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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 is simply that there are no WIPO cases.  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.

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POSTPONED: Berkeley China Law Event – A 60 Year Perspective

60YrsBanner

Please note that this event has now been postponed due to the corona virus outbreak!

[UC Berkeley will be hosting a program March 16-17 commemorating 60 years of teaching Chinese law here.  The first day of the program will focus on business-related issues, including IP/technology and dispute resolution.  Jerome A. Cohen, Stanley Lubman, Don Clarke, Jim Feinerman, Rachel Stern, Jamie Horsley, Mark Wu, and many other leading academics and practitioners will attend this event.

Here is a current  (Feb. 5, 2020) draft agenda.]

 

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The Phase 1 IP Agreement: Its Fans and Discontents

How much will the IP Sections of the Phase 1 Agreement (the “Agreement”) with China change  IP strategies in China?   For the most part, the Agreement adds much less than its appearance might suggest.  Many of the important changes that the Agreement memorializes have recently been codified into law or set into motion for forthcoming codification.  There are some important prospective changes in the text, particularly regarding pharmaceutical patent protections and in civil and criminal enforcement.  If these changes are well-implemented, that could augur significant changes in the future.  Nonetheless, a cautious approach should be taken to these changes as well, as many of them have a long history of disappointing US rightsholders.  An additional problem with the Agreement is its reliance on administrative mechanisms that have a track record of not providing sustained protection for IP rights.

The IP-related sections are found in Chapter 1 of the Agreement (“Intellectual Property”) and Chapter 2 (“Technology Transfer”).  Chapter 1 is divided into the following sections: General Obligations, Trade Secrets and Confidential Information, Pharmaceutical-Related Intellectual Property, Patents, Piracy and Counterfeiting on E-Commerce Platforms, Geographical Indications, Manufacture and Export of Pirated and Counterfeit Goods, Bad-Faith Trademarks, Judicial Enforcement and Procedure in Intellectual Property Cases, and Bilateral Cooperation on Intellectual Property Protection. Chapter 2 concerns Technology Transfer and is not divided into separate sections.

There are many concerning textual aspects of the Agreement.  For example, it is unclear why “Technology Transfer” was not considered an IP issue in the Agreement.  Additional ambiguities are supplied by inconsistent use of legal language as well as differences in the English and Chinese texts, both of which are understood to be equally valid (Art. 8.6).  A careful reading shows that in many cases the Agreement does not afford any new progress on particular issues, but merely serves as a placeholder on issues that have long been under active discussion (e.g., on post-filing supplementation of pharmaceutical data in patent applications).  There are also several provisions that appear to break new ground, such as in consularization of court documents by foreigners and enforcement of civil judgments.

Reactions from the dozens of people I spoke with about the Agreement in the US and China have been mixed.   One prominent Chinese attorney thought that Chinese IP enforcement officials were now much more likely to be responsive to US requests in forthcoming enforcement proceedings.  Several individuals thought that the Agreement would be a great stimulus to IP agencies and the courts in their enforcement efforts as well as in drafting new laws, regulations and judicial interpretations.  Many academics were perplexed by the unclear language in the Agreement.  Some experts shared my view that the Agreement places an undue emphasis on the wrong issues, such as punitive damages, administrative campaigns, and criminal punishment at the expense of compensatory civil compensation.  Due to the numerous errors and inconsistencies in the Agreement, many people speculated that the negotiators on the US side and/or the Chinese side may not have been adequately consulting with experts, bringing to mind the Chinese expression of “building a chariot while the door is closed (without consulting others)” (闭门造车）.  The administrative and Customs enforcement provisions were dismissed by many as out of date or just for show.  On the other hand, it did appear that the Chinese negotiators did rely upon their interagency experts.  Susan Finder, the author of the Supreme People’s Court (SPC) Monitor, told me that the SPC (and likely the Supreme People’s Procuratorate [SPP]) provided input to the Chinese negotiating team.

Review of the Individual Sections and Articles

The trade secret provisions generally memorialize amendments already made to China’s Anti-Unfair Competition Law, including an expanded scope of definition of “operator” (Art. 1.3), acts that constitute trade secret infringement (Art. 1.4), as well as a shifting of burden of proof in civil proceedings where there is a reasonable basis to conclude that a trade secret infringement has occurred (Art. 1.5).  Interestingly, the United States asserts in this section that it provides treatment equivalent to such shifting of a burden of proof.  I am unaware of any nationwide burden-shifting in US civil trade secret proceedings, except – as a stretch – insofar as US discovery proceedings provide an opportunity to compel production of evidence from an adverse party.  This view was also shared by others I had spoken to.

The trade secret provisions also require China to provide for preliminary injunctions in trade secret cases where there is an “urgent situation”.   The use of preliminary injunctions to address early-stage trade secret theft has long been under discussion between the US and China.  This is an awkward hybrid of Chinese and English legal standards.   Generally the test in Chinese law for “action preservation”  as in US law for “preliminary injunctions” is whether there is irreparable injury arising from such urgent situation which necessitates provisional relief (See Sec. 101 of Civil Procedure Law)  An “urgent” situation which is not likely to cause irreparable injury does not require granting of a preliminary injunction.   China’s judicial practice currently permits the use of preliminary injunctions where there is a risk of disclosure of confidential information (关于审查知识产权纠纷行为保全案件适用法律若干问题的规定, Art. 6.1).  It appears likely that the current test for preliminary injunctions are unaffected by this provision, and the provision just memorializes current Chinese law –  notwithstanding that is unclear about the standards and scope of action preservation procedures in China

The Agreement also uses inconsistent nomenclature to describe preliminary injunctions.  As noted, the Chinese text does not refer to preliminary injunctions but refers to an overlapping concept of “action preservation.” Other provisions of the English language text of the Agreement discuss “preliminary injunctions or equivalent effective provisional measures” (Art. 1-11).

Historically, Chinese judges have been highly reluctant to issue preliminary injunctions.  As Susan Finder has noted in an email to me, the language in the Agreement also does not address the underlying structural problem that judges may be reluctant to give injunctions because they are concerned they will be found to have incorrectly issued them, and hence held accountable under the judicial responsibility system.  The Agreement also does not account for the fact that provisional measures serve a different function in the Chinese system compared to the United States.  China concludes its court cases far more quickly than the United States, thereby providing more immediate relief, often without needing recourse to provisional measures if there is not an urgent need.

The Agreement also requires China to change its trade secret thresholds for “initiating criminal enforcement.” (Art. 1.7).   The Agreement does not specify what measures are to be reformed, such as the Criminal Law or Judicial Interpretations,  or standards for initiating criminal investigations by public security organs and/or the procuracy and State Administration for Market Regulation (SAMR) administrative enforcement agencies (See, e.g., 关于公安机关管辖的刑事案件立案追诉标准的规定（二)).  The issue of what constitutes “great loss” for calculating criminal thresholds has itself been the subject of discussion and changing standards over the years.

As mentioned in Susan Finder’s November 26, 2019, blogpost, a judicial interpretation on trade secrets is on the SPC’s judicial interpretation agenda for 2020, scheduled for issuance in the first half of the year.  Additional guidance may be expected from the procuratorate, SAMR, and Ministry of Public Security to address criminal enforcement issues.

Consistent with the Foreign Investment Law, the Agreement also prohibits government authorities from disclosing confidential business information (Art. 1.9).

The Pharmaceutical-Related Intellectual Property section of the Agreement requires China to adopt a patent linkage system, much as was originally contemplated in the CFDA Bulletin 55, but subsequently did not appear in the proposed patent law revisions of late 2018. Linkage will be granted to an innovator on the basis that a  (a) company has a confidential regulatory data package on file with China’s regulatory authorities,  and (b) where a third party, such as a generic pharmaceutical company, seeks to rely upon safety and efficacy information of the innovator.  The drafters seem to be describing a situation similar to an Abbreviated New Drug Application (ANDA) in the United States under the US Hatch-Waxman regime.  According to US procedures, a generic company needs to demonstrate, inter alia, bioequivalent safety and efficacy to an innovator’s pharmaceutical product in order to obtain regulatory approval.  Notice is thereafter provided to the patent holder or its licensee of the application for regulatory approval to address the possibility that the generic company may be infringing the innovator’s patent(s).

This linkage regime, if properly implemented, with be an important step for Chian’s struggling innovative pharmaceutical sector.  China’s proposed linkage regime also extends to biologics (Art 1.11).  Taiwan has also recently introduced a linkage regime.

In order to implement the linkage regime, the Agreement requires an administrative or judicial process for an innovator to challenge a generic company’s market entry based on the generic company’s infringement of a patent held by the innovator  As drafted, the Agreement omits a requirement to amend China’s patent law or civil procedure law to permit a court to act when there is an “artificial infringement” by reason of approval of an infringing product for regulatory approval, notwithstanding the lack of any infringing manufacturing, use or sale of the product prior to its introduction into commerce in China. The lack of a concept of “artificial infringement” could make it especially difficult to implement a civil linkage regime in China.  The US Chamber of Commerce and the Beijing Intellectual Property Institute (BIPI) had previously recommended revising Article 11 of China’s patent law to address this issue.  BIPI had noted in its report that “Lacking of artificial infringement provisions results in lacking [sic] of legal grounds for the brand drug company to safeguard their legal rights.” This provision likely reflects continuing turf battles between the courts and China’s administrative IP agencies in enforcing IP rights.  Implementation of a linkage regime by China’s National Medical Products Administration (NMPA) may be possible in the alternative, as a matter of its regulation of pharmaceutical products, however, there may be concerns that NMPA lacks the necessary expertise and independence to properly adjudicate pharmaceutical patent disputes.

The Agreement also does not reference regulatory data protection, which was one of China’s WTO obligations, nor does it reference China’s efforts to adopt an ‘orange book’ similar to the US FDA’s to govern patent disclosures and regulatory data protection as recommended by CFDA Bulletin 55.  This section also reiterates in general terms a commitment by China to provide for post-filing supplementation of data in pharmaceutical patent matters, which has been a long-standing request of the US reflected in several JCCT commitments.  Permitting post-filing supplementation is necessary to support a linkage regime.  In the absence of any meaningful patent grants, China’s patent linkage commitments would be a hollow outcome.

The  Patent section continues the focus on pharmaceutical IP by providing for patent term extension due to regulatory delays for pharmaceutical patents, including patented methods of making and using pharmaceutical products (Art. 1.12).  The draft patent law already provides for patent term extension.  The additional encouragement is welcome.

There are no provisions in this Agreement addressing non-pharmaceutical patent concerns.   Companies that may have concerns about such issues as:  standards-essential patent prosecution or litigation, low-quality patents, patent trolls, procedures involving civil or administrative litigation involving patents or Customs enforcement of patents, China’s increasing interest in litigating global patent disputes for standards-essential patents, the relationship between industrial policy and patent grants, expanding the scope of design patent protection, China’s amending its plant variety protection regime and acceding to the most recent treaty obligations, etc.,  will find that their issues are not addressed.

Section E on “Piracy and Counterfeiting on E-Commerce Platforms” addresses “enforcement against e-commerce platforms”.  By its terms, it does not specifically discuss e-tailers, online service providers or other third parties.

The text (Art. 1.13) seeks to clarify and update the E-Commerce Law by “eliminat[ing] liability for erroneous takedown notices submitted [presumably by rightsholders] in good faith,”  extending mandating a time period of 20 days for rightsholders to file an administrative or judicial response to a counter-notification, and penalizing counter-notifications taken in bad faith.  Joe Simone (SIPS) has told me this Article’s 20 day period may require an amendment to the E-Commerce law, which currently requires a 10 day period.

Article 1.14 specifically addresses infringement on “major” e-commerce platforms. As part of this commitment, China also agreed to revoke the operating licenses of e-commerce platforms that repeatedly fail to curb the sale of counterfeit and pirated goods.  It is unclear from this text if this provision is limited to “major” platforms as the title suggests (in both English and Chinese), or to platforms of any size as the Article itself states.  In addition, it is unclear what kind of “operating license” is involved auch as a general business license or a license to operate an internet business.  Whatever license is involved, this remedy has theoretically been available for some time for companies that sell infringing goods.  As I recall, past efforts to use license revocations to address IP infringement had little success.  Smaller enterprises might be able to circumvent the license revocation, perhaps by transferring businesses to another platform  In the past, companies also evaded enforcement obligations by establishing a new business incorporated or operated under their name or that of a relative or friend.  This provision, similar to other IP provisions of the Agreement, rehashes earlier JCCT commitments with apparent disregard to lessons previously learned or developments in Chinese law and its economy.

Article 1.14  notes, unlike other Articles which note that the United States has equivalent procedures, tellingly states that the United States “is studying additional means to combat the sale of counterfeit or pirated goods.”  According to news reports, the USTR has threatened to place Amazon on the  list of “notorious markets.” Since the publication of the Agreement, Peter Navarro at the White House has also threatened to crack down on US platforms due to the increased pressure of the trade deal to “combat the prevalence of counterfeit or pirated goods on e-commerce platforms.”

The Geographical Indications (GI) Section (F) continues long-standing US engagement with China with respect to its GI system.   The Agreement requires that multi-component terms that contain a generic term will not be protected as a GI, consistent with prior bilateral commitments.  China will also share proposed lists of GI’s it exchanges with other trading partners with the US to help ensure that generic terms are not protected as GI’s.  The competing GI systems of the United States and China have been the subject of decades of diplomacy.  This Section arguably is intended primarily to show political support for American companies that manufacture or distribute generic food and other products that compete with GI-intensive products such as wine and cheese.  It is also likely intended to support US advocacy around these issues at the WTO, WIPO and bilaterally.

Section G requires China to act against counterfeit pharmaceuticals and related products, including active pharmaceutical ingredients (API) and bulk chemicals (Art. 1.18).  It is unclear if these APIs need to be counterfeited to be seized, or if they should be liable for seizure because they are low quality or contribute to the manufacturing of counterfeit goods.  The issue of API’s and bulk chemicals contributing to the production of counterfeit medicine has long been a discussion point between the US and China and had been the subject of JCCT outcomes.  Providing API’s to counterfeiters is already a crime and civil violation.  It can also give rise to administrative liability, although administrative agencies have often not prioritized contributory liability.  Thanks to Joe Simone again, for providing me with the benefit of his experiences in this area.

China is also required to act against “Counterfeit Goods with Health and Safety Risks” (Art. 1.19).  The text does not explicitly address unsafe products that do not bear a counterfeit trademark or the enforcement agencies that will implement this commitment.  Generally, the burden of enforcing against counterfeit products belongs to trademark enforcers, rather than enforcement officials involved in product quality or consumer protection violations.  However, the NMPA and/or the Ministry of Industry and Information Technology are specifically named as enforcement agencies in a related provision to this one (Art. 1.18).

This section also seeks to address “Manufacture and Export” of these goods, including “block[ing]” their distribution (chapeau language).  It does not elaborate on how such cross-border steps will be undertaken – such as by Customs agents, law enforcement authorities, cooperation between food and drug regulatory agencies, or through bilateral or multilateral law enforcement cooperation.

The failure to clearly designate a responsible agency in these administrative and law enforcement commitments can lead to problems with enforcing IP rights.  The academic literature, including that of Prof. Martin Dimitrov,  has suggested that when multiple agencies have unclear and overlapping IP enforcement authority, they may be more inclined to shirk responsibility.  I hope that coordination mechanisms for these and other outcomes have been well-negotiated to address this issue.

Article 1.20 addresses the destruction of counterfeit goods by Customs, in civil judicial proceedings and in criminal proceedings.  Article 1-20(1) requires Customs to not permit the exportation of counterfeit or pirated goods  Due to the growth of e-commerce and B2C exports from China via online platforms, container-sized seizures have become rarer, and the practical consequences of this provision may be limited.  Moreover, rightsholders have not often complained of Customs’ destruction procedures.  A WTO case brought by the United States involving Chinese customs destruction procedures also failed to identify losses to the United States by reason of China’s not disposing of seized goods outside of the channels of commerce consistent with its WTO obligations to seize goods on import  (DS362) (see 0% auctioned on imports, below).  At that time, when containerized shipment seizure was more common, only 3.7% of imported and exported goods were auctioned by value and 1.9% by shipments.   7.351ds362

My former colleague, Tim Trainer,  has identified what is new in the Agreement in Customs as seizures in transit.

The Article does not define what is a “counterfeit” good, or whether manufacturing a product for export may constitute an infringement of the rights of a third party that holds the right in China, which is the so-called OEM problem.  In a typical OEM scenario, the importer in a foreign country owns the relevant rights in the importing country, but not in China.

Article 1.20(2)(d) requires the courts to order that a rightsholder be compensated for injury from infringement in civil judicial procedures, presumably when goods are seized.  It is unclear to me why the Agreement does not address the critical issue of affording adequate civil damages generally, why it is limited to the Customs context, and why the Agreement does not generally address the overuse of low statutory damages in IP-related civil disputes generally.

The Agreement requires that materials and implements which are “predominantly” used in the creation of counterfeit and pirated goods shall be forfeited and destroyed.  This “predominant use” test is derived from the TRIPS agreement. It regrettably provides a basis for goods that are demonstrated to have a less than dominant use (e.g.,  49.9 percent) to avoid forfeiture and destruction.   A better test might have been to encourage China to use a “substantial use” test, or a test based simply on use in commercial-scale counterfeiting and piracy.  IP owners may wish to consider using judicial asset preservation measures by the courts in order to address issues involving the seizure of goods that are also used for legitimate manufacturing purposes.

Destruction of counterfeit goods by Market Supervision Bureaus in administrative trademark enforcement proceedings is not discussed in this Agreement and has been an area of concern by rightsholders in the past.  This omission is concerning as China’s administrative enforcement of trademarks has historically been a highly active area of IP enforcement on behalf of foreign rightsholders.

Section H addresses the bad-faith registration of trademarks.  No specific action is required by China in the text.  I have previously discussed the importance of expanding concepts of “good faith” in IP protection in China with hopes that it would be addressed in resolving the trade war and had specifically noted two issues addressed in the Agreement: bad-faith registration of trademarks, and ensuring that employees were covered objects of China’s trade secret law.  Certain steps have already been undertaken by relevant agencies to address the important issue of bad faith trademark registrations, including:  supporting oppositions/invalidation against marks filed in bad faith and with no intention to use (Article 4 of the Trademark Law);  addressing the problem of trademark agencies that knowingly facilitate those bad faith trademark filings under Article 4, and imposing administrative fines against bad faith trademark applicants for a purpose other than use or judicial punishments against pirates that bring trademark infringement lawsuits against brand owners victimized by bad-faith registrations.

Given the lack of identified concrete next steps in this important area, China may not be planning to do little more legislation in this area in the near future, and/or waiting to better evaluate the impact of recently implemented measures and policies, including provisions allowing fines to be imposed against trademark pirates. Joe Simone has suggested that one helpful measure to consider in the future might be for courts to award compensation for legal and investigation fees in bad faith cases, ideally by the same courts handling invalidation and opposition appeals.

Section I requires the transfer of cases from administrative authorities to “criminal authorities” when there is a “reasonable suspicion based on articulable facts” that a criminal violation has occurred.  “Criminal authorities” are not defined.  This could include the Ministry of Public Security and/or the Procuracy. The intent behind this provision is likely to ensure more deterrent penalties for IP violations and avoid the use of administrative penalties as a safe harbor to insulate against criminal enforcement.  This problem of low administrative referrals is an old and thorny one.  In bilateral discussions of the last decade, we would often inquire about the “administrative referral rate” of China, which is the percentage of administrative IP cases that were referred to criminal prosecution, which has historically been quite low. See National Trade Estimates Report (2009) at pp. 101-102.  However, if administrative agencies are required to transfer cases to the Public Security Bureau or Procuratorate, it will have little impact unless these agencies accept the case and initiate prosecutions.  A loophole in this text may be that it does not mandate that a case is accepted after it has been referred by administrative agencies, thereby risking non-action by prosecutors.  As administrative agencies have more limited investigative powers, the evidence provided by administrative authorities may also often be insufficient to initiate a criminal investigation.

Article 1.27 requires China to establish civil remedies and criminal penalties to “deter” future intellectual property theft or infringements.  These requirements are also found in the TRIPS Agreement.  The English language text of the Agreement conflates the role of civil remedies and criminal penalties and their deterrent impact.   Civil remedies should, at a minimum, deter or stop (制止，阻止） the defendant from repeating the infringing act, whereas criminal remedies might also provide broader social deterrence (威慑 as in nuclear “deterrence”, which is found in the Chinese version of the Agreement).  This paragraph and the Agreement more generally do not underscore the important role of compensatory civil damages in providing deterrence.

The Agreement also requires China to impose penalties at or near the maximum when a range of penalties is provided and to increase penalties over time.

These provisions regarding criminal enforcement generally reflect concerns articulated in the unsuccessful WTO IP case the US brought against China to lower its trademark and copyright criminal thresholds  (DS362).  However, the lost lesson from that case is that criminal thresholds are not as important as other factors in creating deterrence. Prosecutors may still decline in fact to prosecute cases, even if they are required by law to accept cases.  Law enforcement may also lack adequate resources. Judges may also have discretion in imposing sentences.  The calculation of the thresholds themselves, whether based on illegal income or harm caused, may be difficult to assess.  The civil system also needs to play a robust role in creating respect for IP.  The proof of the limited impact of lowering criminal thresholds is that criminal IP cases significantly increased in China after it lost the WTO case.  After the United States “lost” that WTO case, the number of criminal IPR cases rapidly increased to a high of approximately 13,000 in 2013.  Whether the Chinese data  of 2013 was calculated to include only IPR-specific crimes or crimes that may encompass IPR-infringing products (such as involving substandard products), this was a dramatic increase from approximately 2,684 criminal IP cases or 907 IPR infringement crimes from 2007.  The bottom line is that simply increasing criminal cases through lower thresholds may not be enough to create a healthy IP environment.

Another issue of concern is that foreigners have often been named as defendants in serious civil or criminal cases. The first significant criminal copyright case in China involved American defendants distributing counterfeit DVD’s.  More recently, patent preliminary injunction cases were granted in favor of two different Chinese entities in two cases against American defendants (Micron and Veeco). The largest patent damages case involved the first instance decision in Chint v. Schneider Electric (330 million RMB).  The NDRC investigation of Qualcomm similarly pioneered high antitrust damages in an IP licensing matter.  In many instances,  the final decisions in pioneering cases where foreigners lost were also never published.  Given this track record, we might not want to be advocating for harsher enforcement in the absence of greater commitments to due process and transparency.

The Agreement also pioneers by providing for expeditious enforcement of judgments (Article 1.28).  According to Susan Finder, the SPC already lists judgment debtors in its database.  This is a welcome area of engagement and should also be supported by continuing transparency in this area.

Over the past several years, there has been an increasing incidence of multijurisdictional IP disputes, particularly in technology sectors.  The Agreement does not address the problems arising from these cases.  It does not mention that China does not enforce US judgments, although the US has begun enforcing some Chinese money judgments, nor does it address the practice of many Chinese courts to fast track their decision making to undercut US cases.  Generally, US lawyers cannot conduct discovery in China and formal international procedures to collect evidence are slow.  Both Chinese and US courts often rarely apply foreign law, even when such law may be more appropriate to resolution of a dispute.  Based on a recent program I attended at Renmin University, it also appears likely that Chinese courts will issue their own anti-suit injunctions soon.  The Agreement also does not require anything further in terms of judicial assistance in gathering evidence.  These are areas for potential cooperation as well as confrontation.  Indeed Berkeley and Tsinghua have held a continuing series of conferences on this topic.  At the recent Renmin University conference, British, German, US and Chinese judges exchanged their views on these topics in a cordial and productive manner.  It is my hope that this topic is an area of collaboration, not confrontation.

Regarding copyright, Article 1.29 provides for a presumption of ownership in copyright cases and requires the accused infringer to demonstrate that its use of a work protected by copyright is authorized.  It would also have been helpful if the US and China had discussed the problem of title by title lawsuits in China, which has also increased costs of litigation through requiring multiple non-consolidated lawsuits for one collection of songs, photos or other works.  One Chinese academic confided in me that the current practice of requiring that each individual title be the subject of an individual lawsuit was not the original practice in China’s courts and that the old practice was more efficient for both the courts and rightsholders.

The Chinese and English texts of the Agreement also differ to the extent that the English text refers to the US system of related rights, while the Chinese next refers to the Chinese (and European system) of neighboring rights.

In terms of civil procedure, Article 1.30 permits the parties to introduce evidence through stipulation or witness testimony under penalty of perjury, as well as requiring streamlined notarization procedures for other evidence.  China’s ability to implement “penalty of perjury” submissions is limited by China generally lacking a concept of authenticating a document under penalty of perjury, which also hampers lawyer’s ability to represent clients by powers of attorney.  The implementation and impact of this provision is unclear.

Article 1.31 permits expert witness testimony.  Expert witnesses are already permitted under existing Chinese law, although the trend appears to favor greater use of them.  Moreover, Chinese courts have been expanding the role of expert technology assessors to provide support for technologically complex cases.  Once again the implementation and impact of this provision is uncertain, although we can expect further developments from the courts in this area, particularly in anticipated guidance concerning evidence in IP cases.

Article 1.35 requires that China adopt an action plan to implement the IP chapter of the Agreement.  In an additional welcome development, the Agreement also supports reinstatement of cooperative relationships with the USPTO, the USDOJ and US Customs.

Chapter 2 addresses US allegations regarding forced technology transfer.  It prohibits China from seeking technology transfer overseas consistent with its industrial plans subject to the qualifier that such plans  “create distortion.”  Distortion is not defined.

Other provisions prohibit require technology transfer as a condition of market access, using administration or licensing requirements to compel technology transfer and maintaining the confidentiality of sensitive technical information.   These are consistent with the recently enacted Foreign Investment Law and other legislation.

The Technology Transfer provisions do not address whether the provisions that were removed from the TIER  are now governed by China’s Contract Law and proposed Civil Code provisions on technology transfer contracts.  Clarity on this important issue could help support the autonomy of parties to freely negotiate ownership of improvements and indemnities.  The Agreement also does not address the regulation of licensing agreements by antitrust authorities or under China’s contract law or proposed civil code for the “monopolization” of technology.  The Civil Code provisions are now pending before the NPC and could have appropriately been raised as “low hanging fruit” in this Agreement.  Antitrust concerns in IP had also been raised by several parties in the 301 report concerning IP concerns (at pp. 180-181).  Hopefully, these issues will be decided in the Phase 2 Agreement.

Some additional hope for IP commercialization is afforded by the commitments by China in the Agreement to increase its purchases of services by $37.9 billion from the United States during the next two years, which include purchases of IP rights as well as business travel and tourism, financial services and insurance, other services and cloud and related services.  Considering the central role played by forced technology transfer in this trade war, it was to be hoped that a specific commitment on purchases of IP rights might have been secured.

Concluding Observations

It is often difficult to discern the problems that the Agreement purports to address and/or the appropriateness of the proposed solution(s).    In some instances, it also appears that USTR dusted off old requests to address long-standing concerns that may also not have high value due to technological and economic changes.   For example, it is unclear to me if commitments in the Agreement regarding end-user piracy (Art. 1.23) by the government are as necessary today when software is often delivered as an online cloud-based service and not as a commodity.  The leading software trade association’s position in the 301 investigation did not mention end-user piracy as a top-four priority (p. 4). Moreover, China had already been conducting software audits for several years and piracy rates had been declining.  The commercial value of these commitments is also uncertain under China’s recent “3-5-2 Directive”, where the Chinese government is obligated to replaced foreign software and IT products completely with domestic products within the next three years.  The Agreement already contains commitments for China to increase its share of cloud-based services.  The issue does have a long and sad history. The U.S. Government Accountability Office had calculated 22 different commitments on software piracy in bilateral JCCT and economic dialogues between 2004 and February 2014.

Among the more anachronous provisions of the Agreement are the five separate special administrative IP campaigns that the Agreement mandates.  The general consensus from a range of disciplines and enforcement areas (e.g., IP, counterfeit tobacco products, pollution, and taxation) that campaigns result in “short term improvements, but no lasting change.”  Moreover, the focus of these campaigns, including Customs enforcement and physical markets appears outdated due to the growth of e-commerce platforms.

The situation was predictable: “late-term administrations may … be tempted to condone campaign-style IP enforcement, which can generate impressive enforcement statistics but have limited deterrence or long-term sustainability.” The Administration took this one step further, with enforcement campaign reports timed to be released during the various stages of the Presidential campaign.   Here are some of the administrative campaign reports we can expect, with some corresponding milestones in the Presidential campaign season:

March 15: China is required to publish an Action Plan to strengthen IP protection and to report on measures taken to implement the Agreement and dates that new measures will go into effect. (Art. 1.35)

May 15: China is required to substantially increase its border and physical market enforcement actions and report on activities by Customs authorities within three months (or by April 15, 2020) (Art. 1.21).

May 15: China is required to report on enforcement activities against counterfeit goods that pose health or safety risks within four months and quarterly thereafter (Art. 1.19).

June 15: China is required to report on enforcement at physical markets within four months and quarterly thereafter (Art. 1.22).  This report will coincidentally be released at the same time as the Democratic Party Convention.

August 15: China is required to report on counterfeit medicine enforcement activity in six months and annually thereafter (Art.. 1.18).  This report will coincidentally be released approximately one week before the Republican Convention.

September 15: China is required to report on third party independent audits on the use of licensed software within seven months, and annually thereafter (Art. 1.23).

Also, a quarterly report is required regarding the enforcement of IP judgments (Art. 1.28).

There is no explanation provided in the Agreement for the timing of each of these reports, their sequential staging or why the usual date for release of government IP reports (April 26) is not being used.

There are many other important IP areas not addressed in the Agreement.  The Agreement offered a missed opportunity to support judicial reform, including China’s new national appellate IP court, the new internet courts as well as local specialized IP courts at the intermediate level.  The Agreement also entails no obligations to publish more trade secret cases, to make court dockets more available to the public, and to generally improve transparency in administrative or court cases, which might have made the Agreement more self-enforcing.  Due to the relatively small number of civil and criminal trade secret cases and recent legislative reforms, the greater publication of cases would be very helpful in assessing the challenges in litigating this area and China’s compliance with the Agreement. The new appellate IP Court will be especially critical to the effective implementation of the important changes in China’s trade secret law as well as the implementation of the patent linkage regime.  The patent linkage provision also similarly neglects to describe the critical role of the courts in an effective linkage regime.  The Agreement to a certain extent memorializes the ongoing tensions between administrative and civil enforcement in China and regrettably reemphasizes the role of the administrative agencies in managing IP through campaigns and punishment.

The trade war afforded a once in a lifetime opportunity to push for market mechanisms in managing IP assets through a reduced role for administrative agencies and improved civil remedies in China’s IP enforcement regime.   A high cost was paid in tariffs to help resolve a problem that the Administration estimated, or exaggerated, to be as high as 600 billion dollars.   The reforms in the Agreement hardly total up to addressing a problem of that magnitude, and in many cases appear more focused on yesterday’s problems.  While the continued emphasis on administrative agencies and limited focus on civil remedies is disappointing, there are nonetheless many notable IP  reforms in the Agreement in addition to legislative reforms already delivered.  I hope that a Phase 2 agreement will deliver additional positive changes that also address the challenges of the future

Please send me your insights, comments, criticisms or corrections!  Happy Spring Festival!

Please send in any comments or corrections!

Revised 1/23/2020, 1/27/2020

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Draft Civil Code Technology Contract Law Available for Comment

The NPC has released a draft of the contract chapter of the draft civil code for public comment. According to the NPC Observer, this is the first draft of the entire Civil Code with the final round scheduled for consideration as early as March 2020.  Comments are being accepted by the NPC through January 26, 2020.  According to the NPC Observer the contracts section of the draft had previously been separately published in December 2018.  This blog considers the differences between the contract law provisions and the current draft, as well as the relationship of the draft entire civil code with other legislative changes involving technology contracts.

Chapter 20 of the contract chapter deals with technology contracts. Based on a quick read, several provisions are directed to long-standing concerns, such as ownership of service invention compensation, ownership of improvements (grant backs), indemnities from infringement, and the relationship of contract regulation to China’s Antimonopoly Law and the recently amended Technology Import Export Regulations (TIER).

Some Key Substantive Provisions

Articles 847 and 848 deleted from the prior draft the part  (Arts. 622, 633) that addressed mandatory service invention (employee inventor) compensation, which proposed that “[a] legal person or an unincorporated organization shall extract a certain percentage [emphasis supplied] from the proceeds obtained from the use and transfer of the service technical achievements and award or reward individuals who have completed the service technical achievements.” The draft law thereby appears to carry forward the ambiguity and debate regarding what amount of compensation is required, if any, in addition to salary and other benefits.  This had also been a focus of previous bilateral discussions.

第八百四十七条 职务技术成果的使用权、转让权属于法人或者非法人组织的,法人或者非法人组织可以就该项职务技术成果订立技术合同。法人或者非法人组织订立技术合同转让职务技术成果时,职务技术成果的完成人享有以同等条件优先受让的权利。职务技术成果是执行法人或者非法人组织的工作任务,或者主要是利用法人或者非法人组织的物质技术条件所完成的技术成果。

第八百四十八条 非职务技术成果的使用权、转让权属于完成技术成果的个人,完成技术成果的个人可以就该项非职务技术成果订立技术合同。

Article 847 Where the right to use or transfer a service technical achievement belongs to a legal person or an unincorporated organization, the legal person or unincorporated organization may conclude a technical contract for the service technical achievement. When a legal person or an unincorporated organization concludes a technology contract to transfer service technology achievements, the person who completed the service technology achievements has the right to receive priority transfer on equal terms. The service technical results are the technical results of performing the work tasks of a legal person or an unincorporated organization or mainly using the material and technical conditions of a legal person or an unincorporated organization.

Article 848 The right to use or transfer a non-service technical achievement belongs to the individual who completed the technology achievement, and the individual who completed the technology achievement may conclude a technology contract for the non-service technological achievement.

Articles 849 and 875 addresses ownership of improvements, providing further detail on the implications of the removal of Article 27 in the recently revised Administration of Technology Import Export Regulations (TIER). This provision also supports freedom of contract, by providing that the improving party owns the improvements unless the parties stipulate otherwise.  Article

第八百七十五条 当事人可以按照互利的原则,在合同中约定实施专利、使用技术秘密后续改进的技术成果的分享办法；没有约定或者约定不明确,依照本法第五百一十条的规定仍不能确定的,一方后续改进的技术成果,其他各方无权分享。

Article 875 The parties may agree in the contract in accordance with the principle of mutual benefit and determine how to share the technical results of implementing patents and using technological secrets for subsequent improvements; if there is no agreement or the agreement is not clear, and it is still uncertain according to the provisions of Article 510 of this Law 【regarding  supplemental contractual language】 then the technical results of subsequent improvement by one party shall not be shared by the other parties.

Article 874 also supports freedom of contract by providing for a default but negotiable indemnity against third party infringements or torts.   This language is consistent with the revised Art. 24 of the TIER

第八百七十四条 受让人或者被许可人按照约定实施专利、使用技术秘密侵害他人合法权益的,由让与人或者许可人承担责任,但是当事人另有约定的除外。

Article 874 Where the assignee or the licensee implements a patent or uses proprietary technology to infringe upon the legal rights and interests of others, the assignor or the licensor shall be held liable unless the parties agree otherwise.

Relationship with Other Laws

As indicated, the draft law must also be read in conjunction with the revised TIER and other laws and regulations.  As a higher level, more recent legislation, the Civil Code language would generally be more authoritative than the TIER in the event of any conflict.  Among the provisions that reference other laws and regulations is Article 877 which provides that these other laws and regulations shall normally govern.  Moreover, Article 877 does not expressly restrict the Civil Code from “gap-filling” these other laws and regulations.  It may thereby perpetuate the possibility of government intervention through its vague language such as “mutual benefit”, “monopolize technology”,  “hindering technological development”, ‘infringing technological achievements”, etc.

第八百七十七条 法律、行政法规对技术进出口合同或者专利、专利申请合同另有规定的,依照其规定。

Article 877 If there are laws and administrative regulations on technology import and export contracts or contracts for patents or patent applications, such provisions shall be followed.

The draft law also contains vague references to competition and antimonopoly law.  Article 850 contains identical language to Article 329 of the Contract Law, and Article 864 is nearly identical to Article 343 of the Contract Law:

第八百五十条 非法垄断技术、妨碍技术进步或者侵害他人技术成果的技术合同无效。

Article 850 A technology contract that illegally monopolizes technology, hinders technological progress, or infringes on the technological achievements of others is invalid.

第八百六十四条 技术转让合同和技术许可合同可以约定实施专利或者使用技术秘密的范围,但是不得限制技术竞争和技术发展。

Article 864 A technology transfer contract and a technology license contract may stipulate the scope of patent implementation or use of technology secrets, but they shall not restrict technology competition and technology development.

As with the prior Contract Law and TIER, the law does not clarify the difference between a covenant not to sue or a settlement of an infringement lawsuit on the one hand, and a patent license agreement.  Lawyers drafting such settlement agreements may wish to ensure that default provisions of the Civil Law, such as those regarding indemnities and ownership of improvements do not come into play.

These provisions also further underscore the importance of thorough monitoring of changes on technology transfer, including the TIER, particularly as operational implementation by the courts and administrative agencies, through cases, judicial interpretations, and rule making,  may now be more significant than legislative changes.

In addition to these revisions to China’s contract law in the proposed Civil Code, an Export Control Law has also been released for public comment by the NPC.  The draft law sets up a general export control system and specifically regulates both technologies and services (Art. 2).  Comments are also due January 26, 2020.

Happy New Year to all!

Note: all translations are based on machine translations with minor editing and are not intended to be authoritative.  Please provide any corrections or suggestions on these translations or any additional commentary to the author.  This blog was revised on March 23, 2020 with the assistance of Dr. Xu Xiaofan.

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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.

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December Lecture in Taipei; January in Beijing

I will be speaking on December 5 at NCCU on licensing and litigation during the trade war.  Here is the announcement (in Chinese):

人工智慧與網路治理」專題演講 : When IP Systems Collide: US-China Transnational IP Litigation and Licensing

Prof Cohen NCCU 2019.jpg
主講人： Director Mark Cohen (柯桓主任)
Berkeley Center for Law and Technology (BCLT), UC Berkeley (美國加州柏克萊大學科技與法律中心)

地點：商學院六樓 寶來國際廳
時間：12月5日 (四) 下午1點10分至4點
報名網址：https://bit.ly/2qyXNmo

演講資訊：https://reurl.cc/EKWY6m

主辦單位：政治大學 傳播學院
協辦單位：政治大學 商學院科技管理與智慧財產研究所

講者簡介：

馬克·柯桓（Mark Cohen）是美國加州柏克萊大學科技與法律中心的亞洲智慧財產權負責人，並負責教授國際貿易法與研究，著作以智慧財產權議題見長。

早先曾出任以下職務：微軟公司國際智慧財產權總監、眾達國際法律事務所北京辦事處法律顧問、美國駐北京大使館擔任高階智慧財產權主任（2004至2008年），隨後於美國專利及商標局下設的中國政策與國際事務辦公室擔任高階法律顧問，及在美國福坦莫大學法學院（Fordham Law School）擔任客座教授（2011-2012年）。

主講人在中國和轉型經濟中致力於科技貿易和智慧財產權，並擁有30餘年的公私部門及學術經驗。

If traveling to Taiwan is inconvenient, I expect to be at a program on transnational IP litigation January 18-19 at Renmin University in Beijing on transnational IP litigation.  More details will follow shortly.
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New CPC and State Council Opinions on Improving IP Protection

wordcloud

On November 24,  2019, the General Office of Communist Party of China and the State Council jointly released the Opinions Concerning Enhancing Intellectual Property Rights Protection (关于强化知识产权保护的意见).

It is often too easy to dismiss documents like these, that have typically delivered an ephemeral higher state of vigilance by the Chinese government.  Nonetheless, there are some useful statements in this document that may be an indicator of future durable improvements, including:

  1. It is jointly published by the CPC and the State Council and thus has high level political and executive branch support.
  2. It does address some long-standing concerns raised by industry, such as development of a patent linkage system, patent term extension and copyright protection for sports broadcasts.
  3. There continues to be a focus on punitive damages in litigation. However, this document does appropriately point out the need to increase actual damages.
  4. Improving criminal enforcement, including revising criminal judicial interpretations – is also addressed.  Along with revising the criminal code, revising criminal JI’s and their high criminal thresholds was a goal of the WTO case that the US filed against China over 10 years ago (DS362).  This task is long overdue.
  5. Improving coordination between administrative and criminal enforcement is once again highlighted. This is also a long-standing issue.  In light of numerous prior efforts and experiments, a more concrete explanation of how this might be accomplished to better enable prosecution of major criminal actors would be helpful in the future.
  6. Case guidance and public trial systems are highlighted. Hopefully, the case guidance system will add further momentum to successful case law experiments in IP at the Beijing IP Court.
  7. The introduction of technical assessors into administrative enforcement could suggest a continued enhanced role for patent administrative enforcement, which has been increasing even as trademark administrative enforcement has been declining. If so, it may not augur well for foreigners who have traditionally been heavy “consumers” of the administrative trademark system, but not the administrative patent system.
  8. Improvements in the “examination” of utility models and designs are noted as a goal. However, these rights are generally not examined for substance except in the case of “abnormal” applications.
  9. Continuing attention is paid to challenging markets, such as e-commerce platforms and trade fairs, as well as establishing faster protection mechanisms.
  10. There is a continuing focus on supporting Chinese rightsholders overseas.

This document arguably goes part-way in establishing an outline for addressing US concerns about IP theft.  However, it offers little to address such concerns as ensuring greater transparency in the courts, publishing foreign-related cases, or addressing certain trade-sensitive topics outlined in USTR’s Section 301 report, such as cyber intrusions or criminal trade secret misappropriation.

The word cloud, above, is drawn from a machine translation of this document.  The original Chinese language and my redlining of a machine translation are found here.

Addendum of November 26, 2019:

Susan Finder in her Supreme People’s Court Monitor blog, reported on Judicial Interpretation drafting by the SPC for next year, some of which are referenced in the recently released Opinions.  According to that blog, on 29 April 2019, the SPC’s General Office issued a document setting out a list of 47 judicial interpretation projects, 36  with an end of 2019 deadline.  Several of these involve IP-related issues, including issues addressed in the joint CPC and State Council Opinions, including:

  1. Interpretation Concerning the Application of Law in Cases of Disputes over the Infringement of Trade Secrets (关于审理侵犯商业秘密纠纷案件应用法律若干问题的解释). Responsibility of the #3 Civil (IP) Division.
  2. Interpretation on Several Issues Concerning Punitive Damages for Intellectual Property Infringement (关于知识产权侵权惩罚性赔偿适用法律若干问题的解释). Responsibility of the #3 Civil (IP) Division.
  3. Provisions on Issues Concerning the Application of the Foreign Investment Law of the People’s Republic of China (I) (关于适用《中华人民共和国外商投资法》若干问题的规定（一)). Responsibility of the #4 Civil Division. The Foreign Investment Law and the recently released draft implementing regulations contain provisions protecting the intellectual property of foreign investors, including prohibiting forced technology transfers and enhancing the availability of punitive damages.

These draft JI’s have a due date of the first half of 2020.  Susan Finder notes in her blog that given the worldwide attention on the issues set forth in these three judicial interpretations, she expects that they will be released for public comment.  I hasten to add that the IP Division of the Court has generally taken a positive attitude towards soliciting public comment on its draft judicial interpretations, and I hope that they maintain this tradition.

It was also noted by Susan Finder that certain JI’s were due by year-end 2019, including:

  1. Intellectual Property Rights Evidence Rules (关于知识产权民事诉讼证据的若干规定).  Responsibility of the #3 Civil (IPR) Division. This draft was discussed at a conference hosted by the SPC in Hangzhou in 2018.  As Chinese courts experiment with more expanded discovery, evidence preservation and burden of proof reversals, clearer rules regarding the obligations of parties to produce evidence are becoming more critical.  A particular notable example of such a reversal is found in the recent amendments to the trade secret law (Article 32), whereby  a rights holder that has preliminarily proven that it  has taken reasonable confidentiality measures on the claimed trade secrets and has preliminary evidence reasonably demonstrating that its trade secrets have been infringed upon, can shift the burden of proof (BOP) to the infringer to prove that the trade secrets claimed by the right holder do not belong to those as prescribed in this law.
  2. Judicial interpretation on administrative cases involving patent authorization and confirmation (关于审理专利授权确权行政案件若干问题的解释). Responsibility of the #3 Civil IPR) Division. Another interpretation that previously had a 2018 year-end deadline.  A draft was issued for public comment in the summer of 2018; see my earlier blog.

Addendum of November 27, 2019:

Another China law blog, the NPC Observer also expects that some of the IP legislation flagged in the Opinions for revision may be considered as early as late December of 2019t.  According to the NPC Observer:

We expect the session to review a … draft amendment to the Patent Law [专利法] …The session may additionally consider the following bills: …

I have previously blogged about proposed revisions to the Patent and Copyright Law.

Addendum of January 9, 2020: Here is a translation of the Opinions from China Law translate.