Legislation & Policy

China’s Commitment to IP Protection is Upfront in its Economic and Trade Agreement with the US

SIPSKnowledge, Legislation and Policy

Phase 1 of the Economic and Trade Agreement between the United States and China was released on January 15, 2020 (“the Agreement”).

The eight-chapter Agreement covers a range of trade issues. Importantly, intellectual property (including technology transfer) occupy pride in place in the first two chapters.

This article will analyze China’s commitments regarding IP protection in the Agreement, with particular focus on bad faith trademark registration and online infringement of IP rights.

Key take-aways are as follows.

  • Most of the commitments are already reflected in Chinese law or in draft amendments in the pipeline.
  • Some areas of potential new legislative reform relate to patent linkage with pharmaceutical approvals, destruction of counterfeits by customs and longer prison sentences for trademark infringers.[1]
  • Areas of non-legislative commitments include Chinese undertakings to regularly publish information about its enforcement measures and to increase enforcement actions and personnel at the borders and in physical markets[2].
Chapter 1

Bad faith trademarks

Section H, Chapter 1 states that China will provide “adequate and effective protection and enforcement” against bad faith trademark registrations[3]. No specific measures for doing so are set out in the Agreement. However, in the year leading up to the Agreement, China had already addressed the issue through a revision of the Trademark Law and new regulations (see: Recent Developments in Combating Bad Faith Trademark Piracy in China).

  • the Fourth Amendment to the Trademark Law (2019)[4]; and
  • Measures on Regulating the Application and Registration of Trademarks (2019) (the “Measures”)[5].

Article 4 of the amended Trademark Law is the fulcrum of these reforms, and it states that:

a bad faith application for trademark registration for a purpose other than use shall be rejected.

The amended Trademark Law and Measures also allow administrative enforcement authorities to impose fines against both bad faith filers and their trademark agents. The Measures also provides for possible “social credit” penalties against bad faith filers[6].

Article 11 of the Measures further states that the Trademark Office (“TMO”) will publish decisions issued pursuant to Article 4, thereby making it easier for brand owners to identify confirmed “pirates” and to deter future violations.

These reforms appear mainly focused on trademark hoarders who do not use the marks – as evidenced by the text of Article 4 of the revised law, which exclusively refers to marks filed in bad faith for a “purpose other than use”. This has left a loophole vis-à-vis pirates who actually use copycat marks, as well as pirates that only target one or a handful of marks belonging to others. Both continue to be problems for brand owners in China.

E-commerce platforms

Section E, Chapter 1 of the Agreement reflects long-standing concerns over the enormous scale of infringements taking place on Alibaba and other online platforms based in China.

While the number of legal and practical barriers to cost-effective online enforcement are legion, the Agreement only contains one provision that seems intended to generate substantial changes in law or practice. Article 1.14 states:

“China shall provide that e-commerce platforms may have their operating licenses revoked for repeated failures to curb the sale of counterfeit or pirated goods”.

China may well argue that its existing laws and practice already have this power.

  • Article 45 of the E-Commerce Law (2019)[7] makes e-commerce platform providers jointly and severally liable if they know or should have known that an in-platform business infringes IP rights and fail to take action (see: China’s New E-Commerce Law: A Summary and Assessment of IP Provisions).
  • Internet Content Providers can have their licenses suspended or revoked for allowing any unlawful information to be published on their services.[8] Furthermore, local company registries (the “Market Supervision Bureaux” or “MSBs”) have wide discretion in approving the renewal of business licenses in China.

Meanwhile, the Zhejiang Province Higher People’s Court[9] issued a guidance that gives courts in Hangzhou (where Alibaba is located) the power to hold platforms civilly liable for infringement under the following conditions:

  • where the platform “should have known” of infringing activities, even without a notice from rights holders (Articles 19 and 21);
  • where the platform fails to fulfill its reasonable duty of care in the following ways:
    1. failure to fulfill statutory obligations related to IPR protection;
    2. failure to adopt effective technical measures for infringement monitoring that are widely available at the time of infringement (e.g. key word filters such as ‘counterfeit’);
    3. failure to prevent the re-listing of infringing pages after a complaint has been successfully established. [10]

In the real world, few IP owners have sued Alibaba for infringement, as doing so could undermine their own ability to cooperate with the platform in distributing their goods online. Therefore, the effect of these provisions, while seemingly very helpful, may not be of immediate use.

Section G: Manufacture and export of pirated and counterfeit goods

Section G, Chapter 1 reflects the US government’s prioritization of efforts to address counterfeit goods, and China made the following commitments:

  • take effective action against counterfeit medicines and publish annually the data on enforcement measures;
  • share with the US the registration information of pharmaceutical raw material sites that comply with Chinese requirements;
  • destroy counterfeit goods after seizure;
  • increase enforcement actions and personnel at the border and in physical markets and publish quarterly updates; and
  • annually audit use of unlicensed software by Chinese government agencies.

With the exception of the audit and publication requirements, the commitments are either very aspirational or already reflected in Chinese law.

However, one area where new legislative reform may be required is in relation to destruction of counterfeit goods by Customs. Current rules allow Customs to auction infringing goods in certain circumstances if the infringing parts can be removed[11]. This would not be allowed under the commitments in the Agreement.

Section I: Judicial enforcement and procedure

Section I, Chapter 1 indicates China will increase both criminal and administrative penalties as well as civil damages in two stages:

  • In the first stage, penalties and remedies will be imposed “at or near the [current] statutory maximum” to deter infringements.
  • As a subsequent step, China will increase the minimum and maximum statutory damages, sentences of imprisonment and monetary fines.

The first stage puts the onus on the courts to impose maximum penalties or damages. Steps towards implementing this requirement are in the Supreme People’s Court’s Opinion on Strengthening Judicial Protection of Intellectual Property (Draft for Soliciting Opinions), which suggests that penalties and remedies for IP infringement shall be imposed “severely”[12].

The second stage requires legislative amendment, although some of those amendments have already been implemented.

Article 63 of China’s recently amended Trademark Law[13] increased maximum statutory damages from RMB3 million to RMB5 million.

Meanwhile, for “malicious infringements” of trademark rights, the maximum compensation level was increased from 3 to 5 times of the relevant base[14].

The second stage suggests an intention to increase the maximum criminal sentence for IP violations (presumably of all kinds) from the current seven years[15]. However, details are not stated in the Agreement, and there do not appear to be any drafts amendments in the pipeline to date that would achieve this.

Section B: Trade secrets

In China, administrative and civil enforcement for trade secrets is provided under the Anti-Unfair Competition Law (“AUCL”), while criminal remedies are set out in the PRC Criminal Law.

To date, enforcement of trade secrets have been hampered by onerous evidentiary requirements, difficulties in obtaining preliminary injunctions and uncertainty about whether employees as well as companies could be pursued under the AUCL. Meanwhile criminalization of trade secret cases has required a showing that the infringer had already commenced commercial use of the stolen secrets and generated illegal revenues over a certain threshold (currently RMB500,000)[16]. By contrast, the law in most other countries allows for criminal prosecution following simple theft of the trade secret and without requiring evidence of commercialization by the infringer.

Section B details China’s commitments on improving enforceability of trade secret rights. They include:

  • making clear that individuals as well as businesses can be liable;
  • ensuring that electronic intrusions and breach or inducement to breach of a duty not to disclose can amount to trade secret infringement;
  • shifting the burden of proof to the accused party where the rights holder has produced prima facie evidence of a reasonable indication of trade secret infringement (for civil proceedings);
  • clarification that use or attempted use of trade secrets is an “urgent situation” that authorizes the courts to grant preliminary injunctions under the Civil Procedure Law;
  • elimination of any criteria for criminal prosecution that requires evidence of commercialization by the infringer; and
  • restrictions against disclosure of trade secrets and confidential business information by government officials.

Items 1 – 4 have been largely already addressed through the 2019 Amendments to the AUCL[17] and promulgation of the 2018 Supreme People’s Court Provisions on Application of Laws in the Review of Act Preservation Involving Intellectual Property Disputes[18]. ‘

Section C: Pharmaceutical related IP

Section C deals with the interplay between patent registration and pharmaceutical development. These commitments are not reflected in the most recent 4th Draft Amendment of the Patent Law (released in January 2019), although they could be reflected in the 5th Draft Amendment.

Article 1.10 allows patent applicants to rely on supplemental data (i.e. post filing data) to demonstrative inventive step. This is already allowed in the US and has previously been allowed, although on an extremely reluctant basis, in China.

Article 1.11 deals with patent linkage with market approval. Specifically, a patent holder, licensee or holder of marketing approval of an approved product will be given notice if another party, in seeking regulatory approval to market a pharmaceutical product, relies on evidence or information concerning the safety and efficacy of the approved product during the term of the patent claiming the approved product or its approved method of use.

Section D: Patents

Section D allows for patent term extensions to compensate for unreasonable delays that occur, not at the fault of the applicant, (1) in granting the patent or (2) during pharmaceutical product marketing approvals.

For the former (1), an unreasonable delay shall at least include a delay in the issuance of a patent of more than four years from the date of filing the application in China, or three years after a request for examination of the application, whichever is later.

For the latter (2), the extension may be no more than five years and may limit the resulting effective patent term to no more than 14 years from the date of marketing approval.

This has already been reflected in the Fourth Draft Amendment to the Patent Law, released in January 2019[19].

Chapter 2 Technology Transfer

Chapter 2, Technology Transfer, states commitments at a fairly high level and only consists of two and a half pages.

The key take-aways are that both parties say that they will:

  • allow persons of the other party to operate openly and freely in their jurisdiction without any force or pressure to transfer technology;
  • not pressure persons of the other party to transfer, use or favor technology in relation to acquisitions, joint ventures or other investment strategies or as a condition of any administrative or licensing requirements or any other advantages.

These commitments are a response to long-standing complaints by the US that China forced technology transfers during the course of the administrative/regulatory approval or licensing process.

They were also already addressed in new Foreign Investment Law, that was passed by the National People’s Congress in March 2019. The Foreign Investment Law states that:

  • foreign investment should be treated no less favorably than domestic investment (unless the investment relates to a restricted industry on the Negative List)[20];
  • foreign investments are not subject to governmental expropriation (except in special circumstances)[21];
  • the State will protect intellectual property rights of foreign investors and shall not force technology transfer by administrative means[22].
Conclusion

The Agreement is, at least at a high level, responsive to many US concerns regarding intellectual property and technology transfer.

To a large extent, China had already implemented or was in the process of implementing most of the commitments prior to signing the Agreement in February this year.

However, this is not to diminish the negotiation efforts by the US. Notably, most of the reforms discussed in this Article occurred in the last 12 -18 months, and they are likely the direct outcome of positions taken by the US leading up to Agreement.

It remains to be seen how responsive the reforms will be. As discussed in this article, while the reform in relation to bad faith trademarks and e-commerce appear on paper to be very helpful, they may fall short of wholly addressing concerns by foreign rights holders.

By Courtney Macintosh

This article originally published in the Australian Intellectual Property Law Bulletin, Vol. 33, No.1.


Endnotes:

[1] See Section D: Patents, Section G: Manufacture and Export of Pirated and Counterfeit Goods and Section 1: Judicial Enforcement and Procedure in Intellectual Property Cases in Chapter 1
[2] See Section G: Manufacture and Export of Pirated and Counterfeit Goods in Chapter 1
[3] See Section H: Bad-Faith Trademarks
[4] The Standing Committee of the National People’s Congress passed the Fourth Amendment to the Trademark Law on April 23, 2019, and it came into effect on November 1, 2019.
[5] State Administration of Market Regulation issued the Measures on Regulating the Application and Registration of Trademarks on October 17, 2019, and they came into effect on December 01, 2019.</>
[6] See Articles 19 and 68 of the Trademark Law and Article 13 of the Measures.
[7] The E-Commerce Law took effect on January 01, 2019
[8] See Article 20 of the Administrative Measures for Internet Information Services (2011).
[9] No. 3 Tribunal
[10] See Article 23 of The Guidance on The Determination of IP Trials Involving Online Platforms on December 26, 2019
[11] See Article 33 of the Implementing Rules of Regulations on Customs Protection of Intellectual Property Rights
[12] See section III.14 of Supreme People’s Court’s Opinion on Strengthening Judicial Protection of Intellectual Property (Draft for Soliciting Opinions)
[13] Fourth Amendment of the Trademark Law that took effect in November 2019.
[14] Article 63 of the Trademark Law states that the relevant base can includes calculation of the rights’ holders’ losses, the infringers’ profits or reasonable royalties.
[15] Articles 213 to 219 of the Criminal Law (2017) provide that for crimes in relation to IP rights infringement, the maximum term of imprisonment will be 3 years. For severe violations, the term of imprisonment can be up to 7 years
[16] Article 7 of the Interpretation of the Supreme People’s Court & the Supreme People’s Procuratorate Concerning Some Issues on the Specific Application of Law for Handling Criminal Cases of Infringement upon Intellectual Property Rights] (promulgated Dec. 8, 2004) and Article 219 of the Criminal Law (2017)
[17] See Articles 9 and 32 of the AUCL
[18] See Article 6 of the Supreme People’s Court Provisions on Application of Laws in the Review of Act Preservation Involving Intellectual Property Disputes (issued on December 12, 2018)
[19] See Article 42 of the Fourth Draft Amendment to the Patent Act (2019)
[20] See Article 4
[21] Article 20 of the Foreign Investment Law
[22] Article 22 of the Foreign Investment Law