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.