Legislation & Policy

The PRC Social Credit System and IP Protection

SIPSKnowledge, Legislation and Policy

Introduction

The Chinese government is in the process of developing a nationwide “Social Credit System” (社会信用体系) that aims to strengthen compliance by individuals and corporate entities operating in the Chinese society. The system tracks certain social and commercial behavior of a person or entity, for which it then hands out awards or penalties. Notably, these penalties go beyond what is already provided in the existing administrative, civil, and criminal laws and regulations.

The blueprint for the Social Credit system and foundation for existing pilot programs is the 2016 “Memorandum of Cooperation on Joint Disciplinary Actions against Discredited Judgment Debtors” jointly issued by 44 government agencies. The Memo allows government agencies to impose up to 32 types of disciplinary measures against natural persons and entities that have been added to the Supreme People’s Court’s “blacklist” – a list that the SPC has maintained since 2013 to keep track of parties who have engaged in discredited behaviors such as refusing to fulfil effective legal judgments (not due to inability to perform).

According to a recent report issued by the National Public Credit Information Center, at the end of 2018, over 12.7 million discredited judgment debtors were placed on the SPC’s “discredited” list, with more than 17.4 million defaulters being prevented from purchasing plane tickets and close to 5.5 million stopped from buying high-speed train tickets.

On its face, the Social Credit system perhaps does not seem that different from systems employed by certain European countries. Sweden, for example, has a credit scoring system that tracks people with a history of neglecting to pay bills and taxes. Under this system, those who fail to pay their debt on time will receive a remark in the so-called “non-payment record” and have their case forwarded to the enforcement authorities. Parties with such a record will find it difficult to perform social functions where public trust is involved, such as obtaining a loan or renting an apartment.

China has taken quite a few steps further, however. Points in the Social Credit system can be deducted for, among others, failing to pay social insurance, violating traffic rules, counterfeiting and providing misleading advertising.  Conversely, points are awarded for reporting counterfeit products, contributing to village development, volunteering, donating blood, caring for elders and attracting investments to a city. Data that make up the scores are collected from court judgments, government agency records, citizen observers and corporate records.

While the Social Credit system is currently being run in a number of pilot cities, full nationwide implementation is expected by 2021. To that end, government agencies have taken concerted actions against discredited persons and entities. By the end of last year, there have been 51 memoranda of cooperation on joint disciplinary actions, covering 18 different industries, including the Memorandum on Joint Disciplinary Actions against Discredited Entities in IP (Patents) discussed below.

In the meantime, pilot programs are ongoing in major cities and regions, some less reliant on AI than others. In some villages, the system is being trialed though volunteers who manually keep a scoring system of other villagers.

Among the more technologically advanced programs, Shanghai passed rules on collecting and using public credit information as early as 2015, and in 2017, it became the first municipality in China to promulgate comprehensive social credit regulations. Under the rules, residents who breach certain statutory or contractual obligations are precluded from enjoying certain preferential policies, and those whose breaches of duty are considered serious are prohibited from participating in certain industries and markets. The local government is currently conducting a review of the rules’ effectiveness and implementation problems. Article 25 of the Shanghai rules gives the administrative organs the power to establish a list of untrustworthy parties based on certain behavior, such as:

  1. Behavior that seriously damages the physical health and safety of natural persons;
  2. Behavior that seriously undermines the fair market competition and normal order of society;
  3. Evading the execution of statutory obligations;
  4. Refusing to perform national defense obligations, endangering national defense interests, and undermining national defense facilities.

Concurrently, the Shenzhen government issued its own public credit information rules that prescribe joint disciplinary action against those who engage in serious discredited behaviors. Notably, serious discredited behaviors include the intentional and serious infringement of intellectual property rights.

The local government in Beijing meanwhile has announced an action plan to promulgate its social credit regulations by the end of 2020 and build a city-wide public credit service platform that covers all permanent residents. According to the plan, a credit score file will be kept on each resident, and information from the file will be widely shared and used in fields like public service, job search, and travel. Discredited residents are expected to pay a heavy price and encounter restrictions and limitations in all areas of life.

Other regions, like Shanxi, Shandong and Hubei provinces, have also passed regulations on managing social credit information and it is clear from media reports that the system is being trialed on a smaller scale in villages.

How Does This Relate to Intellectual Property?

Some IP owners have already unwittingly benefited from rules that impose Social Credit penalties on those who default from final civil damages awards.  But soon, more IP owners will enjoy these benefits as plans have been put forth by the CCP to link IP infringement to the Social Credit system.

So far, two sets of Social Credit rules have been put forth to address trademark piracy and patent infringement: the “Provisions on Standardizing Applications for Registration of Trademarks(draft provisions) and the “Memorandum of Cooperation for joint Disciplinary Action against Seriously Discrediting Conduct (Patents)”.

SIPO’s Draft Provisions on Standardizing Applications for Registration of Trademarks

On February 14, 2019, the State Intellectual Property Office of China (SIPO) – the parent organization of the TMO – published draft regulations that would empower the TMO to take more aggressive action against “abnormal” trademarks – i.e., those filed with intent to pirate another brand and/or those filed without bona fide intent to use.

The Provisions were foreshadowed in late 2017 by TMO officials who were quoted in media reports as planning a range of measures to address bad faith registrations, including the establishment of a blacklisting system, new requirements on applicants to prove use of marks, and plans to discipline trademark agents that knowingly assist pirates. The Provisions also followed on the heels of reports from the TMO that it recently rejected over 100,000 applications by blatant trademark warehousers.

In addition, in 2017, the TMO disclosed plans to establish an informal “blacklist” for bad faith filers, and while there is no direct reference to a blacklist in the Provisions, Article 5 states that CNIPA may publish information on abnormal filers on its website. More importantly, CNIPA is empowered to enter the names of abnormal filers into the “national credit information sharing platform”, after which other government authorities may impose relevant “disciplinary measures”.

It remains to be seen how the Social Credit system will be used to punish “abnormal” trademark filers, but Article 5 may well prove to be the most impactful clause in the Provisions – the one IP owners can use to leverage settlements more quickly and at a reasonable price.

In terms of the Trademark Law itself, the latest iteration of the PRC Trademark Law was passed in 2013, but movements are already afoot within the TMO to generate proposals for further amendments.  While the National People’s Congress has not indicated plans to amend the law in any major way, problems with bad faith registration and other issues have increased pressure for it to do so.  Given that focus is already on SC penalties in the Provisions, and that the CCP is pushing for a swift implementation of the Social Credit system, it is likely that any amended version of the Trademark Law will also include a linkage to Social Credit penalties.

Memorandum to Curb Patent Infringers

The abovementioned November 2018 Memorandum was published by the National Development and Reform Commission with the aim of imposing stricter punishment on patent infringements. The Memorandum was issued to further enhance the implementation of a number of long-term state strategies and plans, including the “State Council’s Notice of the Construction of the Credit System (2014-2020) (Guo Fa [2014]) and “Guiding Opinions on Accelerating the Construction of Social Integrity by a Disciplinary System” (Guo Fa [2016] No. 33).

The Memorandum was signed by 38 Chinese authorities, including the China National Intellectual Property Administration, Ministry of Finance, People’s Bank of China, State-owned Assets and Supervision Administration, State Administration of Foreign Exchange and others, and calls for “joint disciplinary action” against “serious discrediting conduct” in the patent field. The Memorandum defines such conduct to include:

  1. Repetitive patent infringement (of the same patent right);
  2. Refusing to perform or conform with effective decisions or punishments, and obstructing the IP office’s investigation and evidence collection;
  3. Serious illegal behavior conducted by patent agencies;
  4. Conduct regarded as discrediting by the Patent Bar;
  5. Abnormal patent applications; and
  6. Providing fake documents in patent applications or relevant patent procedures.

In particular, the Memorandum homes in on “abnormal” patent applications, which in essence are defined as different types of repetitive behavior where:

  1. The same unit or individual submits multiple patent applications with the same content;
  2. The same unit or individual submits multiple patent applications that obviously copy existing technology or designs;
  3. The same unit or individual submits multiple patent applications for simple replacements or a patchwork of different materials, components, ratios etc.;
  4. The same unit or individual submits multiple patent applications containing experimental data or patents with obvious technical defects;
  5. The same unit or individual submits multiple patent applications that use computer technology to randomly generate product shapes, patterns or colors; and
  6. One helps others to submit applications of the type mentioned in items i. to v., and where patent agencies submit the aforementioned items.

The Draft Patent Law

On January 4, 2019, the Standing Committee of the National People’s Congress (NPC) issued the fourth draft of a proposed amendment to the PRC Patent Law. It is currently expected that the NPC could potentially enact the revisions as early as spring 2019. The more significant proposals in this draft include increased damages and longer protection for design patents. It also has a suggested provision on bad faith applications, which provides that the acts of applying for patents and exercising patent rights should adhere to the principle of good faith and that patent rights should not be abused to cause harm to public interest or others’ legal rights, or to restrict competition.

Interestingly, the third draft version had a proposed linkage to the SC system which stated that “the patent administrative department shall establish a patent protection credit information file and incorporate it into the national credit information sharing exchange platform.” However, this article has been removed from the latest January 2019 draft. Perhaps it was believed that the Memorandum already provides enough linkage that the article need not be included, but nevertheless, it remains to be seen what the final version entails.

Social Credit Penalties

The penalties and disciplinary actions are generally imposed on individuals. In cases where the rules are violated by an entity, not only is the entity’s legal representative personally punishable, but the entity itself will face restrictions, such as restricted access to funding, being blacklisted and so on.

Perpetrators of “dishonest” behavior in the IP field may be punished by the following disciplinary actions:

  1. Restrictions from publishing advertisements of products that have been stopped from being produced or sold due to patent infringements, and any already released advertisements would be suspended immediately;
  2. Restricted access to fast-track applications;
  3. Cancellation of enterprise awards and qualifications, such as National Patent Pilot Enterprise Qualifications; and
  4. Restrictions from other preferential policies such as reduced fees, priority review, accelerated procedures and other preferential measures when applying for patents.

Actors of other general types of “dishonest” conduct may face the following disciplinary measures:

  1. Being listed publicly on government websites;
  2. Restricted access to government funding, subsidies and purchases;
  3. Recordal of conduct in the national financial credit database and internet credit databases;
  4. Restricted access to financial and capital markets, import and export activities, and land use; and
  5. Stricter governmental supervision by various administrative departments, including more difficult approval of foreign exchange quotas.

Other penalties include restrictions on the purchase of real estate and state-owned property; restricted employment as a civil servant or a staff member of a public institution; restrictions from taking high-speed trains and booking soft-sleep carriages on trains. There is also a push for dispensing joint punishments by the various departments.

Relief Provisions

In accordance with Articles 11 and 12 of the Supreme People’s Court Provisions on Publishing Information of Discredited Judgment Debtors, those who feel wrongfully included on the discredited list may petition the court that handed down the judgment for relief.

Article 12 gives the court 15 days from the date of receipt of the written petition to examine the matter. Once a decision is made, the court must announce it within three days. A citizen, legal person or other organization can appeal a decision to the people’s court at the next level within 10 days from the date of delivery of the first decision. It should be noted that, during the reconsideration of whether the person/entity should be included on the discredited list, the execution of the original decision will not be put on hold.

Relief provisions similarly exist in municipal regulations.  For instance, Article 25 of Shanghai’s social credit rules affords the right for natural persons and entities to seek relief, and states that administrative agencies that publish discredited lists must also prescribe rules that allow for remedies to be sought.

Constitutionality

While there is little doubt that the Social Credit system reflects the rise of party power, the Social Credit system is clearly intended to reassure business and the public at large that action is being taken to address issues such as bad faith that cannot, or at least has not until this point, been possible to fix through traditional legal remedies.  As such, the push-back against the system from the public and academics has been limited to date, which is perhaps not surprising given China’s tough stance on requiring its people to conform to the rule of the state. Some might call it a surveillance regime of Orwellian proportions and one might even argue that the whole system is unconstitutional. Nevertheless, any challenge to its constitutionality is unlikely – and, in any case, unlikely to succeed.