Foreign Investment Law Implementing Regs Open For Public Comment: Administrative and Punitive Enforcement Ascends Again

The Ministry of Justice had published a draft of the Foreign Investment Law Implementing Regulations for public comment.  Chinalawtranslate has prepared an English translation of the proposed regulations and of the law itself.   The due date for submitting comments is December 1.  The US-China Business Council has graciously already made its comments available in English and Chinese to the public.  The Foreign Investment Law was one of several laws enacted earlier in 2019 that appear to be responsive to US concerns and pressure.

The primary provisions addressing IP are Articles 24 and 25, which state:

Article 24: The state is to establish a punitive compensation system for violations of intellectual property rights, promote the establishment of rapid collaborative protection mechanisms for intellectual property rights, complete diversified dispute resolution mechanisms for intellectual property rights disputes and mechanisms for assistance in protecting intellectual property rights, to increase the force of protections for foreign investors’ and foreign-invested enterprises’ intellectual property rights.

The intellectual property rights of foreign investors and foreign-invested enterprises shall be equally protected in the drafting of standards in accordance with law, and where foreign investors’ or foreign-invested enterprises’ patents are involved, it shall be handled in accordance with the relevant management provisions of state standards involving patents.

Article 25: Administrative organs and their staffs must not use the performance of administrative management duties such as handling registration, approvals or filings for investment projects, and administrative permits, as well as implementing oversight inspections, administrative punishments, or administrative compulsion, to compel or covertly compel foreign investors or foreign-invested enterprises to transfer technology.

(chinalawtranslate translation).

The language in the first paragraph of Article 24 appears to track trade war pressures, including demands for punitive compensation.   As I have argued repeatedly, a better focus might be on deterrent civil damages, and/or the basic structure set forth in the WTO of having adequate and effective civil remedies with criminal remedies as an adjunct for willful, commercial-scale harm.  In this scheme, there is little place for administrative remedies, as was noted in DS362 (the IP enforcement case at the WTO).  The WTO panel, in that case, noted that “neither party [the US nor China] to the dispute argues that administrative enforcement may fulfil the obligations on criminal procedures and remedies set out in Article 61 of the TRIPS Agreement. Therefore, the Panel does not consider this issue.”  There have also been numerous academic studies on the challenges of creating a sui generis administrative IP enforcement system in China.  The language in Article 24 is also highly repetitive of the November 21, 2018 special Memorandum of Understanding/campaign mechanisms involving 38 government agencies to address six types of faithless IP conduct, about which I previously blogged.

What is notably absent from these commitments is an obligation to increase transparency, which is especially concerning due to an apparent slowdown in the publication of foreign IP-related court cases since the trade war began.   I will be blogging more about this soon, but here is what the decline in published US cases looks like based on IPHouse data, with a flatlining since January 1, 2018:

iphouse

See also my slides from the recent Berkeley transnational IP litigation conference available here.

The language regarding standards in the second paragraph repeats long-standing concerns about foreigners being excluded from standards-setting processes, as was addressed in the 2015 JCCT.  It does not set forth commitments about fairness or equal treatment which have been raised before in industrial policy drafting (as was addressed in the 26th JCCT on semiconductor policy), antitrust investigations, patent prosecution or litigation (for which there is a wealth of empirical data).

Article 25 also appears trade responsive.  It would be useful at this time to determine the current magnitude of forced technology transfer in foreign direct investment, and to determine how it subsists and whether it has measurably decreased since the trade war began, including whether legitimate licensing transactions have stepped in to provide increased revenue for technology licensors as a result of these and other reforms, including revision of the Administration of Technology Import/Export Regulations.

 

 

 

How to Monitor an IP Trade Agreement with China

The following observations are drawn from a recent talk I gave at the US-China Business Council, which was called “IP in the Trade War: Strategies for a New Normal.”  A video recap of part of those discussions is available here.  In that presentation, I talked extensively about available data sources on China’s IP environment and how they can be leveraged to shape both government trade strategies and corporate strategies.

Data-driven approaches that are now available have considerable potential value to US and Chinese negotiators thinking over how to monitor and enforce an agreement to settle the US-China trade war and help avoid the problems of continuous government oversight.  One alternative to traditional government monitoring is to empower the companies and individuals that are affected by IP and tech policies to conduct their own “bottom-up” monitoring and evaluation.  This has the added benefit of reorienting trade negotiations from governmental control to a commercial, rights-owner focus that should be its principal orientation for protection of a private right such as IP.  In addition, a bottom-up approach helps create a greater global community interested in compliance, which could also include rights holders in third countries.

What are the key elements in a trade agreement to empower rights holders to monitor an agreement? Here are four critical elements to the trade commitment:

  • The first trade commitment is that the requested conduct of the foreign state must be observable. There must be a degree of transparency associated with the conduct that permits a third party to provide reasonable analyses of the conduct, including any deficiencies in the data being disclosed.  A good example of observable data would be the publication of court cases about patent protection in a given country.
  • The second trade commitment is that the observable information must be accessible, usually by online publication or database compilation with available tools to search for data relevant to the trade commitment. A comprehensive public database of patent cases would an accessible information source, with available search tools for issues of concern.
  • The third trade commitment is that there are clear standards to which the foreign country is committed. A hypothetical example of such a commitment might be that “China agrees not to favor domestic companies litigating patent disputes in technologies that are identified in Made in China 2025, including patent classifications X, Y, and Z”.  The parties might then further agree on a statistically standard to measure compliance with the standard.
  • Finally, the trade agreement itself must have an enforcement vehicle for rights holders to raise violations of the applicable standard based on the application of the standard to the observable and accessible data. Example of an enforcement vehicle would be an investor-state dispute settlement mechanism where affected companies might bring suits directly against the foreign country before a neutral body. Alternatively, a US government IPR case referral mechanism process might be re-established to bring specific cases to the attention of Chinese authorities.  Such a process existed in the years after China joined the WTO.   This would now be strengthened by the additional weapons of withdrawal of tariff concessions or other sanctions.    A less direct mechanism might occur when companies provide the information to a US government agency, such as USTR, such as through the 301 process or a WTO dispute.

In order to ensure that China’s civil enforcement is observable and accessible, China would need to publish all of its IP cases, including cases involving provisional measures, case filings and settlements as well as on enforcement of judgments.  Standards setting should not be too difficult either.  There are numerous areas where negotiators could establish standards, many of which have been identified in this blog including: granting of preliminary injunctions against US companies, patent litigation involving semiconductors and pharmaceuticals, challenges in targeted technology patent grants (pharmaceuticals, semiconductors and strategic emerging industries, difficulties in winning trade secret litigations, retaliation against foreign companies asserting their rights in China, and challenges in bad faith trademark litigation.

As an example of such an approach, China might agree to establish a patent linkage regime requiring that pharmaceutical regulatory approvals are not granted to products that would infringe an IP holders patent rights and to facilitate generic drug introduction into the market.  In order to make the data observable and accessible,  China would adopt an “orange book” to listing relevant patents for approved pharmaceuticals.  Relevant legal databases should also be made available to determine if China’s drug regulators are approving infringing generic drugs and if patent infringement cases are brought to appropriately permit or prohibit their approval.  US rights holders could bring violations to the attention of Chinese or US trade authorities, to Chinese regulatory agencies, or through the 301 process or a case referral mechanism.   Both new and prior commitments could be written to facilitate real-time monitoring.

Due to the difficulties in monitoring China’s complex IP environment, bilateral trade policy should adjust to the era of big data and provide timely and responsive avenues for companies to note compliance or violations of trade agreements.

 

 

 

 

Some Good and Bad News in Recent Reports on China’s IP Environment

“The good news is China interested in IP, and the bad news is that China is interested in IP.” This proposition is proved by some of the recent reports on China’s IP environment  particularly the 2016 China Business Environment Member Survey by  the US-China Business Council, European Business in China Position Paper 2016/2017  prepared by the European Union Chamber of Commerce in China and the Global Innovation Index 2016, (GII) which was prepared by Cornell University, INSEAD and WIPO.   

The Good News

As for the goods news: for US China Business Council Members, intellectual property enforcement has slipped overall to the eight-ranked slot for USCBC members doing business in China. The top challenge is competition with Chinese companies in China.  IP enforcement has, in fact, slid from the number two slot (2014), the number four slot (2015) to number eight.  Still, IP concerns remain highly important for the tech sector, which lists IP in the number four slot, but also includes many “quasi-IP” issues in its top 10: innovation policies (number 2), government procurement ( 5 ), antitrust (7 ), standards (8) and cybersecurity (9).

The GII also singles out China’s improvements in IP.  For the first time this year, China became a “top 25” innovative economy in the GII. It is the first middle income country to do so.  China’s rise is attributable to a number of factors, several of them IP related: the country has a particularly high number of R&D-intensive firms among the top  global corporate R&D spenders.  China has had top scores in indicators such as patent applications by origin, utility model patents, high-tech exports, global R&D companies and  research talent in business enterprise (see chart, below).  While some of these indicators are of questionable value (such as numbers of utility model patents), the GII report recognizes many of the steps China has taken towards improving its innovation and IP environment. 

The Bad News

There are several important issues that the EU Chamber suggests China needs to address: procedural reform in the courts and improvements in administrative enforcement; addressing the problems of counterfeiting for OEM production in China and what constitutes infringement domestically; improving trade secret protections when workers leave an employee;  insuring the availability of provisional measures addressing higher barriers to obtaining High and new Technology Entity Status through removal of a global exclusive licensing approval option; and greater coordination and clarification of standards in IP-related antitrust investigations (amongst others).

One area of bad news shared by both the Chamber and the GII:  The GII scored intellectual property payments according to a formula as a percentage of total trade.  China came out below its overall rank at 72nd place, while it ranked number 1 in high tech exports (p. 199).  While the GII did not draw any specific correlation between the two, this is further support to me that China is a “remarkably underlicensed economy.”   

One reason for this disproportionality between licensing payments and high tech exports is the discriminatory provisions in China’s Technology Import/Export Regulations.  These regulations require that a foreigner indemnify a Chinese licensee against third party infringements and that the licensee own all improvements to the technology, while a Chinese domestic licensor can freely negotiate other terms.  As the EU Chamber notes, these regulations they “not only interfere with the needs of Chinese and foreign companies for effective technology trade mechanisms but also contradict the provisions of the Contract Law on technology transfer contract.” 

These concerns are not only directed to foreigners extracting IP ‘rents’ from China.  The ability to negotiate contractual terms is critical to developing flexible international networks for innovation through negotiated sharing of risks and benefits.  The GII recognizes the increasing importance of such international collaboration to China and  that “the Chinese innovation system is now densely connected to sources of expertise everywhere.” (p. 93).  The report also notes that Chinese companies had “the 7th largest foreign footprint of all countries with 178 R&D centers set up or acquired outside China by year end 2015.” (p. 125).    These unbalanced provisions can also affect bilateral science and technology cooperation by requiring that a Chinese party owns any improvements to technology that is licensed to it, or is indemnified against infringements by reason of use of this technology.  A recent report by the Government Accountability Office regarding clean energy cooperation between the US and China noted that “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 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….” ( p. 2).

It is time for China to create a more level playing field in technological collaboration for foreigners licensing to China by removing these discriminatory provisions that treat foreign and domestic licensors differently. 

graphchinainnovationSource: GII.