Essentially Derived Varieties and The Role of Leading Cases in Chinese Plant Variety Protection

huntingtongardens
Editor’s Note: Plant Variety Protection (PVP) is a little-discussed topic in China’s IP regime. Indeed, this blog has only reported on PVP-specific issues
once before, and once in the context of the China-Swiss Free Trade Agreement (FTA). This guest blog post explores the relationship among plant variety protection, China’s treaty obligations, and determination of the scope of infringement based on essentially derived varieties (EDVs).   The author, Liz Freeman Rosenzweig, is a J.D. candidate at Berkeley Law. She obtained her Ph.D. in plant biology from Stanford University.

As with other intellectual property (IP) rights, China receives more applications for intellectual property protection of new plant varieties (PVP) than any other country. China grants these rights pursuant to its “Regulations on the Protection of New Varieties of Plants” (“Regulations”) (2014) (中华人民共和国植物新品种保护条例). However, China’s PVP legislative regime lags behind many other countries, largely because of China’s failure to date to accede to the most recent international treaty for protection of plant varieties, the 1991 Act of the International Convention for the Protection of New Varieties of Plants (UPOV ’91). Conversely, Chinese jurisprudence on the topic is significantly more developed than that in, for example, the United States. 

China is now considering amending its Regulations to include the concept of essentially derived varieties (EDVs) (实质性派生品种) and molecular markers (分子检测). Broadly speaking, these proposed amendments are also examples of two broader aspects of Chinese IP legal development: (1) China enacting legislation in anticipation or in excess of current international demands, and (2) Chinese legislation riding momentum generated in advance by judicial decision making. If China adopts the proposed amendments to its Regulations, the level of plant IP protection available in China could become among the strongest in the world. Moreover, the legislative changes would be based on the concrete experience and guidance afforded by previous guiding cases from the Chinese Supreme People’s Court (SPC), which suggest how the new provisions might concretely be applied.

 Plant Variety Protection and UPOV

The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) requires WTO member economies, such as China, to provide IP protection for new plant varieties. Members may do so through a patent system, a sui generis system, or both. The United States takes the combined approach, offering plant IP via utility patents and plant patents under U.S. Code Title 35, and also via Plant Variety Protection (PVP) certificates under the Plant Variety Protection Act (PVPA). China does not provide patents for plants. Instead, plant protection in China is under an entirely sui generis approach.

Internationally, the most commonly adopted sui generis mechanism is the system of plant breeders’ rights (PBRs) promulgated by the International Union for the Protection of New Varieties of Plants (UPOV). The UPOV Convention was first finalized in 1961 and was revised in 1972, 1978, and 1991. As of February, 2020, 76 countries are UPOV members, 59 of which are members of the ’91 Act.

One key change between the ’78 and ’91 Acts is the extension of the scope of the breeder’s right to include EDVs. Per UPOV ’91, a new variety is considered “essentially derived” from an initial variety when it is both “clearly distinguishable from” and “predominantly derived from the initial variety, . . . while retaining the expression of the essential characteristics . . . of the initial variety.” A breeder may obtain a PBR for an EDV “in the same way as for any variety,” but if they wish to commercialize the EDV, they must obtain authorization from the initial variety’s titleholder. This is similar to the manner in which practicing a patent that improves upon a previously valid patent may require permission from the dominant patent’s owner. In contrast, under the ’78 scheme, rights to the initial variety are more limited, and no authorization from the initial variety’s titleholder is required to commercialize a variety that the ’91 Act would consider an EDV.

But defining precisely what constitutes an EDV is notoriously difficult. The ’91 Act provides examples of how an EDV may be created, such as by finding or creating a mutation in an initial variety. However, the list is not exhaustive. Furthermore, the text of the Act seems to contradict itself, leaving significant ambiguity as to the required level of physical resemblance between an EDV and its initial variety. That is, Art. 14(5)(b)(i) of the ’91 Act states that EDVs must “retain[] the expression of the essential characteristics that result from the genotype or combination of genotypes of the initial variety.” But then subsection (b)(iii) excepts “differences which result from the act of derivation” from the required level of conformity. It is not clear precisely how those two instructions are meant to be integrated. For example, a slide deck from UPOV itself presents a hypothetical derived variety that is closely genetically related to its initial variety, but in which “more than one or a few characteristics were affected,” and labels it, ambiguously, “EDV yes/no??” Thus, the ’91 Act does not provide a clear boundary line for when a variety is or is not essentially derived.

Many UPOV member countries prefer the definition of EDV to be broad in order to leave the determination of whether a variety is an EDV up to the rights holders. Conversely, UPOV’s guidance, though nonbinding, is narrower. UPOV is, however, currently revising its guidance on the topic to address these current ambiguities.

One method for defining an EDV is through genetic and biochemical techniques such as molecular markers (“markers”). UPOV does not require the use of markers, but it does provide guidance on their use. That guidance cautions against overreliance on molecular techniques, noting that their usefulness is subject to significant variability, and expressing concern that markers could be abused to make closely-related varieties seem more different than they actually are.

The US ratified UPOV ’91 in 1999. But China has only acceded to ’78. According to Dan Prud’homme and Taolue Zhang, one reason that China has not acceded to the ’91 Act is UPOV’s “lack of clarity in the definition of [EDVs] . . . , which makes it difficult to institutionalize in China.” However, China’s Ministry of Agriculture and Rural Affairs (MoARA) and State Administration of Forestry and Grasslands (SAFG), which govern the granting of plant variety rights in China, recently “expressed an intention to formulate a long-term plan to gradually satisfy key requirements of UPOV ’91,” including “adopting UPOV ’78 plus-style provisions/piloting important aspects of UPOV ’91 (e.g., instituting EDV for certain types of plant varieties) in order to see how the system works in practice.” China’s recently-released draft amendments to its Regulations do just that. Moreover, China’s Supreme People’s Court has also announced on March 19, 2020, its own plans to draft a new Judicial Interpretation regarding plant variety infringement determinations which will likely implement China’s emerging practices in this area.

Comparing Plant Variety Protection Definitions in China and the U.S.

China’s Regulations were promulgated and implemented by the State Council in 1997, two years before China acceded to UPOV ’78. China then revised its Regulations in 2013 and 2014. PBRs under the Regulations are issued in parallel by SAFG (for vines, forest trees, fruit trees, and ornamentals, with rights lasting 20 years) and MoARA (for all other plants, with rights lasting 15 years). China has faced both internal and external pressure to update the Regulations: National entities have pushed for a clearer and more streamlined application process, and many countries—members of the European Union in particular—have been pressuring China to adopt UPOV ’91-style provisions such as by providing for EDVs.

To that end, China began the process of revising its Regulations in 2016—a year before ChemChina, a state-owned entity, purchased Syngenta, a major beneficiary and user of the UPOV system, with hundreds of plant registrations internationally. The proposed draft amendments to the Regulations were released for comment in February 2019. These proposed amendments would essentially move China towards UPOV ’91. This is not an unusual move for China; the country has often enacted legislation in anticipation of meeting—or even in excess of—international requirements. For example, China provided copyright protection for the “right of making available” (right of communication to the public) in the 2002 amendments to China’s Copyright Law, well in advance of China acceding to the WIPO Internet Treaties in 2007. As another example, China also recently amended its Anti-Unfair Competition Law to be the most progressive trade secret law (at least on paper) by reversing the burden of proof, which is in excess of international requirements.

These draft amendments to the plant IP Regulations make several important changes. Crucially among those, the proposed amendments introduce the concepts of EDVs and molecular markers into the Regulations for the first time.

The proposed amendments define EDV as “a variety that is distinct from the original variety, but retains the basic characteristics or characteristics of the original variety, except for the differences caused by the derivation.” This proposed definition of EDV appears to be broader than the UPOV definition. Significantly, it also lacks contradictory language, discussed above, embedded in the UPOV definition and copied nearly verbatim into the U.S. definition.

The US recently also overhauled its PVP system, extending PVP eligibility to asexually propagated plants for the first time. The PVPA has included EDVs since 1994, the definition of which was taken almost verbatim from UPOV ’91—meaning it includes the apparently contradictory language that China’s draft avoids. Also unlike China’s draft amendments, the PVPA makes no mention of molecular markers or other genetic techniques. But the Plant Variety Protection Office, which oversees the PVPA, is moving towards incorporating such methods in the future.

China Leads the World in PBRs by Volume

One reason that China may wish to have an advanced PBR regime could be the growth of its own domestic research capacity in this important area. In 2018, China was “the top destination for plant variety applications,” receiving over a quarter of filings worldwide. Not only did China receive the most applications, but Chinese nationals also filed the most applications worldwide. A record high of >20,000 plant variety applications were filed worldwide that year, driven primarily by China. Applications in China grew by an astounding 29% in 2018, driven almost exclusively by domestic filings (this mirrors the Chinese patent system, which is also primarily used by domestic applicants). In contrast, applications in the US and EU grew by only ~3-4% in 2018, and the worldwide growth rate was ~9%. That being said, this surge is fairly recent, and the US and EU still outrank China in terms of number of active titles. But note that this source includes both PVPs and plant patents in the U.S. tallies. It is unclear why the US numbers do not include utility patents on plants (though it may be due to difficulty in data collection; unlike PVPs and plant patents, not all utility patents are directed to plants), but the US total would be even higher if it did. Considering just PVP rights, in 2018 there were 7,521 active titles in the US.

If China adopts its proposed amendments, then filings in China may also increase due to increased foreign applications, as well as stimulating foreign investment in China in this sector. Thus, activity in the Chinese plant variety protection offices will likely continue to dwarf that in the US. 

More Thorough Plant Variety Protection Guidance from Chinese Litigation than U.S. Litigation

There is significantly more PBR litigation in China than in the US. As of November, 2019, there have been at least 338 Chinese cases referencing the Regulations (华人民共和国植物新品种保护条例). At least 18 of these cases discuss molecular markers (分子检测). Although China is a civil law system where cases do not create binding precedent, for the past decade the Chinese Supreme People’s Court (SPC) has issued “guiding cases” that are “intended to be de facto binding decisions” to guide lower courts’ decisions in similar cases. The SPC has issued several guiding cases on PBRs. Stanford University Law School has also initiated a “China Guiding Cases Project” which provides a platform for research on these judicial developments.

Two guiding cases have discussed molecular markers specifically. These cases, discussed below, reveal that the SPC embraces the use of molecular markers—but is wary of overreliance thereon, and is careful to balance genetic results with observations from field trials.

In Guiding Case No. 2633, the SPC denied retrial after a lower court found non-infringement when there were no genetic differences between the varieties at issue, but there were phenotypic differences during field trials. In reaching this decision, the SPC noted that the genetic testing only assessed 40 locations in the genome, which does “not necessarily correspond to the traits” observed in phenotypic field tests.

Guiding Case No. 92 was essentially the reverse situation: the SPC found infringement when markers revealed a single genetic difference but field tests showed no phenotypic differences. In doing so, the SPC formulated a technical balancing test for reconciling field and genetic tests that tempers over-reliance on molecular markers.

By late 2019 there were no reported Chinese cases that specifically referenced EDVs. But the molecular marker cases likely hint at how courts will address them. Intriguingly, the facts of Guiding Case No. 92 seem remarkably similar to an EDV situation, in that the accused variety retained the characteristics of the first variety while displaying minor genetic differences. If Chinese PBR agencies or the Courts formally adopt EDVs, they may determine essential derivation with a test much like the one set out in Guiding Case No. 92, as the Chinese concept of EDV would likely cover most types of genetic changes.

Neither of those two guiding cases have been cited by name, however, in published subsequent cases according to a March 23, 2020 search on Caipanwenshu 裁判文书 (the official SPC database). This is not unusual, as most guiding cases are not widely cited by lower courts, who, along with practicing lawyers, still remain unfamiliar with citing and distinguishing cases in rendering decisions. Rather than being “precedential,” guiding cases such as these may also be issued primarily to illustrate examples of good reasoning for judges, or to provide political coverage for consistent decision making.

Ironically, although China is a civil law country, its case law fills the statutory gaps for plant variety protection far more comprehensively that in the U.S. In contrast to the robust Chinese case law, there have been only 19 reported (and 28 unreported) U.S. cases referencing 7 USCS § 2541 (PVP infringement) as of March, 2020. These include 4 Supreme Court cases and 5 at the Federal Circuit. The Supreme Court cases either reference the PVPA only in passing or are outdated.

A handful of U.S. cases reference genetic testing, but do not address the concept in much detail (See Ark. Seed Co., Inc. v. Williams, No. 10-1231, 2011 U.S. Dist. LEXIS 100224, at *3 (C.D. Ill. Sep. 6, 2011)). Despite the presence of EDVs in the PVPA, there has not been reported EDV litigation in the U.S. as of March, 2020. The closest case was the denial of a motion to stay litigation pending the PVPO’s assessment of an application for an allegedly infringing variety of lettuce, but the court did not decide whether the variety was an EDV, and the case has no subsequent appellate history. (See Genecorp, Inc. v. Progeny Advanced Genetics, Inc., No. C 97-20706 RMW, 1998 U.S. Dist. LEXIS 21910, at *7 (N.D. Cal. Apr. 9, 1998)).

Conclusion

If China adopts its current proposed amendments, it would offer protection to plant breeders in line with “or even above” UPOV ’91. Given that Chinese PBRs represent the lion’s share of all such rights worldwide, this would be a significant change. It seems likely that legislators will approve a version of these Regulations in the next few years, though it is unclear when. Notably, the “Opinions on Strengthening the Protection of Intellectual Property Rights” recently released by the Chinese Communist Party and State Council (November 27, 2019), also explicitly calls for encouraging Chinese innovation by improving the protection, examination, and international sharing of examination results for new plant varieties. If China does adopt the proposed amendments, China would likely become a de facto member of at least part of UPOV ’91, as Chinese officials reportedly “want legislation in line with the 1991 UPOV convention but do not want to actually accede to the 1991 UPOV convention.” This pattern of gradual and partial adherence to international treaties has also manifested itself elsewhere in China’s legal regime, including in the gradual piloting of civil or economic legal reforms before wider introduction into the Chinese legal system or economy.

The nuanced treatment of molecular markers in the proposed amendments and in Chinese guiding cases is ahead of that in the US, and the US may very well follow China’s lead in adopting a more systematic use of molecular markers in the application process. The proposed amendments’ concept of EDV strengthens the incentive for innovation by expanding the scope of the breeder’s right.

Moreover, the definition of EDV put forth in the proposed amendments is arguably broader and clearer than that under UPOV ‘91 and in the US, which may give holders of Chinese rights a competitive advantage and increase the incentive to protect new plant varieties in China. But the extent of foreign investment these amendments would engender is unclear, given that China requires that Chinese parties be controlling shareholders for “selection and cultivation of new varieties of crops.” 

ACKNOWLEDGEMENTS: Many thanks to Mark Cohen, Elaine Wu, David Kappos, Edgar Krieger, Cynthia Mathiesen, Alanna Rennie, Xiaofan Xu, and Alexandra Draggeim for valuable discussion, comments, feedback, editorial help, and research and translation assistance.  Photos (c) by Mark Cohen of Huntington Gardens and US Plant Patent.

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Daren Tang of Singapore Secures WIPO Nomination

Congratulations to Mr. Daren Tang (邓鸿森) (48), the Chief Executive of the IP Ofice of Singapore for his successful nomination by the Coordination Committee of WIPO as WIPO’s next Director General.

Hopefully, Mr. Tang will bring the much-lauded management expertise and accountability of Singaporean bureaucracy to WIPO, which has had so many years of controversy, in addition to the neutrality and balance that characterizes much of Singaporean foreign policy.  Singapore has also had active collaborative projects with China.  Mr. Tang also serves as the first Singaporean to lead a UN agency.

Mr. Tang won in the second round of voting, 55-28, over China’s nominee, Wang Binying, who also had extensive experience in IP and at WIPO and was strongly supported by China, but was opposed by the United States. Here is Mr. Tang’s note of thanks on the IPOS Linkedin page.

Mr. Tang speaks English and Chinese.

前进吧,新加坡! Majulah Singapura! Forward Singapore!

Wang Binying and the Opportunity within the WIPO Crisis

The vote for WIPO Director General will be made in early March.  The Chinese candidate, Madame Wang Binying, is known to many in the foreign IP community in China, IP diplomats, and others.  She is currently a Deputy Director General at WIPO and is consider a front-runner for the position. Ms. Wang’s candidacy has elicited considerable opposition from many in the United States,  much of it ill-informed, but some of it raising legitimate concerns.  The Chinese media has responded in kind and accused the US of “bullying.”

Over a month ago, a bipartisan group of four U.S. senators had written to President Trump to request that the United States oppose Ms. Wang’s candidacy.  Wang’s name was put forth by China’s Ministry of Foreign Affairs in November.  These senators have noted that “ Given China’s persistent violations of intellectual property protections, including through trade secret theft, corporate espionage, and forced transfer of technology, the United States and its allies must stand firmly against such a move.”

Other commentators have joined in the criticism, including Daniel Runde at the Center for Strategic and International Studies, who recently co-authored an article, “Why the United States Should Care about the WIPO Election,” and  James Pooley, a former U.S. Deputy Director General at WIPO, is quoted in Foreign Policy as asking with regard to Ms. Wang, “[w]hy would you put the fox in charge of the [IP] hen house?”   I was also misquoted in the South China Morning Post as opposing Wang Binying on similar grounds.  For me, Ms. Wang’s candidacy is clouded – but not precluded – by the long shadow cast by Francis Gurry on WIPO’s relationship with China, not by any necessary risk of “IP theft”, which is a term I abjure.  I will discuss that issue later in this blog.

One concern is easily dismissed: Ms. Wang is eminently technically qualified to lead WIPO, as even some of her harshest critics note.  DDG Wang has excellent credentials. She has an LLM from the institution, where I teach (UC Berkeley, (1985-86), and  also obtained a certificate in commercial law from my own alma mater, Columbia Law School.  She also worked at the former State Administration for Industry and Commerce.  She has had a long-term tenure in senior positions at WIPO.  She even spent some time training at USPTO early in her career, upon the recommendation of a U.S. Foreign Commercial Service Officer, Clark T. Randt, III, who later served as U.S. Ambassador to China and who has known her for years.  In fact, my introduction to Ms. Wang occurred through Ambassador Randt when I served as IP Attaché to the U.S. Embassy in Beijing (2004-2008).

Another matter that should be cleared up is that she was somehow appointed by the Communist Party, as suggested by one journal.  The recommendation for Ms. Wang comes, appropriately, from China’s Ministry of Foreign Affairs.  It is  true, however, as the Washington Post has reported, that Ms. Wang’s appointment is part of a larger effort by China to assume leadership roles in a number of UN organizations and that most of these officials are likely Party members.  Moreover, U.S. diplomacy in this area is also hampered, as the Post has noted, “by the administration’s public contempt for the multilateralism and its damaged relationships with allies.”

As in every critique of things Chinese, there are also some ardent U.S. defenders.  Some U.S. patent lawyers have suggested to me that the U.S. doesn’t have a basis to criticize Wang or China because China has been strengthening  China’s patent system at the same time as the U.S. has been weakening its own IP regime.  While I am supportive of this observation, I believe it is irrelevant to Ms. Wang’s candidacy.  Different countries necessarily have different strengths and weaknesses in their IP regimes.  The WIPO position does not mandate international conformity with the nationality of its DG, even if that might be welcomed in some circumstances.  More importantly,  US patent practitioners should instead be primarily concerned whether WIPO will be handling international (PCT) patent applications in an expeditious and professional manner.  A second concern may be whether WIPO will embrace intellectual property norms consistent with U.S. policy in its role as the administrator of 26 separate treaties on intellectual property and as an organizer of conferences and training programs on intellectual property issues.

In contrast to the above, the serious  opposition to Ms. Wang generally breaks down into three related areas: (a)  Ms. Wang is a China-promoted official at a time of heightened U.S. concern over China’s support for “IP Theft”; (b) a China DG may be inclined to mishandle PCT applications or mismanage WIPO utilizing the extensive discretion afforded to her; and (c) WIPO’s policies in China are in need of  a change.  I discuss these below:

IP Theft

The United States government has long conflated a range of issues into “IP theft”, including cybersecurity, trade secret infringement, forced technology transfer, and restrictive market access policies.  Many of these policy issues are not within the domain of WIPO and therefore have a limited role in the discussion around Wang Binying.  Some of them are the subject of an ongoing WTO dispute involving forced technology transfer.  WIPO is primarily concerned with the more mundane tasks of filing international applications for patents, trademarks and designs, arbitrating IP disputes, and training on IP issues, and negotiation of new IP treaties.  Although IP enforcement and trade secrets are part of WIPO’s mandate, they occupy a very small policy-oriented role.

The reason there is a WTO case dealing with IP theft and none at WIPO is simply that WIPO doesn’t have a broad IP dispute mandate.  WIPO, unlike the WTO,  is relatively toothless.  It cannot impose compensatory sanctions.  There is also no WIPO-administered treaty devoted to trade secret matters.  The U.S., which has been aggressively advocating for better international protection of trade secrets for several years, has successfully raised standards for trade secret protections outside of the WIPO treaty process, through free trade agreements and bilateral agreements, including the recent Phase 1 Agreement with China.  The major international agreement with the most teeth is the TRIPS Agreement (Article 39), which is administered by the WTO.  It obligates “Members” to “protect undisclosed information.” This affirmative obligation might, for example, support a WTO complaint against state-sponsored economic espionage or cyber-intrusions, among other acts.  Concerns about Ms. Wang aggressively pushing back on the U.S. IP theft policy agenda therefor seem badly misplaced.

A more significant concern than WIPO’s policy function is WIPO management.  The lion’s share of WIPO’s budget is derived from international IP filings, with Patent Cooperation Treaty Fees accounting for 75% of these receipts, followed by trademark fees, contributions, and design fees.  However, WIPO does not appear to have the same level of user accountability that other IP offices have.  For this reason, patent practitioners who actively used the WIPO system should be most concerned about how that system will be managed by a new DG, then with WIPO’s approach to “IP theft.”

PCT Applications and the Extensive Discretion Afforded by the WIPO DG

The record of the incumbent Director General, Francis Gurry, may serve as a useful guide to how much risk Wang Binying might present to US interests in WIPO’s administration of international patent applications through the Patent Cooperation Treaty.   James Pooley, a former WIPO Deputy Director General in charge of the Patent Cooperation Treaty (PCT) process,  testified before the House Foreign Relations Committee in 2016, where he outlined these risks:

The agency, in my opinion, is run by a single person who is not accountable for his behavior. He is able to rule as he does only with the tacit cooperation of member countries who are supposed to act as WIPO’s board of directors. And he is ultimately protected by an anachronistic shield of diplomatic immunity…

During my tenure I witnessed how a lack of any effective oversight frequently led to reckless decisions, often reflecting a disregard for the legitimate interests of the U.S. There are many examples I could provide, but here I will focus on three: his gift of high-end computer equipment to North Korea, his secret agreements with Russia and China to open satellite WIPO offices, and his relentless retaliation against whistleblowers who dared to come forward with the truth.”

Mr. Pooley’s concerns about the integrity of WIPO internal controls should be treated seriously, as the PCT system, which Mr. Pooley managed, contains a wealth of technical information that is confidential.  China or another malevolent actor, through a compliant DG, might access the secure WIPO computer systems for inappropriate purposes.   The  PCT, which is administered by WIPO, allows inventors to file one application and then wait 30 months before choosing the countries where they need a patent. It is particularly vulnerable during the time frame before the patent is published (18 months after the application date_  During this period before publication, the application is a secret and should not be disclosed to the public and is therefore vulnerable to misappropriation.

The risk of misappropriation of patented information by China under a Wang Binying leadership is hard to quantify; however, it remains incumbent upon WIPO to insure the integrity of its systems in order for the PCT system to remain viable.   These risks have historically been especially acute with respect to China.  China has a weak record of addressing bad faith use of its patent and trademark systems.  There is no concept of “fraud before the patent office,” or a sanctionable “duty of candor.”  China’s past record of legalizing the use of overseas patent materials to support domestic patent applications provides scant comfort.  As late as 2008, China permitted the filing of applications on patents based on disclosures by others in overseas markets, provided they had not been published anywhere in the world, or made known or marketed in China. Design patents merely required that the patented design is not marketed in China  (2000 Patent Law, Arts. 22, 23).   This loophole led to a phenomenon known as “patent hijacking” and would typically occur at an overseas trade show where a new product was displayed before its public disclosure or marketing to China.  A Chinese visitor might photograph a new product at an overseas trade show, email a photograph to his home office, and the home office would then rush to the Chinese patent office to file a design patent application, lawfully claiming it as his or her invention.  The Chinese patent system provided incentives to “steal” others’ proprietary information.  In addition to this form of legalized technology misappropriation, the U.S. government has accused Chinese agencies of covertly compelling the transfer of technology from foreign investors, an issue that has recently been addressed by the enactment of China’s Foreign Investment Law.

China also permits the anonymous filing of patent applications, which can further obscure whether an applicant obtained technical information from an illegitimate source (Examination Guidelines 4.1.2). In fact, one U.S. professor, Percival Zhang, was identified as possibly usurping such information and filing a patent application in China anonymously.  Mr. Zhang’s activities are discussed in a federal civil court case brought by the alleged actual inventor.  He was later convicted in a federal court, apparently on other charges.

The civil court case also involved a PCT application, where a Chinese entity was accused of misappropriating confidential information in advance and applying for a patent in its own name.  As the court noted:

“In September 2016, …  Bonumose filed an international patent application regarding tagatose, listing China as a covered country. The application remained confidential until April 2017. But Bonumose learned soon thereafter that the Tianjin Institute had filed its own patent application in November 2016. Tianjin’s application listed several inventors, two of whom asked to have an “unlisted name,” which is an unusual practice. Bonumose believes that the unnamed inventors are Zhang and a former Cell-Free employee. It further believes that there was no way the Tianjin application—which substantially mirrored Bonumose’s confidential application—could have been developed without knowledge and use of the tagatose trade secrets.

The theory of Bonumose’s case is therefore that Zhang,…  shared the tagatose trade secrets with the Tianjin Institute prior to the Tianjin application’s publication in November 2016. Indeed, Bonumose alleges that the Tianjin Institute paid Zhang and Cell-Free in exchange for the trade secrets. Bonumose is litigating five claims against Zhang and Cell-Free: two breach of contract claims; two trade secret claims (one federal and one state); and a declaratory judgment claim to ascertain the parties’ rights …”

These past activities do not mean that Ms. Wang would necessarily condone such activities nor that prior activities continue at the same level as they have in the past.  However, it does suggest that these concerns should be addressed by WIPO or any new DG in his or her interactions with China.

Continuation of WIPO’s policies in China and the need for change

U.S. concerns about WIPO’s potential misuse of confidential information are further magnified by accusations regarding the relationship that the current DG, Francis Gurry, has enjoyed with China. I quote Mr. Pooley again:

“Mr. Gurry had negotiated secret agreements with both China and Russia, which were first announced not by WIPO but by the China Daily News and The Voice of Russia, respectively. I remember very well going to lunch with one of my senior colleagues, when he surprised me with the news of the Moscow office, while I was the one to first inform him about the Beijing office. These secretive deals provoked a storm of controversy among the member states of WIPO, and as a result at their annual meeting in October 2013 they could not agree on a budget for the organization.”

U.S. suspicions regarding Gurry’s relationship with China are magnified by his frequent travels to China and his high-level meetings with the Chinese government. Of course, there is nothing wrong with high-level Chinese government meetings, as China is an active user of the PCT and other WIPO facilities.  Of concern to me is that Gurry underscores in almost all his China interviews the importance of strong government management of IP, via, inter alia,  “repeated messaging from the leadership of the importance of intellectual property.”  In one interview Gurry noted that China’s IP system has evolved so quickly due to the central direction given to China’s IP system, and praised China’s successful “planned, systemic and leadership-driven system.”  Similarly, in a November 2019 interview, Gurry noted that  China’s development in intellectual property has been “outstanding” and underscored the “focus and support of the leadership.”  The interviewer, Tian Wei, by contrast, noted that “the top-down approach is of course sometimes something quite unique to China.”  Gurry’s support of top-down approaches to IP also extended to his Global Innovation Index, which accords considerable weight to raw numbers invention and utility model patent filings as an indicator of innovative capacity.  This approach tends to naturally favor metric-driven IP regimes.

My interview with the South China Morning Post, noted above, was in fact directed to this embrace of state-driven innovation by Gurry.  As I noted in the interview “If Wang steps into those [Gurry’s] shoes, 10 years from now we will no longer have an IP system based on markets.”   This blog has consistently advocated that, despite the many strengths of China’s IP regime, the main defect of China’s IP regime is the inadequate focus afforded to IP as a private property right and that an overemphasis on the “socialist” aspects of China’s developing market economy could be antithetical to such a private property rights orientation.  I have not only criticized Chinese efforts which might weaken a private property rights orientation, but also the efforts of other authorities, including the US and  WIPO, which support greater Chinese intervention in its markets.  Gurry has consistently ignored that a “planned, systemic and leadership-driven system” can easily deviate from the commitment China made at WTO accession in acceding to the TRIPS Agreement that “intellectual property is a private right”  [emphasis supplied] (TRIPS Preamble).

Would a DG Wang be different from DG Gurry? I have known DDG Wang Binying since my tenure at IP Attaché at the US Embassy in Beijing (2004-2008). She also enjoys cordial relations with many prominent and active U.S. IP lawyers and officials.  Indeed, several foreigners I spoke with thought that she should be given a chance to break out from the legacy of Francis Gurry and, given her expertise, could do an excellent job.  Much as Tian Wei noted in her interview that Gurry’s perspective on China’s IP regime is not consistent with some of China’s own criticisms of its regime, it would not be unusual to expect that Wang Binying may have a better understanding of the needs of her country than Francis Gurry.  In this respect, Francis Gurry may have done a disservice to China, the US and Ms. Wang.

I note with regret that Francis Gurry’s legacy also goes deeper than perspectives on the role of the state in China’s IP regime.  During my tenure at the U.S. Embassy in Beijing and later at the USPTO on its China team (from 2004-2008, and 2012-2017), I was never invited to a WIPO-sponsored symposium in China.  In fact, I  was disinvited to one symposium when a Chinese sponsor affiliated with a WIPO program noted with surprise that an American was being invited to speak at a WIPO event in China.

The data on WIPO’s website further confirms the strongly China-oriented focus of the China office’s activities in China.  The online listing of programs of WIPO’s Beijing office fails to list any multinational program or a program with a foreign government. By contrast, the Singapore office holds regional and national programs, and Brazil’s office is engaged in South-South cooperation as well as hosting international events.  WIPO’s HQ has hosted multinational events in China as well, such as a recent judicial program, often with US participation.  I polled several diplomats who have resided in China prior to writing this blog.  Although there appear to have been some positive recent developments, their past experience of being denied opportunities to participate in WIPO programs was consistent with mine.   Would a DG Wang carry forward this nationalist orientation of China’s WIPO activities?

Conclusion

I believe that active management controls, oversight and perhaps structural reform can help address the risk of trade secret leakage and other management risks from WIPO.  I also believe that, if elected, Wang Binying might be able to leave the unhealthy legacy of Francis Gurry in China behind, and indeed could help improve relations with the United States by adopting a more collaborative and balanced approach.  Although she had been closely associated with DG Gurry, I know of no direct accusation against her with regard to any of the risks noted above.  However, the lack of any such accusation is not proof that the risks aren’t real, nor does it mean that U.S. concerns need not be addressed.  For the United States, these concerns generally also do not exist with respect to candidates from outside of China.   Indeed, whatever the success of her candidacy, it would be helpful for WIPO, its member states, and Ms. Wang herself to step out of the shadows and address those legitimate concerns raised by the United States and others.

If these concerns are properly addressed, both WIPO and U.S.-China IP relations can only be strengthened, and a DG Wang, if elected, would be off to a very good start.  As any student of modern Chinese knows, the Chinese term for crisis 危机 contains the character for opportunity 机会.  Wang Binying’s candidacy can present such an opportunity.

The Trump Administration and China IP Diplomacy: Old Wine In a New Bottle?

Two major China IP events occurred in late November and December. One of them was the long-awaited first phase of a settlement of the US-China trade war.  The second was the nomination of Wang Binying to replace Francis Gurry as Director-General of the World Intellectual Property Organization, a United Nations body and US reaction.  A common thread of concern over “IP Theft” unites the US perspective on these issues.  This is the first of a two-part blog, focusing first on the Phase One effort.

The First Phase Agreement

Although a final text of the 86 page agreement is reportedly being “scrubbed” by both sides to the negotiations, and will not be available until January, the Office of the US Trade Representative has called Phase One

an historic and enforceable agreement on a Phase One trade deal that requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, … The Phase One agreement also…establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement.

USTR’s fact sheet outlines these accomplishments in IP:

Intellectual Property: The Intellectual Property (IP) chapter addresses numerous longstanding concerns in the areas of trade secrets, pharmaceutical-related intellectual property, geographical indications, trademarks, and enforcement against pirated and counterfeit goods.

Technology Transfer: The Technology Transfer chapter sets out binding and enforceable obligations to address several of the unfair technology transfer practices of China that were identified in USTR’s Section 301 investigation. For the first time in any trade agreement, China has agreed to end its long-standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a condition for obtaining market access, administrative approvals, or receiving advantages from the government. China also commits to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms. Separately, China further commits to refrain from directing or supporting outbound investments aimed at acquiring foreign technology pursuant to industrial plans that create distortion.

In light of prior bilateral commitments and accomplishments by the Trump Administration to date, the fact sheet adds little that is new.

Let’s pull the IP paragraph apart:

China has already amended its laws regarding trade secrets and trademarks.  The reference to pharmaceutical-related intellectual property is, however, one welcome encouragement of efforts that were recently proposed in the CCP/State Council Opinionsgulation of November 2019.  These changes were in play before the trade war was launched, but had since been delayed.  This welcome recommitment is well supported by a new national appellate IP court, as well as by a recent decision by the new appellate IP Court combining civil and administrative adjudication in a patent dispute, which may also be a harbinger of a possible combined civil/administrative adjudication with third parties in other areas, such as for patent linkage such as with the China’s food and drug authorities or patent authorities.

USTR refers to the Phase One agreement as addressing “long-standing concerns” about trade secrets and “enforcement against pirated and counterfeit goods.”  One of the “long-standing concerns” in trade secrets involved enhancing administrative enforcement of trade secrets.  This commitment was expressed in the 2012 US-China Strategic and Economic Dialogue and incorporated into plans of the National Leading Group.  Efforts to enhance “enforcement” against pirated and counterfeit goods appear is also redolent of increased administrative enforcement more generally – which downplays the significant changes underway in China’s judicial system, and have been the subject of numerous bilateral commitments under the former Joint Commission on Commerce and Trade.  For unknown reasons, many of the earlier JCCT commitments are no longer easily retrievable online, however, a list of commitments was prepared by GAO for the years 2004-2012, which demonstrates their long history.

Several factors combine to suggest that the US and China may be committing to a renewed focus on administrative enforcement: the role that administrative enforcement has played in the recent CPC-State Council Opinions on IP and other regulations, proposed legislation, and recent campaigns, and the problem of a long trade war without any acknowledged results which is affecting the markets and may drag into a presidential election cycle.  Late-term administrations may also be tempted to condone campaign-style IP enforcement, which can generate impressive enforcement statistics but have limited deterrence or long-term sustainability.    As Prof. Dimitrov has noted, IP campaigns are typically a “rapid resolution of a major problem,” done in response to a crisis or political pressure.  Prof. Mertha, another political scientist, described prior commitments to enforcement campaigns as part of the  “red face test: could the USTR state at a press conference, with a straight face, that the [trade] agreement was a good one.”  After much pain and drama, the Administration may yet be placing old wine in a new bottle, “rounding up the usual” enforcement outcomes —  as it ignores the scholarly literature surrounding campaign-driven outcomes of twenty to thirty years ago.  If these observations on Phase One are correct, then the goal of “structural change” in IP enforcement is illusive.

An administrative campaign focus would also ignore the low hanging fruit of China’s recent improvements and experiments in civil enforcement as well as pushing for further reform in administrative enforcement.  The Phase One Fact Sheet omits such pressing matters as continuing improvements in civil enforcement, long-standing problems with administrative enforcement transparency, promising developments in development of judicial precedent, the experiment of a new national appellate IP court similar to the CAFC,  the recent decline in foreign-related civil enforcement transparency, the dramatic decline in criminal IP enforcement including trade secret enforcement in the last several years, the need for rightsholders to have observable means of monitoring a trade agreement outcome in such areas as forced technology transfer or IP enforcement, or the impact of China’s aggressive antitrust regime on IP protection and commercialization, among other issues.   Enhanced punitive enforcement in enforcement, which both the US and China have also been calling for, may similarly be inconsistent with the primary goal of adequate compensation to victims of infringement. Furthermore, absent adequate procedural and substantive safeguards, this could also result in punishments being handed out to foreigners, as they have in the past.

The focus of an IP regime should instead be on transparency, fairness and adequate compensatory civil damages. Due to the many perceived weaknesses of China’s IP enforcement regime, the 2019 US-China Business Council, for example,  has noted in its 2019 survey that IPR enforcement was rated number 6 among the top 10 business challenges faced by the survey respondents.

The technology transfer language also contains much of the same old wine.  China committed to not conditioning foreign investment on technology transfer long before this trade war when it joined the WTO (2001).  It agreed at that time to provide for the “elimination and cessation of … technology transfer requirements” and that “the terms and conditions of technology transfer, production processes or other proprietary knowledge, particularly in the context of an investment, would only require agreement between the parties to the investment.“  Based on the Phase One fact sheet, it is also hard to see how Phase One agreement will add to the important additional legislative changes on this issue that China enacted earlier this year.

Rather than focus on legislative changes, the nature of the continued subsistence of forced technology transfer (FTT) is probably the more important trade issue at this time.  The 2019 Business Climate Survey of the American Chamber of Commerce in China characterized FTT as an “operational”, rather than a “legal” challenge, and placed technology transfer issues fifth in priority among IP-related concerns, well behind IP enforcement, with only 8 percent of respondents reporting it as the most significant IP issue their company faces.  This also appears to be the perspective of Prof. Prud’homme in his December 2019 presentation to the OECD, which outlines how FTT manifests itself.  Depending on the industrial sector, the Business Climate Survey notes that 41-58% of companies reported no difference in the amount of technology they shared with Chinese companies compared to other markets.  The US-China Business Council survey reached similar conclusions: technology transfer concerns ranked 24 out of 27 top concerns in the market. The Business Council further noted that only 5 percent of survey respondents report being asked to transfer technology in the past three years, yet the issue is an acute concern of affected companies in key sectors.

Has FTT declined as an issue of concern?  Earlier surveys by business chambers, before the trade war, suggested a higher incidence of FTT than is currently being reported.   Scholars and practitioners have also estimated that this issue has been exaggerated by the administration.  US data on sales of technology to China show a continued increase in technology licenses, as well as increases in licenses to unrelated parties, which may suggest greater confidence in the market and legal system.  One may argue about the sufficiency of the data, although the legal reforms and recent changes confirm to me that the principle strategic issue is how to ensure that technology is not lost through extra-legal /“operational” measures.

Another concern is that remedies for FTT  may end up again being another opaque process that may not bring the necessary relief.  As with the continuing emphasis on administrative enforcement of IP, China’s legislative efforts to date suggest that a principal remedy would be administrative remedies, as proposed implementing regulations to China’s Foreign Investment Law already suggest.

Conclusion: Is IP Any Different?

One of the better general overviews of the Phase One agreement had been written by Scott Kennedy for the Center for Strategic and International Studies.  Scott’s article “A Fragile and Costly US-China Trade Peace” notes that  “ [I]n the short-term China and Xi Jinping are the clear winners. With only limited concessions, China has been able to preserve its mercantilist economic system and continue its discriminatory industrial policies at the expense of China’s trading partners and the global economy. “

The fact sheet for Phase One suggests that further dramatic improvements since the notable accomplishments of earlier this year may not be in the offing.  Perhaps these will be negotiated as part of any “Phase Two” deal.  For the moment, there is certainly nothing in these outcomes which sets forth a “structural change” such as might include a shift to a private property oriented approach to IP, including support of a civil system, a more limited role for the administrative system and less state intervention into IP protection, enforcement, and commercialization.  There is also no reference to the greater transparency necessary to enable rightsholders and governments to understand how China’s enforcement mechanisms operate to protect private rights in China’s socialist market economy.

Now, let’s see what the scrubbed text brings…

Upcoming blog: on the nomination of Wang Binying to WIPO Director-General.

China Passes the One Million Patent Milestone — Is it Yesterday’s News?

patentfilingchart

Several news outlets have reported on the recent WIPO World Intellectual Property Indicators 2016 report on IP filings, noting that China’s surpassing a milestone of one million patent applications in 2015, and that this may, according to WIPO reflect “’extraordinary’ levels of innovation.”

There are two significant problems with the reporting.

The first is that the news of one million invention patent filings is about one year old.  SIPO publishes its patent filing data on a monthly basis, which is available to all, at no cost.  The chart at the top of this blog is from the SIPO website statistics web page  as of November 27, 2016 and covers patent filings through the end of September 2016.  In other words, the news about China surpassing the one million benchmark was probably available sometime in the first quarter of 2016 – making it hardly news.

The second point though is the more troubling one:   Bigness does not mean “strength”, as China has itself noted in State Council documents.  Moreover, bigness does not necessarily mean innovation.

Let’s tease apart five of the hidden data of what the WIPO:

  1. WIPO Contradicts Itself on China’s efforts to Innovate: Some studies show China lags considerably on its efforts to innovate.  While WIPO’s Francis Gurry notes that “Innovators in China powered global patent applications to a new record in 2015”  another WIPO-commissioned Global Innovation Index looking at a broader range of factors, suggested that China is number 25 in global innovation, and number 72nd in technology payments, despite holding a top position in high tech exports.  The data suggests that what is made in China is disproportionately not innovated in China.  Indeed some would argue that the large overhang of unexamined utility model and design patents in particular is making it more difficult to innovate, by making it difficult to conduct freedom to operate analyses in China’s market.
  2. The Rising Tide Is Not Raising All Boats: China’s rapid increase in patent filings are overwhelmingly from Chinese domestic filers only. For example, according to the more up to date SIPO data above only 10.6 % of the invention patents filed through end of September 2016 were from foreign filers.  For design and utility model patents, the foreign numbers are even lower: about 3% for designs and about 1% for UMP’s.   Possible reason: subsidies for domestic patent filings may be more generally available than subsidies or other incentives to file overseas.
  3. China’s Patent Tide Stops at its Boundary Waters: China is not a major international filer. As the WIPO report notes:  “around 96% of total applications from China are filed in China and only 4% of the total are filed abroad. In contrast, filings abroad constitute around 45% of the total in the case of applicants from Japan and the U.S.”  As I have detailed elsewhere, when China does file overseas – such as at the USPTO – the quality of the patents is high.  However these overseas-filed patents still are a limited cohort of China’s domestic filings, even if it may represent its most innovative and high quality patents.
  4. China Is A Big IP Country, But Not Necessarily A Strong One = Particularly When Other Comparative Data is Introduced.     When patents per capita or patents per unit of GDP are compared or patents in force are calculated, China does not come out on top.  Japan, Korea, Switzerland,  the United States and other countries all have their strengths when comparative data is introduced. In fact, the United States has 2.5 million patents in fact, and China is behind Japan in the number three slot (1.4 million patents in force), despite the rapid growing number of its invention patent applications.
  5. Is China “Pulling out the Stalks to Make the Plants Grow”: A system that is overly geared to easy metrics? No less dramatic than the 1,000,000 patent benchmark are the areas where China so outstrips other countries as to suggest that there may be fundamental problems in the value proposition of its IP system. China’s 1.1 million utility model applications are about 127 times second-ranked Germany’s (chart A55).   China’s design patents constituted nearly 94% of global filings (p. 127)   The data suggests that China is indeed strongest where the government can most actively support registration activity.  Quantitative data also works to the disfavor of economies that have strong pharma sectors, which are dependent on fewer patents, and industries that rely on proprietary/unpatented technology. This blog has also repeatedly reported on both these SIPO filing data, and some of the distortions that have accompanied this dramatic ramp-up in patent filings, including  subsidies, “get out of jail” free subsidies, and end of year acceleration in patent filings to take advantage of incentives.   These incentives have helped increase patent quantity, but their impact on quality is harder to measure.

Summary: Judging the extent to which China’s rapidly evolving system is contributing to China and global innovation requires more careful thought than simply looking at the explosive growth in China’s IP filings.  In addition to the problems noted, it also requires looking at other data such as commercialization, citation rates, relationship to manufacturing and exports, licensing and assignment rates, adoption by standards setting organizations, etc. Nonetheless, the quantitative curve is obvious and impressive (see below).  patentofficetrends

 

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.