O ye who read this truthful rime From Flanders, kneel and say:
God speed the time when every day
Shall be as Christmas Day.
(Frederick Niven, “A Carol from Flanders”, regarding the WW I Xmas truce)
We are in the middle of the 90-day trade war truce, which was announced at the G-20 in Buenos Aires. Is there, however, an opportunity for a lasting trade peace? Let’s look at developments to date…
Shortly after the Buenos Aires G-20 meeting on December 1, 2018 at which the 90 day truce was agreed to, USTR Robert Lighthizer gave an interview on Face the Nation where he hinted at the pathway forward, noting: “We have had conversations ongoing. We have had conversations ongoing for over a year.” Lighthizer went on to say that we need structural changes and market opening “on this fundamental issue of non-economic technology transfer.” Lighthizer’s focus was three-fold: forced technology transfer, cyber theft and state capitalism. Lighthizer noted that tariffs will be raised in March unless a satisfactory solution is found. In fact, USTR has announced on November 19 a deadline of March 2, at which time tariffs will be raised. March 2 is 90 days after the December 1 meeting.
Notwithstanding LIghthizer’s assertions of on-going discussion, there have been several significant developments which suggest that there may not have been much real communication. Typically, a new administration needs one to two years before adequately coming to terms with how China negotiates on IP and what may be the “low hanging fruit” in IP improvements that could have a durable impact. This administration and China have not had anything approaching a “honeymoon” period. It is not surprising, therefore, that some of the developments during this past year, as well as during the truce period appear, to be missing the mark.
If we dial back to the period when the 301 investigation was on-going, China failed to publicly disclose data on civil trade secret cases for 2018, and actually reduced its criminal trade secret prosecutions by approximately 35% to only 26 cases in that year. China’s revised trade secret law (Anti Unfair Competition Law) (eff. 1/1/18) also weakened trade secret protections by expanding the ambiguity around protections and procedures, where a non “business operator”, such as an employee, misappropriates trade secrets.
The United States also did not always engage comprehensively during this period. Although the United States filed a WTO case against China on March 23, 2018 (the day after the Section 301 Report was released) regarding compulsory licensing terms, the complaint does not specifically call out trade secrets (undisclosed information) as a form of technology licensing. The European complaint, by contrast, more thoughtfully notes that “China imposes a different set of rules on the import of technology, including industrial property rights, other intellectual property rights and undisclosed information (“intellectual property rights”).”
Other recent efforts undertaken by China suggest that there may also have been some lack of understanding of US interests, including perhaps an undue emphasis on patent licensing. NDRC, China’s powerful state planning agency, announced a special Memorandum of Understanding/campaign mechanism involving 38 government agencies to address six types of “dishonest conduct” by patenting enterprises and individuals. The “MOU For Cooperation for Joint Disciplinary Actions Against Subjects of Serious Mistrust in the Field of Intellectual Property (patents).” 关于对知识产权（专利）领域严重失信主体开展联合惩戒的合作备忘录 is dated November 21 (before the G-20), but was published on December 2 (immediately after).
How effective will this MOU be? For some time, the academic data has suggested that such special campaigns have rarely brought any durable progress. In fact, China suggested a special campaign for three months at the beginning of the 301 investigation. My response on the record to that suggestion was:
“Many scholars think that these short campaigns have limited duration and effect . . .. So, I’d like to know why is this particular program any different from other ones before it? Why not extend it or make it permanent? Or perhaps should the focus be on judicial reform or other areas?”
The data also shows that foreigners rarely use the administrative patent system and, as I have pointed out, along with former Chief Judge Rader and former PTO Director Kappos, vesting the administrative agency in charge of granting patents with the ability to bring infringement actions and special campaigns may not be conducive to independent adjudication of rights.
Another “truce-responsive” legislative effort appears to be in the works from China’s National People’s Congress, where a first reading of a new “Foreign Investment Law” is reportedly now under consideration. The law would combine existing laws regarding foreign investment into one statute and is intended to insure that foreigners are accorded national treatment and can participate in government procurement and standards setting, as well as insure that transfer technology is on voluntary terms. It hopefully may address some aspects of forced technology transfer that have been identified by USTR in its 301 Report.
There have also been two other significant developments that could affect the landscape for technology transfer and IP protection in China that have a longer history and could be helpful to foreigners facing IP issues in China. One of these is China’s proposed draft patent law amendments which have also been submitted to the NPC and have gone through its first reading. The draft offers some improvement on judicial procedures and remedies (including discovery for calculation of damages, and improved damage calculations). This latest draft also strengthens administrative enforcement, and extends the term for design patents to 15 years (in anticipation of accession to the Hague Agreement on the International Registration of Industrial Designs), provides for enhanced protection of patents in e-commerce, extends patent term for innovative pharmaceutical patents by five years. However, it may also have weakened protections for pharmaceutical patents, as press reports thus far omit any reference to patent linkage, continuing a trend since this past August.
In my estimation, the most positive development is the establishment of a new specialized appellate circuit IP tribunal attached to China’s Supreme People’s Court and under the direction of long time IP judge, Luo Dongchuan, now Justice of the SPC. The new circuit tribunal will have national jurisdiction over technologically complex IP cases and will open for business January 1, 2019. This court could also have an important impact on technical trade secret cases, patent disputes in key areas, such as semiconductors and pharma cases, appeals from China’s patent office, in insuring consistency of decision making across various intermediate courts, and in other areas.
Interestingly, none of these changes address Lighthizer’s other goals of addressing cyber theft and state capitalism.
There have been other changes in how the US engages with China that suggest some modifications in the bilateral relationship are permanent. US companies have now begun wondering how they can take advantage of US Customs rules regarding determinations of country of origin of products with Chinese content, to minimize the potential application of 25% punitive tariffs. They are busy revisiting Customs doctrines regarding “substantial transformation, including the progeny of cases and rulings since the landmark decision in Anheuser Busch v. United States 207 U.S. 556 (1907), in order to see how they might restructure manufacturing in China through conducting more assembly or finishing outside of China. For Customs lawyers this must be a boon period. At the same time, the US Department of Commerce has published new, potentially restrictive rules on “foundational” and “emerging” technologies, which may be targeted towards China, and the Treasury Department/Committee on Foreign Investment in the United States is conducting a pilot program that could restrict “passive, non-controlling” foreign investments in technology. Meanwhile, Huawei’s CFO was arrested pending extradition to the United States, and Fujian Jinhua is banned from acquiring US technology, as it has been determined to be a threat to US national security. It is clear to me that even if this stage of the trade war were to end, a new normal in trade relations with China has emerged and significant steps will need to be taken to reestablish trust.
My next blog will offer some ideas for reducing the bilateral temperature.
Christmas Day, 2018 (rev. 5:00 PM).