Unpacking the Role of IP Legislation in the Trade War

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Here is my attempt to unpack recent legislation and their relevance to the on-going trade dispute.

In recent months, China has amended its Foreign Investment Law, the Technology Import/Export Regulations (“TIER”), the Anti-Unfair Competition Law regarding trade secrets, and the Trademark Law, with new provisions on bad faith filings and damages. A summary of the Trademark Law revisions provided by SIPS is found here. China also amended the Joint Venture Regulations provisions removing provisions that which limited a foreign licensor’s freedom to license technology beyond years or to restrict use of licensed technology after the 10 year period had elapsed.

With the revisions to the TIER and the JV regulations, much of the basis for the US and EU complaints against China at the WTO regarding de jure forced technology transfer may have evaporated (WTO Disputes DS542, and DS549). However, the public dockets do not indicate that the cases have been withdrawn.

China seems to have determined that it has crossed a line in how much it can accommodate US demands. Bloomberg reported on a commentary published after the imposition of escalated sanctions in the influential “China Voice” column of the People’s Daily which accused the US of fabricating forced technology transfer claims. The commentary is entitled “If you want to condemn somebody, don’t worry about the pretext”, with the sub-title, written in classical Chinese: “‘Forced Technology Transfer’ Should Stop!”. (欲加之罪,何患无罪 – “中国强制转让技术论”可以休矣). The title is a quotation from the Zuo Zhuan, a classic of Chinese history written around 400 B.C. that realistically describes the palace intrigues, military tactics, assassinations, etc. from the chaotic “Spring and Autumn” period from 771-476 B.C. The People’s Daily view is also shared by a number of scholars and observers who view the problem as exaggerated or mischaracterized (apart from the TIER and JV regulations). However, this view has been rejected by USTR Lighthizer, as was reported in a recent NPR interview (March 25, 2019):

“CHANG: Though a number of scholars believe the Trump administration is overstating how often forced technology transfers are happening.

LIGHTHIZER: Well, I guess I don’t know who those scholars are. We did an eight-month study on it, and I think it’s the very strong view of the people that we talked to that it’s a very serious problem and has been for a number of years.”

(Update of May 21, 2019: A recent EU Chamber survey in fact showed an increase in businesses reporting that FTT is a concern, from 10% two years ago to 20%.)

There have also been several IP legislative developments that may not be as directly linked to US government trade pressure. Perhaps the most important is the launch of China’s new national appellate IP Court effective January 1, 2019. The NPC has released a draft of the civil code provisions on personality rights (See this translation). Personality rights can be important tools in addressing trademark squatting, such as in the Michael Jordan case with Qiaodan. CNIPA also released Draft Provisions for Regulating Applications for Trademark Registration (关于规范商标申请注册行为的若干规定(征求意见稿) which addresses bad faith registrations. CNIPA released a draft rule for public comment on Protection of Foreign GI’s (国外地理标志产品保护办法 (修订征求意见稿)on February 28, 2019. The comments focus on generic terms and a GI expert committee for examination of foreign GI’s. Here are INTA’s comments on the trademark registration and GI proposed rules. CNIPA also proposed changes to patent examination guidelines on such issues as proof of inventive step and what constitutes “common knowledge.” Here are AIPLA’s comments from April 4, 2019.

Still pending are proposed amendments to the Drug Administration Law, with comments due by May 25, 2019. This is a second public comment draft released by the NPC. Ropes & Gray has provided a useful analysis. The proposed changes to the DAL also include increased punitive damages for counterfeit medicines, in line with increased penalties in the IP laws (Trademark, AUCL, etc.). There are also proposed changes to the patent law which was released for comment earlier this year. Of particular interest to the pharma sector in the proposed changes were provisions calling for patent term restoration. However, a hoped for inclusion of patent linkage through an “artificial infringement” provision to trigger an infringement challenge by reason of a pharmaceutical regulatory approval has not yet materialized. There were also rumors that China and USTR has scaled back regulatory data protection for biologics from the 12 years that had originally been proposed by China in 2018 to the 10 year period provided by the US Mexico Canada Free Trade Agreement.

What is the relationship between all these legislative changes and the trade war? Larry Kudlow, the Director of the National Economic Council, described the legislative snafu that caused the administration to reinstitute tariffs as follows:

“For many years, China trade, it was unfair, nonreciprocal, unbalanced, in many cases, unlawful. And so, we have to correct those and one of the sticking points right now as we would like to see these corrections in an agreement which is codified by law in China, not just the state council announcement. We need to see something much clearer. And until we do, we have to keep our tariffs on, that’s part of the enforcement process as far as we are concerned.”

So what are the unenacted “laws” and what is the State Council “announcement” that Mr. Kudlow is referring to and which in his view launched this new trade war escalation? I doubt that Mr. Kudlow has read China’s Law on Legislation and understands the difference between a Law passed by the NPC and a State Council Regulation, particularly as US and European practice in recent months appears to be oblivious of legislative nomenclature and its role in determining what constitutes a legally binding document.

Perhaps Mr. Kudlow is talking about the NDRC 38 agency MOU published in late 2018 regarding punishments for serious patent infringement, including use of social credit system. The NDRC document is clearly inferior to a Law or State Council Regulation, but it was a directly promulgated document of a State Council agency. As the patent law amendments have not been enacted yet, he may be referring to this delay in enactment and the failure to increase damages for infringement as has been provided by other statutes. In my own view, the focus on punitive or even statutory damages is misguided as is increased administrative enforcement, as the primary reason that damages are low is the failure of most Chinese courts to impose fully compensatory damages and abide by priorities in law for establishing damages. But I hope to have more on that in another blog…

One thing is certain: China has been timing legislative developments with trade diplomacy. This may lead one to believe that China’s approach to the new laws was purely transactional, and/or there were other laws that the US was also expecting but that China has since declined to deliver. The previously mentioned NDRC 38 Agency MOU was enacted before the G-20 meeting but made publicly available shortly thereafter. The “Working Measures [sic] for Outbound Transfer of Intellectual Property Rights (For Trial Implementation), (State Council, Guo Ban Fa [2018] No. 19)” (知识产权对外转让有关工作办法(试行)) which was previously discussed here, appear to have been timed with the 301 announcement in March 2018. In addition, the revocation of TIER provisions, JV implementing regulations, and amendments to the Trademark Law and AUCL revisions all were enacted with incredible efficiency, often denying any opportunity for meaningful public comment in violation of prior procedural practices. A reasonable guess may be that there were some additional laws or regulations that the US was expecting but that China had determined it could not deliver, or deliver in the time frame provided. Nonetheless, the legislative track record thus far is quite impressive.

China’s improved environment for technology transfer and technology collaboration is coming at a time when the United States has tightened up its controls with China. The most notable legislation in this area is the John S. McCain Defense Authorization Act for 2018 (the “Act”), including the enactment of the Foreign Investment Risk Reduction Modernization Act and the Export Controls Act of 2018. These laws extended export control and foreign investment control authorities to foundational and emerging technologies, as well as to non-passive, non-controlling investments. Much of the technologies of concern overlap with Made in China 2025 and other Chinese industrial policy documents. Although the Act did not specifically create “black” and “white” countries as subjects of controls, the Congressional history did point to special concerns about China:

“Congress declares that long-term strategic competition with China is a principal priority for the United States that requires the integration of multiple elements of national power, including diplomatic, economic, intelligence, law enforcement, and military elements, to protect and strengthen national [t]security, [including] … the use of economic tools, including market access and investment to gain access to sensitive United States industries.”

The most recent report which analyzes the impact of US and Chinese regulations on Chinese investment in the United States by Rhodium Group is found here (May 8, 2019). The report notes an “over 80% decline in Chinese FDI in the US to just $5 billion from $29 billion in 2017 and $46 billion in 2016. Accounting for asset divestitures, net 2018 Chinese FDI in the US was -$8 billion. Meanwhile, American FDI in China dropped only slightly to $13 billion in 2018 from $14 billion in 2017.” The Rhodium report also notes that “the chilling impact of politics on US FDI in China was mostly visible in the ICT space where new investment declined significantly last year.” Other countries have also been enacting similar restrictions on FDI in sensitive areas, as pointed out in a recent article by my Berkeley colleague Vinod K. Aggarawal. Note: I will be speaking at a forthcoming AIPLA webinar on export controls and IP strategies on May 23, 2019 as well as at forthcoming events in China (to be announced).

In addition to these legislative efforts, the US has undertaken steps to restrict H1B visas for talented scientists and engineers and the FBI has created a new working group to address economic espionage from China. The Committee of 100 released an important paper in 2017 showing that Asian Americans were more likely to be prosecuted for economic espionage than any other ethnic group, are also subject to higher sentences and were twice as likely as other groups to have cases against them dismissed. Some observers fear that overly broad regulation and enforcement by the United States may now be encouraging exactly what China has sought to do for decades: repatriate to China the vast talent pool of Chinese scientists, engineers, and entrepreneurs to contribute to the technological development of the motherland.

Although there have been few legislative efforts directed to making US science and technology more competitive in response to these perceived threats from China, there have been several general reports and proposals. The National Institute of Science and Technology recently released a green paper, “Return on Investment Initiative for Unleashing American Innovation” (April 2019) to improve federal technology transfer and entrepreneurship. There are increasing calls for Congress to fund the long defunct Office of Technology Assessment, which once played an active role in analyzing US-China technology trade.

Several trade organizations and think tanks have called for increased US funding in science and technology, among them is the recent report of the Task Force of American Innovation, “Second Place America – Increasing Challenges to America’s Scientific Leadership” (May 7, 2019). The R&D graph at the head of this blog showing China’s rapid growth in R&D is from that report. The report notes:

“America’s competitive edge is now at stake, as China and other countries are rapidly increasing investments in research and workforce development in order to assume positions of global leadership. Our nation risks falling perilously behind in the basic scientific research that drives innovation, as our global competitors increase support for cutting-edge research and push to the forefront in fields such as artificial intelligence (AI), robotics, aerospace, advanced manufacturing, and the next generation of telecommunications networks.”

To round out this summary of legislative developments, there have been developments at the USPTO that impact US relations with China on IP. The USPTO published a proposed regulation which will regulate legal services for the rapidly increasing number of Chinese pro se trademark filers in the US (2/15/2019). This proposed regulation would require these applications to use a US licensed attorney. The purported purpose of this change in current practice is “instill greater confidence in the public that U.S. registrations that issue to foreign applicants are not subject to invalidation for reasons such as improper signatures and use claims and enable the USPTO to more effectively use available mechanisms to enforce foreign applicant compliance with statutory and regulatory requirements in trademark matters.” The rule also seems generally consistent with TRIPS Art. 3, which permits WTO members to require “the appointment of an agent within the jurisdiction of a Member … to secure compliance with laws and regulations which are not inconsistent with the provisions of [the TRIPS] Agreement”.

Another important development involves USPTO efforts to clarify subject matter eligibility under Sec. 101 of the patent act, and functional claim limitations for computer-enabled inventions under Section 112. The United States had been weakening and destabilizing protections in these important areas affecting artificial intelligence, fintech and biotech inventions at the precise time when China had been strengthening its protections. These are important steps towards strengthening predictability in our domestic IP system, which may be further strengthened by proposed legislative changes.

Ironically, China’s improvements in its investment and tech transfer environment are coming at a time of heightened concern over a Chinese technological threat and increased US and international regulatory scrutiny. It may be difficult, therefore, to perceive any immediate positive impact from changes in China’s investment environment. Indeed, the media has recently been reporting on decisions of different companies or entrepreneurs to close down R&D operations in each other’s markets. Hopefully, both countries may ultimately create the right mix of IP enforcement and protection, regulatory controls over collaboration and industrial policy to enable bilateral scientific collaboration to once again flourish and contribute to the global economy.

The Changing Legislative Landscape of Trade Secret Protection in China

This blog is a supplement to my prior blog on the recent TM law and AUCL revisions.  Attached is a bilingual translation provided by the Quality Brands Protection Committee (QBPC) of the recent revisions to the Trademark Law and Anti-Unfair Competition Law (AUCL).   This blog focuses on the trade secret amendments.  And thank you, QBPC!

The trade secret amendments by themselves are promising.  The NPC, recognizing their importance, took the unusual step of making the amendments immediately effective, unlike the Trademark Law amendments which have a delayed effective date.

Perhaps the most critical change addressed the problem created by prior amendments to the AUCL which removed natural persons from the scope of covered entities.  The logic at that time appeared to be that natural persons were covered under the definition of trade secrets provided in the General Outline of the Civil Code (GOCC),  中华人民共和国民法总则 (Art. 123).  However, the inconsistency between the AUCL and the GOCC created unnecessity ambiguities that these amendments help address.

The AUCL revisions also expand the remedies for trade secret protection by imposing liability on “inciting” or “abetting” (教唆)trade secret theft.  Inciting or abetting is an inchoate offense under the Chinese Criminal Law (Art. 29), and it also appears in China’s Tort Law (Art. 9), as well as in actual or proposed IP legislation, such as a 2012 Judicial Interpretation regarding online copyright liability.   This would appear to expand the scope of liability for those who facilitate or organize a trade secret infringement.

The AUCL also “borrows” the concept of quintupled damages if bad faith infringement is found.  This is similar to the new TM law revisions that provide for quintuple damages if there is malicious 恶意infringement.  I am not certain, however, if this provision will have its desired effect of deterring infringement, at least in the short term for two reasons: statutory damages still remain the principal remedy in most IP cases, and cases where actual damages are imposed and could be multiplied are also rare. Nonetheless, this provision could become of increasing importance as Chinese courts experiment with calculating actual damages.  Moreover, quintuple damages may not only be in place to deter infringement and better compensate rightsholders but also to assist in improving the leading role of the civil IP system compared to the criminal and administrative systems in China.

The revised law also clarifies that “electronic intrusion” to obtain trade secrets is an enumerated infringing act (Art. 9), which is in line with other computer crime laws in China such as the Criminal Law  (Art. 285).  This language may be helpful in prosecuting those civil cases where a computer intrusion was involved.  Although my data on trade secret cases involving electronic intrusions in China was very limited (from 2012) it had suggested that cyber intrusions were a  small percentage of China’s civil trade secret docket, perhaps because these matters were pursued through other legal channels.   If readers have more recent data or analysis on this issue, please provide them to me in comments to this blog.

The revised AUCL also provides for a burden of proof reversal (Art. 32).  Jim Pooley described  this provision as the “most promising” among trade secret legislative developments, as it “involves shifting the burden of proof in cases where the circumstantial evidence seems strong—such as the development of a similar product in an unusually short time after access to the plaintiff’s secrets—and requiring the defendant to prove independent development.”  According to Article 32 a rights holder that has preliminarily proven that it  has taken reasonable confidentiality measures on the claimed trade secrets and has preliminary evidence reasonably demonstrating 初步证据合理表明 that its trade secrets have been infringed upon, can shift the burden of proof (BOP) to the infringer to prove that the trade secrets claimed by the right holder do not belong to those as prescribed in this law. The preliminary evidence that may be provided by the rights holder includes: “evidence proving that the alleged infringer has channels or opportunities of obtaining the trade secrets and that the information it uses is substantially the same as the trade secrets“ or “evidence proving that the trade secrets have been disclosed or used by the alleged infringer or have risks of being disclosed or used” or “there is other evidence proving that the trade secrets have been infringed upon by the alleged infringer.”

This is a notable development.   However, the history of BOP reversals in China suggests that such provisions have not always had their expected impact.  Importantly, BOP reversals in process patent cases are required to be available under Article 34 of the TRIPS Agreement and under China’s Patent Law (Art. 61). Stringent requirements, such as requiring that the infringing product is identical with the one accused of violating the manufacturing process, have made it difficult to successfully bring these cases in China.  Most importantly, the low level of publication of trade secret cases, as well as the non-publication of interim orders, may mean that the public will have little insight into how courts handle actual cases, including this BOP reversal.   Trade secrets are perhaps the most opaque area of China’s IP enforcement regime, making it also very difficult to judge when significant improvements are being made.

Another difficulty may occur in ascertaining what constitutes a willful infringement and compensating for it.  Trade secret cases necessarily involve an act that circumvents or ignores precautions taken by the rightsholder.  The fact that such an inappropriate act may have been wrong, willful or even premeditated, also does not necessarily mean that the rightsholder suffered serious losses.  A good example of this is the recent case brought by the US Department of Justice against Huawei, involving the theft of T-Mobile technology and related behavior.   A  prior civil jury verdict related to one aspect of that case found that Huawei’s acts constituted trade secret misappropriation, but declined to award damages or to find that the actions were willful and malicious.

Another challenge, also identified by Jill Ge at Clifford Chance, is that Chinese courts may yet remain intent on using patent doctrines such as ‘novelty’ to determine that a given technology is not a protectable trade secret because it is otherwise in the public domain according to patent law doctrines.  Additionally, as I have noted this approach inappropriately “provid[es] a non-infringement defense based on modifying misappropriated technology,” that is a court may determine that the accused infringer did not use the precise technology and therefore there is no trade secret theft, borrowing perhaps from patent law doctrines regarding conduct that constitutes infringement (make, use or sell).  This problem of borrowing patent law doctrines into technical trade secret cases may be magnified by the experience and background of the technologically oriented IP judges in the IP courts or their IP assessors whose experienced has principally been informed by patent litigation.

In an unrelated development which also highlights the importance of making appropriate linkages between the civil and criminal trade secret regimes, US Deputy Assistant Attorney General Adam Hickey  recently gave a speech on national security and trade secret theft (April 24, 2019).  Reflecting on recent criminal prosecutions against Chinse nationals he noted:

“[T]here are trade secret cases where we cannot prove beyond a reasonable doubt that the Chinese government itself directed the theft.  …  But although we could not prove in court that these thefts were directed by the Chinese government, they are in perfect consonance with the Chinese government’s economic policy. “

China’s problem seems to be the reverse of the United States, by its historical underemphasizing of criminal remedies.  Although the AUCL amendments incorporate many notable improvements, they also do not address weaknesses in the criminal IP regime for trade secrets, the low level of criminal trade secret cases, and the widening differences that now exist between civil and criminal cases in such areas as proof of infringement.    All countries seeking to protect trade secrets need to strike the correct social balance between civil and criminal enforcement of trade secret theft.  DOJ’s inabilities to secure convictions also demonstrate the necessity in the US of having effective civil remedies, including 337 actions.    An integrated, stand-alone trade secret law in China that incorporates civil, criminal and administrative remedies, as well as doctrines from labor law, contract law, corporate law, and other areas, could help secure a more advanced, holistic perspective on how China should address trade secret infringements.  To address cross-border trade secret infringements, foreign government judicial cooperation in facilitating discovery, taking depositions, and enforcing judgments would also help improve the bilateral environment in this area.  In addition, China might consider additional policies that make it harder to engage in “efficient” trade secret theft, where costs of being caught are less than the cost of innovating on one’s own.  Such policies might include government procurement debarment for products using stolen technologies, invalidation of patents granted on the basis of misappropriated technologies and debarment from the Chinese patent office, return of any subsidies or grants for developing the technology, and denial or revocation of recognition capital contributions of technology for tax or other purposes, amongst other possibilities.

 

Trademark Law and AUCL Revisions Passed Into Law

Jill Ge of Clifford Chance has brought to my attention that the changes proposed  to the Trademark Law and Anti-Unfair Competition Law that I reported on April 21, have now been passed at the 10th session of the Standing Committee of the 13th National People’s Congress on April 23, 2019. There does not appear to have been the usual process for public comment on these changes.  This was fast!

Here is a link to the iprdaily.cn reporting of this news, a pdf of the article as it appeared on that website, as well as a machine (google)  translation of the article.  I wanted to distribute these to readers quickly in the interest of time.  If any readers have more polished translations that I can use, please send them to me.

No doubt, these changes are intended to help address US concerns over “forced technology transfer”, “IP theft” and related issues.  A significant concern I have about these positive legislative changes is whether they will be accompanied by the requisite transparency of the implementing and enforcing agencies.  Because trade secret cases in particular often include confidential technical or business information, they are often not reported by the courts in public databases.  In recent months, there has also been a reported slowdown in the adjudication of foreign-related cases in the courts, which may also affect reporting on IP litigation by the courts.  Unless there is comprehensive reporting of this information, it will be difficult to assess the problems they had sought to address, their impact, and their compliance with expectations of the NPC, rightsholders or foreign governments.

These legislative changes are also timed with events around IP Week in China, which typically includes releases of statistical data on patent and trademark prosecution, significant cases, policy initiatives, etc.  In light of other pending legislative changes (such as the patent law, the drug administration law, etc.), the government reorganization, the new IP court, a reported “surge” in IP litigation in China in 2018, and US-China trade relations, we can expect that there will be other useful information released in the days ahead.

Update of April 25, 2019:  Here are the NPC Observer’s comments on the revised laws as well as Jim Pooley’s observations on the new AUCL amendments in the context of international developments.

Further Trade-Responsive IP Legislative Developments May Be In the Works…

“When a stranger lives with you in your land, do not mistreat him. The stranger living with you must be treated as one of your native-born. Love him as yourself, for you were strangers in Egypt.” (Leviticus, Vayikra וַיִּקְרָא) .

He Jing of the Anjie law firm brought to my attention today an article in the April 21 Legal Daily which identifies proposed amendments to the Trademark Law, Anti-Unfair Competition Law and Administrative Licensing law that appear to be responsive to United States concerns over unfair treatment of Americans, “forced technology transfer” and IP protection in the current trade war.   Here is a copy of the Legal Daily article.

While we wait for the actual draft, I will place these proposed changes in context.

In my posting on good faith in IP-related trade issues,  I identified several issues which this legislation attempts to address, including warehousing of bad faith trademark registrations without intent to use; and  the removal of “employee” as a covered party (经营者) in China’s revised trade secret law (Anti Unfair Competition Law) which facilitates bad-faith employee behavior.   Actually, I am relieved that China may now be understanding how tolerance of bad faith behavior has had a wide spread impact on foreign perceptions of China’s willingness to protect IP.  These are important new steps.

Other provisions this legislation attempts to address also appear to address long-standing US concerns, such as requiring the destruction of counterfeit goods or materials and tools used for their manufacture.  The destruction of semi-finished counterfeit goods and materials and tools was a subject of DS-362, the China IP enforcement case, particularly regarding Customs’ disposal of goods outside the channels of commerce and the role of semi-finished goods in calculating criminal thresholds.

Other concerns raised in the legislation have been raised bilaterally.  Bad faith trademark registrations had long been discussed bilaterallyProtecting confidential information submitted by foreigners in administrative licensing has also been a long-standing concern of the United States and has been the subject of several JCCT discussions.

Although these changes are positive, I am reluctant to enthusiastically endorse them in the absence of corresponding measures ensuring their implementation.  As previously noted, newly amended provisions in the new Foreign Investment Law prohibiting forced technology transfer are likely to have little impact absent effective complaint and legal challenge procedures, such as the creation of a foreign investment ombudsman and/or appeals to the newly established IP court.  The inclusion of a non-discrimination position in administrative licensing procedures is also welcome news, although it may be similarly difficult to monitor and enforce.

China’s existing trademark law shows the limitations of forcing changes in behavior through legislation.  The trademark law and civil law have had provisions requiring “good faith” behavior, yet there has been little demonstrable impact on the flood of bad faith applications, which had increased to 7.3 million applications in 2018.  Chinese-origin bad faith and fraudulent applications are also causing USPTO to revise its own rules regarding pro se trademark applications from overseas.

As other examples, providing for treble or quintuple damages in patent or trademark proceedings is only useful in those still rare proceedings where statutory damages are not being used to calculate damages.  Similarly, the burden of proof reversals in IP cases, such as trade secrets can be useful but only if they are appropriately and effectively utilized and if motion practice in the courts is observable through online publication. Increasing penalties in administrative trade secret cases sound good on paper, but foreigners little use administrative trade secret enforcement proceedings.  Such proceedings have traditionally been an IP enforcement backwater.  According to the 2011 SAIC Yearbook (p. 855), there were only 57 reported administrative trade secret cases in that year, with an average 77,543 RMB average value and only 1,430,000 RMB (less than five thousand dollars) in fines.  The greatest focus of these cases were individuals, as 26 cases involved natural persons.  The data suggests to me that these cases largely involve employer/employee disputes over trade secret misappropriation, which should be resolvable in the courts.  Perhaps even more striking was the 35% decline in criminal trade secret prosecutions in 2017 to only 26 cases, which was also accompanied by a significant decline in criminal IP cases generally since 2012.   To address tolerance of trade secret theft (and IP infringement) by Chinese society, the most effective approach will be a commitment to criminal trade secret enforcement and an even greater commitment to civil remedies.  The proposed legislation only addresses part of this need.

Substantive changes can only be as effective as they can be monitored.  With respect to changes in substantive trademark and trade secret law, it would be especially useful if the full court dockets and more final cases were published.  If the data cannot be observed, it cannot be monitored for compliance.

While these legislative developments are underway, there is also word that the State Council continues to solicit opinions from the foreign business community on how IP issues are handled on their behalf.  This may also lead to welcome news.

There have also been two separate, non-IPR developments, which may have some bearing on the negotiations over the resolution of the trade war.  According to Bloomberg, the European Union is said to have won a dispute brought by China at the WTO seeking recognition of China’s market economy status (“MES”).    A similar case is pending involving the United States.  The lessons from these cases for IP should be that both the US and the EU should encourage more comprehensive and systemic treatment by China of IP as a private right if China is ever to achieve full MES.

In another development, a WTO panel ruled in favor of Russia in a dispute brought by Ukraine that the “national security” exception afforded by the WTO was not completely self-judging. The case could be read as a warning that the United States does not have unbridled discretion in deciding what constitutes a threat to its national security.  Taken together both cases affirm the WTO’s desire to remain relevant to changing circumstances in China and a changed perspective on international trade of the United States.

I wish everyone a happy Passover, Easter or spring holiday.

Buddha

 

Upcoming Program on Fashion and IP Law

I will be speaking on February 20, 2019 at Berkeley Law at 12:50 in a Fashion and IP discussion and screening with my former Fordham colleague Prof. Susan Scafidi. We will be screening the recent film Fashion and IP.

The program is free and open to the public.

Fashion and IP Poster - Feb. 20th (1)

 

Here’s a report from last year  of the Council of Fashion Designers of America on the problem of bad faith registrations of trademarks in China which discusses the pervasiveness of the problem, including the costs imposed on small and medium enterprise members, as well as the impact of serial squatters.

This report further underscores the importance of addressing tolerance of bad faith activities in China’s IP regime in current bilateral trade discussions as well as the need to recognize the significant improvements that are being made that have begun to address them.  Amongst the many significant cases addressing bad faith registrations in the clothing sector was the Michael Jordan case in 2016, which was based in part on naming rights and was reported here.  Another significant case from last year involving protection of trademarks and design elements that has significance for the fashion industry was Bayer v. Li Qing, which involved pirating of a Bayer design for its Coppertone lotions for pirate registrations, and Bayer’s assertions of a copyright interest in those designs to defeat the pirate’s assertions of trademark infringement in a declaratory judgment action involving the anti-unfair competition law, trademark and copyright laws.  The case was also notable as the court did not suspend its decisions pending the outcome of trademark invalidity decisions.

A Statistical Snapshot of IP Prosecution, Admin. Enforcement and Monetization for 2018

As reported by zhichanli, CNIPA (the new agency formed from SIPO, SAIC and AQSIQ’s – IP authorities within the State Administration for Market Regulation) held a news conference on January 10 to report on statistical developments for 2018.  Here are some of the highlights:

Explosive Patent Growth Continues: 1,542,5000 invention patent applications were received by CNIPA, an increase from 2017 when it was 1,381,594.  432,000 patents were granted.  Of these 346,000 were domestic patent applications (2017: 326,970).  This leaves 86,000 foreign applications for 2018 (2017: 93,174).  There was therefore an increase of  5.8% to 19,030 in Chinese domestic patent grants in 2018, while foreign grants appear to have dropped by 7.7% to 7,174.  Any drop in a growing economy and IP system can be indicative of a problem of some type.

In total 93.3% of the domestic invention patents were service inventions, which is one indicator of possibly increasing quality.    Huawei remained the lead domestic filer with 3,369 invention patent applications.

CNIPA had a busy year examining 808,000 invention patents, 1,874,000 utility model patents (an increase from 1,687,593), and 667,000 design patents (an increase from 420,144).  The PRB heard 38,000 cases, resolved 28,000 and invalidated 5,000 patents.

Comparative data on 2017 is drawn from this report.

Trademarks Too, on Overdrive: CNIPA received 7,337,1000 trademark applications (2017: 5,748,00) and registered 5,000,7000.  Of these, 4,797,000 were domestic applicants.  In aggregate, there were 18,049,000 trademarks registered in China (2017: 14,920,000).  The good news is that the rapid growth in TM applications is slowing.  In 2017, there had been a year-on-year increase of 55.7% in trademark applications. In 2018, the increase was “only” 31.8%.

Patent Administrative Enforcement Continues to Be the Focus:  CNIPA reported 77,000 administrative patent cases, with an increase of 15.9% over the previous year.  35,000 cases involved patents disputes, of which 34,000 involved infringement (an increase of 22.8%).  43,000 cases involved counterfeit patents, with an increase of 10.9%.  There were also 31,000 cases involving illegal trademark activities.  This was an increase from approximately 30,000 the year before, which was itself a decrease of 5.1% from the prior year.  The apparent administrative enforcement realignment to patents thus continues, despite recent moves to improve the civil patent system, including the establishment of a specialized IP court at the SPC level, and the relatively high historic utilization of the administrative trademark system by foreigners.

Another odd development: 2018 marked the launch of the first administrative case involving infringement of a registered semiconductor layout design.

TM’s Remain Number 1 in Geographical Indications: There were 67 sui generis GI registrations approved, presumably under the former AQSIQ system, and 961 GI trademarks registered.   The trademark-based GI system thus appears to be occupying a dominant role.

Cross-border Trade In IP – is it Growing:  CNIPA also reported that “usage fees” for IP rights in cross border trade increased to 35 billion USD.  Comparative data to prior years and breakout data with individual countries would be especially useful, in order to do year-on-year comparisons and to also compare with US data on licensing revenue.  As reported in an earlier blog, according to official Chinese statistics for 2013, technology import contracts into China were reported at 41 billion dollars, with patent licensing contracts constituting 15.4% of that total.  I don’t have comprehensive data to make even preliminary comparisons at this time – and such data would be highly useful.

Summary: Altogether, the report shows a rapidly growing huge IP system, with active government involvement, encouragement and planning.  The report also suggests that there may be a diminishing foreign role, relative and/or absolute, in certain areas.  Finally, this report is the first hint of how the combined CNIPA may report on its joint activities in patents, trademarks, semiconductor layout designs, GI’s and administrative enforcement.  Additional data is usually released around IP Week of each year (April 26).

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