The Phase 1 Agreement and the Prospects for Piloting A New IP Dialogue

At the recently concluded Berkeley-Tsinghua conference on Transnational IP Litigation,  Tsinghua Professor Yang Guohua addressed the question of whether the Phase 1 Trade Agreement is alive or dead.   Prof. Yang formerly served in the Law and Treaties Department of MofCOM and later as MofCOM’s IP Attaché at the Chinese Embassy in Washington, DC.  I have known Dr. Yang for over 20 years.  There are few people who have had as much experience in China handling IP negotiations with Americans. In Prof. Yang’s view, the non-IP aspects of the Phase 1 Agreement are not likely to survive in the current trade environment. The IP aspects may, however, continue.   

There are good reasons to believe that Phase 1 is dead.  China is behind on  its purchase  commitments.  Those commitments also raised serious WTO concerns over Most Favored Nation obligations.    China has also obtained a WTO ruling that the sanctions imposed by the United States  were not WTO compliant. While the US drifted into unilateralism during the Trump era, China has recommitted to multilateralism.  It extended its global trade reach through both the CAI and RCEP and has also expressed an intent to join the CPTPP in the future. The Biden administration may also have concerns about Trumpian unilateralism and has said that it would like to see more multilateral engagement with China.   President Trump also noted in July 202O that he was pessimistic about prospects for a Phase 2 Trade Agreement.   I have not heard of any negotiations regarding a Phase 2 Agreement in IP, although the Phase 1 Agreement by itself was hardly a comprehensive agreement.  Finally, the new Biden administration may also want to demonstrate its own strategic priorities with new approaches.   

As Yang Guohua noted, the prospects for continued IP engagement are relatively strong.  His optimism has merits.  IP commitments extended by China to the United States typically get extended to all trading partners, thereby avoiding the violation of  MFN obligations.  As many speakers noted during the program, the Phase 1 Agreement also acted as a stimulus for additional reforms in China and was generally consistent with China’s own goals.  I expect that if the Biden administration were to pick up the Phase 1 Agreement again, IP could be a good focus.  However, the Biden administration might also be inclined to show some discontinuity with the past, such as changing the name to something other than a Phase 2 Agreement, or not using names of prior dialogues. National security and human rights issues may also dominate the discussions of how bilateral dialogues should be structured. Every administration for the past 20 years has had its own view on dialogues with China, and the Biden administration should be no different.   

Several polls during the four-day Berkeley/Tsinghua program revealed that the 200 plus attendees from both countries believed that a resumption of bilateral discussions on IP and technology issues would be a positive step forward.  President Biden’s nominees to date, however,  have offered little insight on whether they would like to restart trade dialogues. Many of the Biden nominees and appointees are veterans of Obama-era dialogues, including Secretary of State Blinken, Secretary of Treasury Yellen and Agricultural Secretary nominee Vilsack.  None of these nominees have had experience leading interagency discussions concerning technology or IP.  The general sentiment appears to be that they would not want to be “bogged down” by dialogues.  However, important officials, such as Dr. Kurt Campbell, who will serve as the President’s senior official on Asia in the National Security Council, have noted that there should be room for a dialogue that is “somewhere between the secretive kind of a high-level engagement between the White House and China and this incredibly large strategic and economic dialogue ― a new mechanism that helps support advancing the bilateral interests of the two countries.” A great recent discussion with Dr. Kurt Campbell at the Asia Society of Northern California can be found here (the Asia Society’s full program on relations with China, including interviews with Henry Kissinger and George Schultz, is worth listening to as well!).

The most compelling reason for China and the United States to reinitiate engagement with respect to IP is that it is in both countries’ mutual interests.  China has made dramatic changes to its IP regime in the past two years.  Many of these changes have gone beyond the limited scope of the Phase 1 Agreement.  Some of the changes, such as recent revisions to China’s patent examination guidelines on pharmaceuticals, are welcome improvements that also help in implementing Phase 1 commitments.  Americans and Chinese companies also continue to file for IP rights in each other’s countries, and continue to use the courts and administrative agencies, both as plaintiffs and defendants.  Judges in both countries would also benefit from a better understanding of each other’s legal systems.  Judge Jeremy Fogel (ret.), who previously served as the Director of the Federal Judicial Center (FJC), noted that the FJC greatly benefitted from having Chinese interns during his tenure there.  He also praised the contributions of China’s judges to an on-going project of WIPO regarding patent case management procedures.  Many of the judges speaking at the Berkeley-Tsinghua conference expressed concern about the consequences of a declining level of understanding of each other’s legal systems.  Several judges stated that increased dialogue between judges would also lead to less friction between our legal systems, such as in anti-suit injunctions. Prof. Yang also noted that concrete cases were often points of discussion in prior dialogues. 

As Prof. Dan Prud’homme notes in a recent article, there are many “myths” that each country has about the adequacy or inadequacy of China’s IP system.  An IPR-related dialogue would need to avoid being based on “myths,” which often results in meaningless political posturing, as well as getting “bogged down” and accomplishing little.  During times of trade tension in the past, the United States and China often found common ground in exchanging views on IP-related matters. A useful approach might be to identify shared tangible interests of both countries in areas such as patent and trademark prosecution, complex multinational litigation, patent linkage, plant variety protection, standardization, educating each other’s rightsholders, promoting fair, transparent and predictable litigation, IP issues in emerging technologies, etc.  These discussions should not be “talk-fests”, but should have real outcomes.  If the discussions can have tangible results, they might also serve as a pilot for other, more contentious dialogues. If so, it would not be the first time that IP-related dialogues served as a pilot, such as a past effort in the Obama era on judicial exchanges.

Service Inventions A Focus Point Once Again…

Although there is nothing under a year old when I looked today on SIPO’s s special service invention webpage, the topic of how much freedom employers have in determining how to reward their employee/inventors, has once again become a hot issue. Much of the discussion on this topic is being raised by the Ministry of Science and Technology, although SIPO reportedly is focusing on this issue as well.

Here’s an update on where we are:

At the US-China Innovation Dialogue in July 2014, the US and China agreed to the following language:

The United States and China resolved to protect the legal rights of inventors in accordance with their respective domestic laws and regulations, and in line with their domestic laws committed to respect the rules and policies developed by employers and/or legitimate contracts between employers and inventors concerning the awards and/or remuneration of inventors.

This language was essentially reaffirmed at the subsequent JCCT in December 2014:

The United States and China commit to protect the legal rights of inventors in respect of their inventions and creations, in accordance with their respective domestic laws and regulations, and in line with their domestic laws, commit to respect the legitimate rules and regulations developed by employers and legitimate contracts between employers and inventors concerning inventor remuneration and awards.

On March 2, 2015 the National People’s Congress also released a draft for public comment of The Law for Promoting Science and Technology Achievements (促进科技成果转化法修正案(草案)).  Here’s an unofficial translation of the changes that this draft makes to the old law.  This draft contains the following specific provisions on inventor compensation:

One article is added as Article 43: “After the commercialization of a service STA [Science and Technology Achievement], the STA completing entity shall give reward and remuneration to those who have made important contributions to the completion and commercialization of the STA.

The STA completing entity may prescribe or agree with its scientific and technological personnel on the form and amount of the reward and remuneration. When formulating the relevant regulations, the entity shall fully listen to the opinions of its scientific and technological personnel and make public the relevant regulations within the entity. ”

A revised Article 44 provides for default provisions for compensation, presumably if provisions are not established with technological personnel: “If the STA completing entity has not formulated such regulations or agreed on the form and amount of the reward and remuneration, the reward and remuneration shall be given to those who have made important contributions to the commercialization of the service STA according to the following criteria:

(1) If the service STA is transferred or licensed to others for implementation, no less than 20% shall be drawn out of the income from the STA so transferred or licensed;

(2) If the service STA is evaluated for investment, no less than 20% shall be drawn out of the shares or the proportion of contribution formed by the STA;

(3) If the entity implements the service STA by itself or in cooperation with others, no less than 5% shall be drawn out of the operating profits obtained from 3~5 consecutive years of implementation of the STA after its commercialization and successful start of production.

The criteria provided in the preceding paragraphs for the reward and remuneration given those who have made important contributions to the completion and commercialization of service STAs include the remuneration given to the inventors and designers of service inventions and creations that have received patent right in accordance with the Patent Law of the People’s Republic of China and the detailed rules for implementation thereof. …”

Although more general than the Service Invention Regulations that are under consideration by SIPO, this is a law that is more authoritative than a regulation. This law, along with agreed statements by the Minister of Science and Technology Wan Gang and OSTP Director Dr. John Holdren at the Innovation Dialogue could be read to show an inclination to favor contractual arrangements or corporate policies in establishing appropriate compensation for employee/inventors, although greater clarity concerning when such arrangements would be superseded by default provisions would be helpful.   Also of concern is that if more restrictive regulations are adopted in the Service Invention Regulations proposed by SIPO, they will be entitled to considerable deference as a subsequently adopted regulation which narrowly focuses on inventor compensation.  Moreover the regulations will be particularly important to SIPO itself in any enforcement or policy making it undertakes.

Another boost to regulating service inventions appears to have come from Premier Li Keqiang at  his March 5 speech at the recent 2015 “lianghui” – the meeting of the National People’s Congress and Chinese People’s Consultative Congress, where he stated that China should “enable innovative talents to share in achievements and profit, complete the transformation of science and technology achievements, and the service invention legal system” (使创新人才分享成果收益, 完善科技成果转化、职务发明法律制度).

Comments on the draft law are due by April 1.

As always, these are my personal opinions.



Outcomes of the Fifth US-China Innovation Dialogue

The White House Office of Science and Technology Policy recently released a blog on the results of the bilateral Innovation Dialogue with China with the Ministry of Science and Technology and other agencies:

Of particular note are the provisions regarding sanctity of contracts involving inventor compensation. According to the blog:

The United States and China resolved to protect the legal rights of inventors in accordance with their respective domestic laws and regulations, and in line with their domestic laws committed to respect the rules and policies developed by employers and/or legitimate contracts between employers and inventors concerning the awards and/or remuneration of inventors.

For further background see: .