Phase 1 and CAI: A Tale of Two Agreements

The European Union has recently released a draft text of its Comprehensive Agreement on Investment with China (CAI).  Compared to the other two major agreements signed by China since the beginning of 2020, the Phase 1 Trade Agreement (the Phase 1 Agreement) and the Regional Comprehensive Economic Partnership Agreement (RCEP), this is the least IP-focused.  The CAI is limited to bilateral investment and skirts IP  concerns. It could have done more.

 A report prepared by the Swiss National Center on Competence in Research in Trade Regulation  succinctly defined the differences between a Bilateral Investment Treaty (BIT) such as CAI and a broader trade agreement, by noting that “the role BITs can play in protecting the investors’ investments internationally against IPR piracy seems systemically limited. Investment law protects investors against undue interference by the state (and its various authorities) but not against violations by private parties.”  These broad considerations make sense in a traditional market economy, where investors may not face undue interference in their IP rates at the hands of the state.  They are less convincing in markets, such as China, where the state plays an active role. 

The distinction is also artificial for all BITs as IP is an asset that is often contributed to an investment.  In some instances, it can constitute the whole investment.  Licensing revenues are also considered service income and may be considered as a service industry investment.  The use of IP in an investment is also contemplated by the TRIPS agreement which requires national treatment in the “use” of IP rights overseas.  While IP issues may complicate negotiation of a BIT, excluding them can undercut the credibility of the BIT.  The United States Model BIT (2012) (Model BIT) recognizes IP rights as investments and is accordingly somewhat more comprehensive than the CAI. 

The CAI – along with many other BITs – grandfathers compulsory licensing, which restricts and can devalue IP rights.  It exempts compulsory licensing imposed by competition and public health authorities from its scope (Sec.  II.3.5(ii)).    While TRIPS standards regarding national treatment and most favored national treatment are also specifically grandfathered (Sec. II.7.5), a more balanced approach to BIT drafting would be to specifically identify IP-related investment risks. These risks might include: restrictions on licensing; excessive requirements for recordals of patent or trademark assignments; preferential taxes on locally created IP; subsidies and other preferences for IP creation given to local entities; discrimination against patenting in technological fields dominated by foreign investors; or other efforts that minimize the value of foreign innovations or discriminate against their use.    

Based on an initial read of this draft text, here are the CAI provisions that relate to IP and how they compare to the Model BIT and other legislative changes undertaken by China.

Section I fails to enumerate intellectual property as a covered “investment.”  The Model BIT recognizes IP as an “investment” (Art. 1, Definitions).

Section II.3 prohibits performance requirements in an investment that require the transfer of technology to the recipient country, or that a percentage of R&D is conducted in that country, or the use or favoring of a technology of the host country.  It also prohibits an advantage to an investment based on the use or favoring of a technology.  The United States has negotiated similar restrictions in the Phase 1 Agreement, Chapter 2.   The Chinese government had made similar commitments in its accession to the WTO, and has sought to address US concerns in the  Foreign investment Law , the Administrative Licensing Law, and other measures.  These concerns are also likely addressed in the context of the WTO disputes filed by the United States and the European Union regarding forced technology transfer.  The Model BIT also requires national treatment in technology transfer in terms of domestic performance requirements (Art. 1(h)). 

Section II.3bis.2.3 exempts national security entities from the scope of regulation. There is no reference to  security or competition regulations being exempted from the CAI.  The Model BIT exempts national security type regulation, as may be applied by the Committee on Foreign Investment in the United States (Art. 18).  It also excludes competition and other “laws of general application” from the scope of “investment authorizations” regulated by the BIT (fn. 6).  To the extent that national security laws are intended to protect the state, they should normally be exempted from national treatment obligations.  Competition laws present a different challenge which may depend upon whether they are indeed of general application, transparently and uniformly applied, and not intended to advance national economic security.

Section II.3.5 exempts compulsory licenses of competition authorities from the scope of the CAI.  A similar provision is found in the Model BIT (fn. 6, Art. 3(b)).

Section II.5 requires that the Parties protect the confidentiality of information in regulatory proceedings and that they do not impose unnecessary disclosure requirements.  Confidential business information is to be protected “in accordance with domestic law, including with respect to the protection of confidential business information or other information treated as confidential under the Party’s laws that is obtained during administrative proceeding.” 

As the above quote suggests,  each party should apply its own law.  If this is the correct interpretation, the CAI does nothing to further improve  protection of confidential information in a regulatory proceeding affecting foreign investments  Thankfully, China’s Administrative Licensing Law, Foreign Investment Law and the Phase 1 Trade Agreement  already have extensive provisions in this area. 

Section III.1.7 permits “covered enterprises” of the CAI to participate in the development of standards by the central government bodies, including “related standardization working groups and technical committees” on  a national treatment basis. The CAI also requires the Parties “to recommend that local and non-governmental standardizing bodies in its territory allow enterprises that are covered enterprises of the other Party to participate” in standardization activities.    A similar issue was addressed in the 26th JCCT  which provides that “China welcomes U.S.-invested firms in China to participate in the development of national recommendatory and social organization standards in China on a non-discriminatory basis.”  The CAI goes further than the JCCT commitment by requiring equal participation in national standards including, presumably including  mandatory standards (“GB” standards), and recommended standards (GB/T standards).   It does not go as far as the JCCT commitment by failing to address social organization standards.  Social organization standards tend to be more market-driven and ‘bottom-up.”  The CAI language might suggest that China is out of compliance with the 26th JCCT requirement since it does not mandate foreign participation in social organization standards setting.

 Section III.2.5 provides for a minimum of due process in competition investigations.  It requires the competition authority to “notify, in writing if so provided by domestic law, the addressee of its competition concerns or objections, including the facts and legal basis on which the proposed decision will be based. The address of the decision shall, prior to its adoption, be informed, to the extent provided for in the domestic law, of the evidence on which the decision will be based.  Prior to the adoption of the final written decision, the addressee of the decision shall have the right to submit written comments to the competition authority in relation to the competition authority’s competition concerns or objections. During such proceedings, the addressee of the decision shall have the right to a legal representative of its choice. The addressees shall have the right to appeal the final decisions of the competition authorities to a competent court of law.” 

The United States negotiated similar due process type requirements in the JCCT of 2014.  The summary of those negotiations provided that “the United States was able to address a significant concern for many foreign companies, which have expressed serious concern about insufficient predictability, fairness and transparency in the investigative processes of China’s Anti-Monopoly Law enforcement. The Chinese side agreed that, under normal circumstances, a foreign company in an Anti-Monopoly Law investigation would be permitted to have counsel present and to consult with them during proceedings. China also made several additional commitments, including to treat domestic and foreign companies equally and to provide increased transparency for investigated companies.” 

A weakness in both the CAI and the JCCT of 2014 is the failure to reference the TRIPS Agreement, which has long provided “guard rails” for IP-related competition investigations, including a substantive obligation on competition authorities to demonstrate an “adverse effect on competition” where there is an “abuse” of IP rights. In addition, TRIPS enforcement provisions require “fair and equitable proceedings”, based on “evidence” where the parties had an “opportunity to be heard”,  the right to “independent counsel”:  “judicial review”; no “overly burdensome requirements” for “personal appearances” ; and “safeguards against abuse”  (TRIPS Arts. 40-43, 49).  A more pro-IP approach would have been to recognize these commitments and elaborate on due process requirements in antitrust proceedings regardless of their IP-related elements.

Another  general “due process”  weakness in the CAI’s approach is its failure to deal with “commercial hostages”, including detention of foreigners by purported creditors or adverse parties in IP matters.   Entry and exist of temporary visitors for business purposes is addresses in Section II.6bis, with no mention of foreign detentions.

The final text of the CAI is not scheduled for completion for another two years.  In addition, the annexes to the CAI are not yet publicly available.  In the final text, there are likely to be numerous provisions which will have an indirect effect on the commercialization of IP rights, including  provisions requiring SOE’s to not discriminate in their purchase of goods or services (including  technology licensing?), the lifting of an investment ban for cloud services (subject to a 50% equity cap),  and not imposing new restrictions on investment in R&D in biological resources.

CAI, RCEP and the Phase 1 Trade Agreement all responded to different economic, trade demands and political urgencies.   The CAI has been understood as a sign by the Biden administration that the European Union will pursue its own trade relationship with China based on its own interests.  While the IP and forced technology transfer provisions of the Phase 1 Agreement helped establish new standards in China that are applicable to all countries, the non-IP provisions of the Phase 1 Agreement were not kind to Europeans and other allies in their preferential buying requirements.   Overall, the CAI may not undersell MFN treatment as much as the Phase 1 Agreement did.  On the other hand, the EU did not significantly advance IP protections in the CAI text, nor did it take an expansive view of the role of IP in BITs.  The bright side of this picture is that the CAI leaves space for  the United States and the European Union to further coordinate strategies on IP protection in China.  

Due Process and ASI’s: Wuhan and Texas

Attached is the December 25 decision of the Wuhan Intermediate Court (Chinese language only) (the “Decision”) in the matter of Samsung v. Ericsson, about which I previously blogged.   The Fosspatents blog has also posted some of the other recent filings in the E.D. of Texas, including former Chief Judge Rader’s expert opinion, and the patent infringement case recently filed by Ericsson against Samsung.

I will focus here on the procedural elements of the Wuhan case (Samsung v. Ericsson). 

Anti-Suit Injunctions (“ASI”) are often discussed as if they were a “first to file” priority right where timing is critical.  In the Huawei v. Samsung ASI case in the Northern District of California and Shenzhen, the separation in filing times between the two case was likely a matter of hours, owing to time zone differences between the West Coast and California.   However, timing is not the only determinant of whether an ASI should grant.  It is certainly less critical if there are forum selection clauses in contracts between the parties.  In Microsoft v. Motorola, an earlier SEP ASI case, other factors such as whether one case would be dispositive of another, and the jurisdiction’s interest in limiting forum shopping, were determined to be supportive of the lower court’s decision to grant an ASI.  

In terms of the first court to grant an ASI, the Wuhan court comes out ahead, but only nominally.  The Decision granting Samsung’s Anti-Suit Injunction (ASI) was signed by five judges of the Wuhan Intermediate Court on Friday December 25, 2020, a US holiday.  Counting for the difference in time zones, this is only one business day ahead of Judge Gilstrap’s Anti-Anti Suit Injunction decision/ TRO of the morning of Monday December 28, 2020.    

To the extent that the Samsung ASI was intended to thwart the original exercise of jurisdiction of Judge Gilstrap, it also came a few days too late. Samsung requested the ASI on Monday December 14, 2020 (Decision pp. 1, 2).  Ericsson had brought suit in the Eastern District of Texas on Friday December 11, 2020. 

As the preceding indicates, the difference in time between different filings is often quite nominal.  The gaps in time were considerably shorter than the “several months into… the domestic litigation” behavior of Motorola in Microsoft v Motorola.  Comparisons might also be made to the slower docket in Xiaomi v Inter Digital case in Wuhan, which involved three of the five judges to the Samsung v. Ericsson dispute, and which was initiated on August 4, 2020 with an ASI decided on September 23, 2020. 

Samsung comes up especially unfavorably when taking into consideration the adequacy of notice to the adverse party.  Samsung sued on December 7, 2020 in Wuhan (qisu/起诉) (Decision, p. 5).  Ericsson had filed its case in Texas on December 11, 2020. Samsung filed it request for an ASI on December 14, 2020. There is no record in the Decision of service or notice having been delivered to Ericsson for the initiation of the case, or on the motion for an ASI, although 18 days had elapsed since the case was accepted on December 7, and 11 days had passed Samsung requested its ASI.  Samsung left Ericsson operating in legal darkness.

In Chinese civil procedure and practice, there are several periods of case opacity where the court de facto condones secrecy.  These periods can include: before a case is accepted; when service of process is being made; when a final decision is being reached and an adjudication committee of outside judges may be involved; and when a decision is made to publish a judgment and a case may be written or denied publication on political grounds.  The first period is the most germane here.

A party initiates a case by “suing” (qisu).  When a party “sues” it should file a complaint that meets the minimal criteria set forth in Article 119 of the  Civil Procedure Law (CPL).  These criteria include indicating: a party in interest, an actual defendant, an actual complaint with facts and reasons, and appropriate jurisdiction.   The court has seven “opaque days” to “accept and review” (shouli/受理) the complaint.  After acceptance and review,  the case will be “established” (li’an/立案).  Docketing, assignment of judges and service of process follows thereafter.   The relevant terms are drawn from the CPL, particularly Art. 123.  The Wuhan court generally adheres to this statutory nomenclature in its Decision. 

In Huawei vs Conversant, the Supreme People’s Court looked at case acceptance as one milestone event in determining the priority of filings (p. 9). However, I believe that the Chinese case acceptance procedure, despite recent reforms, lacks adequate transparency for significant international rights to be affected without further inquiry.  Case acceptance has long been the subject of criticism and concern from both domestic and foreign litigants.  See Liu Nanping and Michelle Liu, “Justice Without Judges: The Case Filing Division in the People’s Republic of China,” 17 U.C. Davis J. Int’l L. & Pol’y 283 (2011), and my blog.  Concerns about discretion and opacity in case acceptance decisions have also caused foreign litigants to make “noisy” filings in China before a holiday which involve an immediate press conference after the filing in order to limit the risk that a case suddenly appears that was filed in advance of another filing. 

At this time, further information is needed in order to substantiate the December 7 filing date.  Case acceptance is not automatic and can be denied or accelerated for a variety of reasons, including the political sensitivity of a case, such as in environmental matters.  The Decision states that Samsung sued on December 7 (p. 5), and that case was accepted and established  on the same day (pp. 2, 5).  It is possible that Samsung filed its case and the court reviewed and accepted and reviewed the same day.  However, by law, the Wuhan court had a week to review the case.  Moreover, accelerating review during December might have been difficult because this case acceptance was accomplished during a pandemic and the end of the year is also typically a busy time for China’s IP courts when they try to resolve all pending cases for that year.  Hubei Province, where Wuhan is located,  has also had an unusually high increase in IP-related litigation.  In 2019 alone the province’s IP docket of cases “accepted and reviewed”  increased by 100%  to a total of 20,825 cases.  While a December 7 filing, review and acceptance is not impossible, it is also likely that there were other reasons that all three of these tasks were accomplished on one day.   For example, Samsung may have sued during the week prior to December 7 and was required to make changes to its filing, or perhaps the court decided that it would permit Samsung to enjoy a filing date of December 7 due to problems that may had arisen later during the review process.   A case acceptance date clearly is more ambiguous in its significance than a US court filing made with the Clerk of the Court.

US courts increasingly have to concern themselves with problems posed by lack of transparency of this type.  The US Supreme Court has had to grapple recently with these issues.  In Animal Sci. Prods., Inc. v. Hebei Welcome Pharm. Co., 138 S. Ct. 1865, 1873-74 (2018), the Court noted that “the transparency of the foreign legal system” is one factor in China in determining the level of deference that should be given to the Chinese legal system. In a recent University of Pennsylvania Law Review  article, “Illiberal Law in American Courts” (May 2020), Mark Jia has noted that China’s legal regime has increasingly imposed difficult questions for US judges.  Ultimately, he advises “American judges … [s]ometimes …must decide whether the foreign legal system is fair.”

There are now numerous IP cases where foreign judges have decided that Chinese courts failed to provide adequate notice or procedural transparency.  The Delhi High Court in Inter Digital v Xiaomi,  noted in its AASI decision that the parallel Wuhan case “appear[s] to have been less than fair, not only to the plaintiff, but also to this Court.” Judge Kaplan in Vringo v. ZTE, another SEP dispute, noted that:  “Vringo long remained entirely unaware of the Shenzhen litigation.  It was not until June 26, 2014 – more than four months after the lawsuit was initiated – that it received a copy.”  In a non-SEP case involving semiconductor manufacturing equipment, and a US company,  Veeco, a preliminary  injunction was issued “without providing notice …  and without hearing”  in order to undermine a long pre-existing foreign proceeding in the Eastern District of New York.   Knowles, another US corporation, which was sued in China in retaliation for filing a Section 337 patent action, was also barred from attending legal proceedings and stated that “a fair trial is impossible.”  In antitrust actions, including IP-related antitrust actions, the situation had become so severe that the US government had to obtain a promise from China that it would “allow Chinese practicing lawyers to attend and participate in meetings with any of the three [anti-trust agencies].”   Still worse, foreign lawyers have complained that company officials have been threatened with arrest if they did participate in meetings in China, and there have been rising concerns of detentions of foreigners as commercial hostages including during the pendency of civil litigations

As Mark Jia notes, this is within the discretion of the presiding judge.  While judicial procedures vary from nation to nation, delays in notification to adverse parties can raise concerns about violation of generally accepted standards of IP litigation, as reflected in the TRIPS Agreement.  That agreement requires “timely” written notice of “civil judicial procedures” to the parties as well as the right to an “independent counsel” (Art. 42 “Fair and Equitable Procedures”). 

There are other, troubling aspects of the December 25 decision. The court appears to base its jurisdiction on SEP cases being global and affecting Chinese and other national and territorial courts (pp. 2, 11).  It therefore has jurisdiction over “global licensing conditions, including licensing rates” (p. 7).  The court does not explain its departure from prior Chinese practice, such as the Guangdong SEP Guidelines, which would authorize a court to consider a worldwide rate setting if the parties agreed to it, nor does it consider whether it is the optimal form for these disputes.  Long-standing US precedent for ASI’s also establishes that “comity teaches that the sweep of the injunction should be no broader than necessary to avoid the harm on which the injunction is predicated.” (Laker Airways v. Sabena, 731 F.2d 909, 933 n. 81 (D.C. Cir. 1984)).  The court also adopts an anti-trust like approach to granting the ASI, by looking at harm to consumers and competition if an infringer were to be enjoined (p 10, para. 4). A thoughtful analysis of the choice of law and ASI issues could likely have helped de-escalate and de-conflict the issues. To rub salt further into the choice of law wound, the ASI extends to access to all courts, including those of the United States, and thereby includes US patent matters (Decision, p. 12, para. 2).  

To be fair, Chinese courts’ entry into the “global SEP litigation” arena in 2020 has been preceded by global rate setting decisions elsewhere in the world, including the recent Conversant and Unwired Planet cases in the United Kingdom.  Additionally, the Chinese courts have been instructed to take a more aggressive approach to international parallel litigation. The court at this stage should, however, also be committed to the increase of procedural fairness  as well as careful legal analysis in order to minimize friction among the parties and with other jurisdictions.

Updated on January 5 & 11, and Feb. 21, 2021 to correct minor typographical errors.

NYU Program on Due Process for Foreign Business in China

I was honored to be invited to moderate the opening session for the 21st annual Timothy A Gelatt Dialogue at NYU Law on “Due Process for Foreign Business in China?” on November 12, 2015.

Here’s a quick summary the program (November 14, 2015):

There were presentations on intellectual property (by me/Mark Cohen), antitrust, human rights, detention and release of foreigners, and cybersecurity.

As several speakers noted business people have human rights too, although these interests are often ignored by the human rights community in favor of non-commercial issues. Another speaker also suggested that the current division between human rights and commercial law made little sense, and that human rights advocacy should pick up commercial concerns, while commercial concerns should also not ignore human rights issues.

In listening to various anecdotes, it became apparent to many of us that no matter how cautious, expert or how much of a “China hand” one is, one (or one’s client) may not be immune from detention, arrest or arbitrary proceedings, and that these legal proceedings may be initiated out of spite and well distanced from any kind of legal accountability. One speaker suggested that in the current environment, China has neither rule of law nor rule by laws, but rule by agency in a range of fields.

I gave a presentation on due process concerns for foreigners, noting that there were increasing concerns about national treatment and differential procedures and remedies for foreigners in IP litigation, including detention during the pendency of a disputed legal matter, extended time periods for civil litigation, delays in evidence gathering and extra-territorial reach of the courts. I also briefly discussed how foreign courts were handling disputes that involved concerns over handling of matters by Chinese courts or enforcement agencies (notably Gucci and Vringo). Some speakers also expressed concern about an increasing extraterritorial reach of the Chinese courts.

Regarding antitrust and intellectual property, one expert in the field asked a question about whether Chinese practices were mercantilistic/outliers, or simply reflected the interests of “implementers” vs innovators.  I noted that I had heard these perspectives expressed previously, but I wondered if China was in fact proposing a different kind of question: whether antitrust law demanded any proportionality with IP protection as it seemed to me that imposing nearly one billion dollars in damages (in the Qualcomm case) is disproportionately high in a country where average patent damages are 20 to 30,000 dollars, and even injunctive relief can be difficult to enforce.

There appeared to be widespread support regarding the Xi/Obama outcome on establishing a dialogue on cybersecurity. Some speakers noted that cybersecurity had widely different concepts in the United States and China, with the Chinese focus on cybersecurity referring to the overall control by the state of the Internet and related infrastructure.  The Chinese government was also interested in direct regulation of the Internet with more government controls.

Several speakers saw an important relationship amongst cyberespionage, innovation policies and antitrust as calculated efforts by China to develop its technological edge. In addition, several speakers from a range of disciplines noted that China and Chinese officials were now increasingly engaged in efforts to advance its own perspectives in areas such as human rights, cybersecurity/internet governance and antitrust, which may increasingly challenge the United States’ role as a global norm setter.

Altogether, it was a great group of thought leaders with divergent backgrounds but convergent and deep interests in China. My congratulations to Jerome A. Cohen, Ira Belkin and NYU’s Asian law Institute.