Judge of the Civil Division No.3 (IP Division) of SPC
Zhou Xiang 周翔 Deputy Chief Judge Deputy Director General of the Enforcement Bureau of SPC
Li Jian 李剑 Deputy Chief Judge Presiding Judge of the Civil Division No. 3 (IP Division) of SPC
Zhu Li 朱理 Judge Senior Judge of the Civil Division No.3 (IP Division) of SPC
Shen Hongyu 沈红雨 Judge Judge of the Civil Division No.4 of SPC (for foreign-related cases)
Luo Xia 罗霞 Judge Judge of the Administrative Division of SPC
Fu Lei 傅蕾 Judge Judge of the Civil Division No.3 (IP Division) of SPC
Wei Lei 魏磊 Judge Assistant Judge of the Civil Division No.3 (IP Division) of SPC
He Peng 何鹏 Judge Judge of the Civil Division No.3 (IP Division) of SPC
Jiao Yan 焦彦 Judge Deputy Chief Judge of the Civil Division No.3 (IP Division) of Beijing High People’s Court
Cen Hongyu 岑宏宇 Judge Assistant Judge and the Judge of the Civil Division No. 3 (IP Division) of BHPC
Liu Xiaojun 刘晓军 Judge Judge of the Civil Division No. 3 (IP Division) of Beijing High People’s Court
Cui Ning 崔 宁 Judge Judge of Beijing Intellectual Property Court
Deng Zhuo  邓 卓 Judge Judge of Beijing Intellectual Property Court
Ren Xiaolan 任晓兰 Judge Director of the No.1 Chemical Appeal Division of the Patent Reexamination Board of CNIPA
Gao Xue 高 雪 Judge Deputy Director of the Mobile Communicating Technology Appeal Department of the Patent Reexamination Board of CNIPA
Zhan Jingkang 詹靖康 Judge  Deputy Director of the Examination Guide Department of the Examination Management Division of the CNIPA
Xu Yanru 徐燕如 Judge Deputy Chief Judge of the Civil Division No.3 (IP Division) of ZHPC
Xu Zhuobin 徐卓斌 Judge Judge of the Civil Division No.3 (IP Division) of Shanghai High People’s Court
Ling Zongliang 凌宗亮 Judge Judge of the Intellectual Property Division No. 2 of Shanghai Intellectual Property Court
Zhang Xiaoyang 张晓阳 Judge Judge of the Civil Division No. 3 (IP Division) of Jiangsu High People’s Court
Zhang Hongwei 张宏伟 Judge  Judge of the Civil Division No. 3 (IP Division) of Fujian High People’s court
Liu Xiaomei 刘晓梅 Judge  Judge of the Civil Division No. 3 (IP Division) of Shandong High People’s Court
Tong Haichao 童海超 Judge Deputy Chief Judge of the Civil Division No.3 (IP Division) of Hubei High People’s Court
Tang Xiaomei 唐小妹 Judge Judge of the Civil Division No.3 (IP Division) of HHPC
She Zhaoyang 佘朝阳 Judge Judge of Guangzhou Intellectual Property Court

Internet Courts, Circuit Courts, Specialized IP Courts: The types of courts in China has expanded and is potentially confusing to those unfamiliar with the new experiments.  The SPC had already established Circuit Courts, which are arms of the Supreme Court itself, except that they are in cities other than Beijing.  An example of such a court is the Shenzhen Circuit court which hears retrial cases from Guangdong, Guangxi, Hunan, and Hainan as well as cases relating to Hong Kong, Macau and Taiwan.  The Specialized IP Courts, which will remain the same as before, are intermediate courts in Beijing, Shanghai and Jurisdiction, vested with jurisdiction over certain IP lawsuits. They will function all the same as before, but their decision will now be appealable to the SPC’s IP Court, rather than to High Court of the province where the Specialized Courts reside.  These IP Courts are in addition to other local IP tribunals and courts which localities have set up with the support of the SPC and have been experimenting in cross-district jurisdiction, and in combining civil, criminal and administrative adjudication.

The three Internet Courts, located in Beijing, Guangzhou and Hangzhou, will function as before.  Their decisions are not likely to be appealed to the SPC’s IP Court given that the latter only hear patent, mask works, variety of plants, computer software and anti-trust cases.

Standardization of Trial Rules: A mission of the SPC’s IP Court is to formulate judicial standards and trial rules based on their investigation and research of relevant practices, and such standards and rules shall be followed by the lower courts. This may suggest that the SPC’s IP Court will take over the responsibility of formulating certain judicial interpretations and selecting guiding cases. Wang Chuang noted at the Summit that the Court is considering judicial interpretations on such topics as technology assessors and trade secret protection.  Thus, we could expect a more consistent guidance, both procedural and substantive, from the Supreme Court over IP cases, especially when involving technical matters.  Judge Su Chi (retired) of the Beijing IP Court, also noted at the Summit that he expected that some of his work on development of a case law system would likely be taken over by this Court as well.

Extended Jurisdictional Scope of the Court:  The SPC’s IP Court is empowered to hear major and complicated cases of first instance on a national scale. This implies that some plaintiffs may bring high-profile lawsuits to the Supreme Court directly. This kind of arrangement is very rare in China’s judicial system. The only case we are aware of before this time is the trial of the Gang of Four in 1980. This could be good news for patentees facing difficult issues of local protectionism. It may also have profound impacts on society, and thereby raise the IP awareness of the public.  The Federal Circuit had a similar impact on US society when it decided major cases such as Polaroid v Kodak early in its tenure, which in the US signaled “a new period in which patents regained their importance as intellectual property protection for technology companies.”  The SPC’s IP Court will likely have discretion to determine whether a case belongs to a major and complicated one. There are various factors to be taken into consideration, such as the damages claimed, the nature of the subject matter, the parties concerned, the relevant technicality, the social impacts, and so on.  In addition to this area, the court will also retrial cases arising from application by any party of interest and protest by the Supreme Procuratorate as mentioned (Article 2(5) and Article 11 of the Provisions).

For Chinese IP practitioners and regional IP judges this is also a major game changer.  Chinese patent firms that were once focusing on establishing offices throughout China may now need to think about reinforcing their staff in Beijing.  Chinese judges from various localities may also wonder why certain appellate jurisdiction was removed from their courts.  The answer to that last issue likely lies in the desire of the SPC to establish greater uniformity and predictability throughout China in important technology-related IP cases, as was explained at the Summit.

At the Summit, Judge Wang Chuang noted that four goals of this new court are: boosting technological innovation; testing fields of judicial reform; being a bellwether for patent trials and becoming a preferred court for international patent litigation.  These goals are laudable, not surprising, consistent with the current directions of judicial reform and can help inspire confidence of the foreign business community.  In view of the goal of increasing China’s role as a center for international IP litigation, it is not surprising that so many judges attended the Summit.

In all, the establishment of the SPC’s IP Court is exciting news in Chinese IP community.

Written by Mark Cohen, Harry Fang 方春晖, Steve Song 宋献涛 and Jerry Liu 刘良勇attorneys with the Deheng law firm北京德和衡律师事务所.

Mark Cohen excercised final editorial control and is responsible for any errors. Photograph of Judge Wang Chuang  by Mark Cohen from the Summit.  All rights reserved.

Please write in with your observations on this important development!

flowchartofnewcourt
Updated January 8, 2019 to clarify uncertainty over jurisdiction over trademark administrative appeals, and on January 9 to add a photo of the flow chart for litigation from the Summit which does not include trademarks  (above).

Trade and Peace on Earth: Part 2

pendency

In the first part of this blog, I talked about unilateral steps that the United States and China have been taking during the ‘trade war’ to address concerns regarding forced tech transfer.  In this section I look at bilateral steps that can be taken.   I begin by looking at what the US and China should not do (“Do No Harm”), and then I focus on 5 areas for legislative reform:  trade secrets, licensing, good faith, patents and litigation. I conclude with confidence building steps.

Do No Harm:

There are some bilateral steps taken from playbooks of the past that China and the US should not do:

  1. Political campaigns, particularly to address patent or trade secret infringement. These actions are great for politicians, but they offer no prospect of durable relief.
  2. Accepting Chinese political statements or enactment of normative documents (inferior to State Council “regulations” 法规) that have no binding effect.
  3. Permitting two different fact sheets in Chinese and English to emerge from discussions – Diplomatic discussions should not be a “Rashomon” (羅生門) (see picture below) –  subjective explanations of a common experience.  We have already  differing interpretations of recent negotiations.  For a formal document, that generally means that an agreement needs to be reached several days before a due date in order to ensure there is a harmonized text.
  4. Entering into an agreement that is not verifiable or that the US government doesn’t have the resources to verify.

In his June 9, 2010 testimony  before the Congressional Security Commission, USTR’s Lighthizer, then a private attorney, noted that “China’s commitment to the rule of law is very much in doubt, and the U.S. government continues to express major concerns about China’s failure to respect  U.S. IPR.”  Given the investments to date in effecting change in China, I hope that USTR seeks durable legal changes that have too often been atypical.

The prognosis, however, is not positive.  Willingness to “horse trade” ZTE sanctions and Huawei extradition for trade concessions is one indication of US willingness to bend its rules.  Similarly, Xi Jinping apparently suggested at Buenos Aires that he would approve the NXP merger with Qualcomm at this time.  Many countries, including the US have extended  bilateral science and technology cooperation agreements with China without necessary legal changes to China’s licensing regime in place that would definitively facilitate sharing of improvements between the countries.  The administration’s reluctance to bring trade cases involving IP against China is another sign that negotiation, rather than durable legal changes, may become the dominant means of resolving the current impasse.  However, if we accept extra-legal commitments from China, how can we expect China to make structural changes in accordance with rule of law?

Nonetheless, it isn’t too hard to develop a range of possible legal outcomes that would help address US concerns over the IP issues identified in the Section 301 Report, provided they are carefully monitored.  Here is my initial positive list:

Trade Secrets:

China adopts a unified, stand-alone trade secret law.  This law would address the problem of scattered trade secret laws, insure that criminal trade secret cases are prosecuted, and that employees are treated as subject of trade secret protection and as actors in trade secret infringement, provide appropriate burden of proof reversals (e.g., for “inevitable disclosure” or in proving aspects of misappropriation), establish punitive damages, provide for referral mechanisms from administrative or civil proceedings to the courts, etc.  China previously rejected the idea of a stand-alone law in revising its current Anti-Unfair Competition Law, yet many leading Chinese IP authorities still consider it to be a useful concept.

China might also follow recent Korean legislative practice criminalizing overseas trade secret misappropriation with the intention to benefit a  domestic entity, and imposing aggravated penalties in such circumstances.  Such a provision, if enforced and monitored, could help address US concerns about Chinese indifference to overseas trade secret thefts, as well as set the stage for greater cooperation in transborder trade secret theft.

Technology import/Export Regulations and Licensing:

The Chinese government is already seeking to revise the Catalogue of Foreign Investment in China,  and is considering a Foreign Investment Law to provide greater protections against forced technology transfer, including, hopefully, provisions regarding Joint Venture ownership of foreign licensed technologies.  These positive steps are still not enough, due to pervasive national and local incentives in China at this time to acquire new technologies and the difficulties in tracking forced technology transfer.  As one additional step, China should vest jurisdiction in disputes over such forced technology transfer in the newly established circuit IP tribunal of the Supreme Peoples Court, in order to insure a consistent, high-level focus and opportunity for redress, including expanding its jurisdiction over decisions to approve or deny joint venture registrations.

China has also shown no interest to date in revising the Administration of Technology Import/Export Regulations (TIER).  Chinese intransigence in this area is harmful to China.  Until China amends its law, I suggest that the US consider enacting legislation imposing reciprocal treatment on Chinese licensors of technology to the United States, as ITIF has also suggested.

I also encourage formation of a bilateral non-governmental commission (“Bilateral Commission”) to review progress in forced technology transfers.  If necessary, the US could reimpose sanctions if sufficient progress is not made.  This Commission should also require that China regularly publish reliable licensing data on the quantity of legitimate technology transfer occurring between China and other countries, including technology transferred as part of a joint venture formation.  This information could support better data-driven discussions on technology flows between China and other countries.

Patents:

China’s patent law reform offers the possibility for concrete changes that should not be missed.  Of particular concern, is the absence of a patent linkage regime in the current draft.  USTR might consider requiring China to make necessary changes in its patent and food and drug laws to fully implement a modern pharmaceutical patent linkage regime, including data exclusivity and patent term restoration.

The Section 301 report also hardly addressed potential issues involving discriminatory treatment in patent prosecution, such as has been alleged from time to time in China.  As examples, low rate of patent grants in pharmaceuticals, and disparate treatment in granting of SEPS have been the subject of academic and industry concern.  Consideration of discriminatory treatment, or lack thereof, should be the focus of any future collaboration between the US and China (such as my proposed Bilateral Commission).

This issue of bias need not be “tip-toed” around.  China fired what was likely the first salvo when it alleged unfair treatment by USPTO regarding an IWNCOMM patent application at the USPTO during a JCCT meeting (a “Rashomon” meeting, where there was a  different U.S. outcome sheet).  USPTO data, however, generally shows that Chinese patent applications in the US are treated as well if not better than US applications, according to my former colleague Larry Lian (see, e.g.,  slide 14 above and the accompanying deck).  China has not produced similar data on American applications in China or refuted the research to date in this area.

The United States and other countries might also look at temporal studies to see if there is any link between changing industrial policies and behavior of China’s patent office towards foreigners.  One promising area of research that one of my students undertook in my Chinese IP class this year suggests that there could be temporal differences in patenting behavior over a multi-year period: as China increasingly focuses on national policies to stimulate indigenous innovation, bias rates may be affected.

The US should also push China to reform its metrics driven approach to patent filings, which wastes resources and distorts markets.

Good Faith/Bad Faith:

One of the discrete trends in China’s domestic IP environment is an increasing focus on the role of good faith / bad faith in a range of IP-related activities.  Elevating the legal consequences of bad faith actions could lead to structural changes in China’s IP regime.  Good faith has been an increasing factor in dealing with bad faith trademark registrations, in Guangdong IP court guidance on SEP negotiations, as well as in trust-losing patent behavior in the recent NDRC MOU providing for coordinated interagency action involving patenting behaviors, and will likely play a part in consideration of punitive damages for patent infringement in the proposed patent law reforms.  It could be extended further to impose a duty of candor on patent and trademark applications, provide for deterrent penalties against frivolous IP litigation, address contempt of court, etc.  Despite my concerns regarding the social credit system, it can also be tasked to monitor bad faith behavior in IP and non-IP related areas, to support claims for enhanced damages or referrals to criminal prosecution.  The courts can take an initial look at this area across a range of judicial sectors.

Litigation:

China’s efforts to publish cases and increase transparency over the past several years are laudable, but the work is not complete and confidence in the judicial system thereby suffers.  The courts should insure that, wherever possible, all cases are published.  Cases involving national or trade secrets could be expunged of confidential information but otherwise be made public.  The current data on trade secret theft is especially incomplete.  Complaints and other motion papers, including dismissals due to settlements, should be made available to the public, along with preliminary and interim injunctions.   Generally speaking,  China’s transparency efforts are vulnerable to claims of selection bias, which undercut the utility of these efforts for comprehensive trade negotiation purposes.  Transparency has the potential to create and support structural change, and it should be exploited for that purpose.

Confidence Rebuilding:

Assuming that the US and China can get past this 90 day milestone, efforts to improve the environment for high tech also need to be established  There were some efforts underway in the Obama administration that can create incentives for improvement in China’s IP regime (e.g., accession to the TPP), and positive environments for technology collaboration (e.g., the US-Clean Energy Research Center).  There is a tremendous upward potential for collaboration between the US and China if the right frameworks can be developed.

One thing is clear: real accomplishments, not conferences and dialogues, are needed.  As I often reminded my Chinese colleagues over the years, reform in China should not be an entirely self-serving process. The world needs better scientific collaboration to address many of the looming global challenges we face.  If China plays its cards correctly it can emerge as a balanced global stakeholder and welcome partner in innovation.  Otherwise, I fear that the trend could be ever downward.

January 2, 2019 Update:  A translation of the draft Foreign Investment Law, which is now open for public comment is available at the NPCObserver website.

(Note: Please feel free to add your suggestions!  Also, I am indebted in this blog to the work of my students in my Chinese IP class at Berkeley this year, many of whom prepared papers on some of the suggestions in this blog).

Movie poster for Rashomon, below:

rashomon

Trade and Peace on Earth: Part 1

O ye who read this truthful rime From Flanders, kneel and say:
God speed the time when every day
Shall be as Christmas Day.

(Frederick Niven, “A Carol from Flanders”, regarding the WW I Xmas truce)

We are in the middle of the 90-day trade war truce, which was announced at the G-20 in Buenos Aires. Is there, however, an opportunity for a lasting trade peace?  Let’s look at developments to date…

Shortly after the Buenos Aires G-20 meeting on December 1, 2018 at which the 90 day truce was agreed to, USTR Robert Lighthizer gave an interview on Face the Nation where he  hinted at the pathway forward, noting: “We have had conversations ongoing.  We have had conversations ongoing for over a year.”  Lighthizer went on to say that we need structural changes and market opening “on this fundamental issue of non-economic technology transfer.”  Lighthizer’s focus was three-fold: forced technology transfer, cyber theft and state capitalism.  Lighthizer noted that tariffs will be raised in March unless a satisfactory solution is found.  In fact, USTR has announced on November 19 a deadline of March 2, at which time tariffs will be raised.  March 2 is 90 days after the December 1 meeting.

Notwithstanding LIghthizer’s assertions of on-going discussion, there have been several significant developments which suggest that there may not have been much real communication.  Typically, a new administration needs one to two years before adequately coming to terms with how China negotiates on IP and what may be the “low hanging fruit” in IP improvements that could have a durable impact.  This administration and China have not had anything approaching a “honeymoon” period.  It is not surprising, therefore, that some of the developments during this past year, as well as during the truce period appear, to be missing the mark.

If we dial back to the period when the 301 investigation was on-going, China failed to publicly disclose data on civil trade secret cases for 2018, and actually reduced its criminal trade secret prosecutions by approximately 35% to only 26 cases in that year. China’s revised trade secret law (Anti Unfair Competition Law) (eff. 1/1/18) also weakened trade secret protections by expanding the ambiguity around protections and procedures, where a non “business operator”, such as an employee, misappropriates trade secrets.

The United States also did not always engage comprehensively during this period. Although the United States filed a WTO case against China on March 23, 2018 (the day after the Section 301 Report was released) regarding compulsory licensing terms, the complaint does not specifically call out trade secrets (undisclosed information) as a form of technology licensing.  The European complaint, by contrast, more thoughtfully notes that “China imposes a different set of rules on the import of technology, including industrial property rights, other intellectual property rights and undisclosed information (“intellectual property rights”).”

Other recent efforts undertaken by China suggest that there may also have been some lack of understanding of US interests, including perhaps an undue emphasis on patent licensing.  NDRC, China’s powerful state planning agency,  announced a special Memorandum of Understanding/campaign mechanism involving 38 government agencies to address six types of “dishonest  conduct” by patenting enterprises and individuals.  The “MOU For Cooperation for Joint Disciplinary Actions Against Subjects of Serious Mistrust in the Field of Intellectual Property (patents).” 关于对知识产权(专利)领域严重失信主体开展联合惩戒的合作备忘录  is dated November 21 (before the G-20), but  was published on December 2 (immediately after).

How effective will this MOU be?  For some time, the academic data has suggested that such special campaigns have rarely brought any durable progress.  In fact, China suggested a special campaign for three months at the beginning of the 301 investigation. My response on the record to that suggestion was:

“Many scholars think that these short campaigns have limited duration and effect . . .. So, I’d like to know why is this particular program any different from other ones before it? Why not extend it or make it permanent? Or perhaps should the focus be on judicial reform or other areas?”

The data also shows that foreigners rarely use the administrative patent system and, as I have pointed out, along with former Chief Judge Rader and former PTO Director Kappos, vesting the administrative agency in charge of granting patents with the ability to bring infringement actions and special campaigns may not be conducive to independent adjudication of rights.

Another “truce-responsive” legislative effort appears to be in the works from China’s National People’s Congress, where a first reading of a new “Foreign Investment Law” is reportedly  now under consideration. The law would combine existing laws regarding foreign investment into one statute and is intended to insure that foreigners are accorded national treatment and can participate in government procurement and standards setting, as well as insure that transfer technology is on voluntary terms.  It  hopefully may address some aspects of forced technology transfer that have been identified by USTR in its 301 Report.

There have also been two other significant developments that could affect the landscape for technology transfer and IP protection in China that have a longer history and could be helpful to foreigners facing IP issues in China.  One of these is China’s proposed draft patent law amendments which have also been submitted to the NPC and have gone through its first reading.  The draft offers some improvement on judicial procedures and remedies (including discovery for calculation of damages, and improved damage calculations).  This latest draft also strengthens administrative enforcement, and extends the term for design patents to 15 years (in anticipation of accession to the Hague Agreement on the International Registration of Industrial Designs), provides for enhanced protection of patents in e-commerce, extends patent term for innovative pharmaceutical patents by five years.  However, it may also have weakened protections for pharmaceutical patents, as press reports thus far omit any reference to patent linkage, continuing a trend since this past August.

In my estimation, the most positive development is the establishment of a new specialized appellate circuit IP  tribunal attached to China’s Supreme People’s Court and under the direction of long time IP judge, Luo Dongchuan, now Justice of the SPC.  The new circuit tribunal will have national jurisdiction over technologically complex IP cases and will open for business January 1, 2019.   This court could also have an important impact on technical trade secret cases, patent disputes in key areas, such as semiconductors and pharma cases, appeals from China’s patent office, in insuring consistency of decision making across various intermediate courts, and in other areas.

Interestingly, none of these changes address Lighthizer’s other goals of addressing cyber theft and state capitalism.

There have been other changes in how the US engages with China that suggest some modifications in the bilateral relationship are permanent.  US companies have now begun wondering how they can take advantage of US Customs rules regarding determinations of country of origin of products with Chinese content, to minimize the potential application of 25% punitive tariffs.   They are busy revisiting Customs doctrines regarding “substantial transformation, including the progeny of cases and rulings since the landmark decision in Anheuser Busch v. United States 207 U.S. 556 (1907), in order to see how they might restructure manufacturing in China through conducting more assembly or finishing outside of China.  For Customs lawyers this must be a boon period.  At the same time, the US Department of Commerce has published new, potentially restrictive rules on “foundational” and “emerging” technologies, which may be targeted towards China, and the Treasury Department/Committee on Foreign Investment in the United States is conducting a pilot program that could restrict “passive, non-controlling” foreign investments in technology.  Meanwhile, Huawei’s CFO was arrested pending extradition to the United States, and Fujian Jinhua is banned from acquiring US technology, as it has been determined to be a threat to US national security.  It is clear to me that even if this stage of the trade war were to end, a new normal in trade relations with China has emerged and significant steps will need to be taken to reestablish trust.

My next blog will offer some ideas for reducing the bilateral temperature.

Christmas Day, 2018 (rev. 5:00 PM).

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.

JCCT 2014 Winds Up – Joint Fact Sheets Now Released

JCCT2014

The 2014 JCCT was hosted by the US government in Chicago, Illinois this year. Here is a link to the updated English  fact sheet (released Dec. 29) (Chinese:第25届中美商贸联委会联合成果清单)  that is now a joint fact sheet.    Here is a summary of the IP accomplishments of this year’s JCCT according to the joint fact sheet:

One significant outcome involved “technology localization” which is the practice whereby China grants tax preferences based on where IP is owned or R&D is undertaken.  Here is what the fact sheet says about the outcome in this area:

The United States and China commit to ensure that both countries treat intellectual property rights owned or developed in other countries the same as domestically owned or developed intellectual property rights.  ..Both China and the United States confirm that the government is entitled to take measures to encourage enterprises to engage in research and development and the creation and protection of intellectual property rights. 

In my personal estimation, the significance of this outcome is that China committed to not discriminating in awarding tax preferences based on where IP is owned.  To a degree this reflects footnote 3 of the TRIPS Agreement, which prohibits discrimination in “protection” of IP, which includes “matters affecting the use of intellectual property.”

Regarding service invention compensation, which has been important to readers of this blog, the JCCT commitment reflected the accomplishments of the 2014 Innovation Dialogue regarding freedom of contract:

The United States and China commit to protect the legal rights of inventors in respect of their inventions and creations, in accordance with their respective domestic laws and regulations, and in line with their domestic laws, commit to respect the legitimate rules and regulations developed by employers and legitimate contracts between employers and inventors concerning inventor remuneration and awards.

Another JCCT outcome involved protection of trade secrets in government regulatory proceedings:

The United States and China confirm that trade secrets submitted to the government in administrative or regulatory proceedings are to be protected from improper disclosure to the public and only disclosed to government officials in connection with their official duties in accordance with law…

The rather “hot” issue of geographical indications was also the subject of an “outcome” involving not extending GI’s to generic terms and establishing procedures to object to and cancel the registration of the GI.

There were also a number of cooperative commitments which will likely be a focus of various bilateral discussions and programs, including on technology licensing, bad faith trademark registrations, judicial best practices, data supplementation for pharmaceutical patents, IP in standards setting, sale of IP-intensive goods and services, and addressing on-line infringement.

The revised joint fact sheet also includes a joint commitment on abusive litigation:

Patent Protection and Bad Faith Litigations

  • The U.S. and China remain committed to promoting a robust intellectual property system that will incentivize future innovation and economic growth in both countries. Both parties are to strengthen cooperation to protect innovators from bad faith litigations, including to hold a joint seminar on IP licensing, so as to create positive conditions for innovation.

 

 

There were also outcomes that weren’t focused on IP but have significant IP implications.  One involved medical device and pharmaceutical market access, where China committed to accelerate approval procedures, which has long been hampered by inadequate resources at China’s Food and Drug Administration.  Another involved clarifying standards for antimonopoly law enforcement, including providing for greater due process and law firm access.  Still another commitment involved collaboration on law firm market access, which certainly affects foreign IP lawyers practicing in China.

In my personal experience, this 25th JCCT might equally be labeled JCCT v. 3.0.  The JCCT has changed to accommodate the growing complexity and importance of US-China trade.  In its first version (1983 to approximately 2001), the JCCT was as often a rather sleepy technical exchange mechanism.  I remember attending an early JCCT dealing with the enforcement of arbitration awards.  Another iteration (v 2.0) was under the leadership of Vice Premier Wu Yi after China’s WTO accession.  The JCCT then became a mechanism for negotiating trade issues with the Vice Premier chairing on the Chinese side and the Secretary of Commerce and US Trade Representative as formal co-chairs, but with an important added role for the Secretary of Agriculture.  Version 3.0 includes the same leadership structure, but with more involvement by industry and the host locality through various programs and symposia, joint fact sheets, and commitments to move negotiations changes in the negotiating calendar, including “a year of continuous work to address important issues facing our two nations.”

The above are my personal, non-official observations.