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Previously partner at Mallesons Stephen Jaques.
31 March 2020
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Is the end of the U.S.-China trade war in sight? A new economic and trade agreement signed between the two countries is an important step in this exercise of improving IP protection and trade relations, but as Espie Angelica A. de Leon reports, putting it on paper and signing it might have been the easy step.
The year 2020 started off on a bright note for the United States and China as far as the two countries’ ongoing trade dispute is concerned.
This is because on January 15, the U.S. and Chinese governments signed the phase one documentation of a new economic and trade agreement.
Chapter 1 of the agreement tackles intellectual property, while Chapter 2 focuses on technology transfer.
“Both of these provisions were needed to begin to address the IP challenges faced predominantly by companies from the U.S. that sell into markets in China,” says Christopher J. Rourk, a partner at Jackson Walker in Dallas.
“Chapter 1 addresses many of the concerns of U.S. companies that are directly related to intellectual property in general and Chapter 2 addresses the concern that U.S. companies were required to transfer technology as a condition to doing business in China,” he says.
Could this agreement be a major step toward improving IP protection and thus result in better trade relations between the two countries?
Some lawyers believe it may depend on how it is going to be implemented.
The agreement contains measures for addressing the issue of pirated and counterfeit goods in e-commerce platforms. These measures include getting e-commerce platform owners to take greater action against pirated and counterfeit products and facilitating take down measures for IP rights owners. Responsibility will also be placed on the e-commerce platform operator when infringement occurs.
There are also measures covering unlicensed software and bad faith trademark filings.
In China in particular, bad faith trademark registrations have been a perennial problem for the past 10 years or so.
“If you look at the number of trademark filings in China, ever since China abolished the trademark attorney qualifying exam, the number has been dramatically increasing. Trademark squatting has been regarded as a lucrative business. In my opinion, the absence of regulations on trademark professionals and the absence of entry threshold to be a trademark professional contributed partly to this issue,” says Stephen Yang, managing partner and patent attorney at IP March in Beijing.
The problem is so serious, he says, that trademark applications with real intention to use have been slow to reach the stage of registration. Prior bad faith filings by squatters are the culprit.
According to Coral Toh, principal and managing director at Spruson & Ferguson in Hong Kong, differences in the trademark systems of the U.S. and China have contributed to this.
“China operates on a first-to-file system for trademarks under which very strong rights are accorded to the first filer with limited opportunities only for others who are able to prove extensive prior use in China to defeat such rights. Whereas in the U.S., a few instances of genuine first use would give the user significant prior rights. Such difference has been exploited by trademark squatters in China who filed applications for foreign trademarks which had not entered the Chinese market, with the aim to sell them back to the rightful owners at inflated prices,” Toh explains.
To make matters worse, the China National Intellectual Property Administration (CNIPA) reduced the official fee for filing trademark applications by 50 percent so that in April 2017, the fee was only US$47. This made it very convenient for the squatters, says Toh.
According to George Chan, a partner at Simmons & Simmons in Beijing, 24,000 bad faith trademark applications were refused during examination ex officio in the second quarter of 2019. This does not include the number of trademarks rejected in oppositions or invalidation proceedings initiated by rights owners.
“Bad faith trademark registrations are probably a bigger problem for U.S. companies doing business in China than for U.S. or Chinese companies doing business in the U.S.,” says Rourk. “The provisions of Section H of Chapter 1 at least acknowledge that the problem of bad faith trademark registrations needs to be addressed in China while not specifically identifying any steps that must be taken by China.”
Unlicensed software use is also a bigger problem in China than it is in the U.S., says Rourk. “Articles 1.23 and 1.27 of Chapter 1 probably go far enough to allow such private enforcement mechanisms to be effective in China, as long as they are properly implemented by China,” he says.
“Statistics from the Business Software Alliance in 2018 reported that the commercial value of unlicensed software in China was US$6.8 billion – 14.77 percent of total worldwide commercial value – which gives China the unglamorous title of being the world’s leader in using unlicensed software by value,” Chan says.
The agreement also aims to better protect IP in the pharmaceutical industry and patents in general. This will be done via regular publication of fines and punishments, stronger border enforcement, more effective surveying of physical markets, effective destruction of counterfeit products following border enforcement or judicial proceedings and others.
Patent applicants for pharmaceuticals are particularly having a difficult time with all IP 5 offices, with China having the most rigid standards.
Oliver Lutze, China country manager and principal at Spruson & Ferguson in Beijing, cites as an example the allowability to support technical statements made in the description by supplementing experimental data post filing to overcome insufficient disclosure or lack of inventiveness rejection.
“In this way the highest focus was on preventing merely speculative or abusive patent applications based on written down, unproven statements. This view, and the consequential inability to support statements later by supplementation of experimental data, have caused grievances for pharmaceutical patent applicants because patents could not be granted or were lost in invalidation proceedings due to the strict standards applied,” Lutze says. “This has been witnessed even for major inventions which do not appear to be abusive and which have been defended by data submission in other IP 5 offices but were still subjected to the same strict standards.”
Lutze explains that if examiners and judges in invalidation proceedings have more discretion in applying less stringent standards, applicants will more easily be able to defend their applications and eventually get the patents.
This transition to a more harmonized practice however has to be codified in the Guidelines for Examination, says Lutze.
Aside from these, the agreement tackles geographical indications according to international agreements and introduces changes in judicial enforcement and copyright enforcement, among others.
According to an article titled “China update: IP section in the China-U.S. trade deal (phase one)” authored by Lutze and Toh and published in the Spruson & Ferguson website on January 20, 2020, “the long list of agreed IP system improvements addresses several points that have been demanded over many years by the U.S. as well as other foreign IP owners. Some of these points are already being addressed in ongoing law reforms but have not produced final results.”
So why are these final or end results nowhere to be seen…or felt?
“Many of the listed agreed items will require complex law reforms impacting various laws simultaneously,” says Lutze.
Taking the pharmaceutical-related laws as example, he says: “The agreed patent term extensions must be introduced during a patent law reform. However, it appears highly advisable to also include this in the lawmaking process for revision of the drug regulatory laws, establishing a patent linkage system as started already according to the 2017 China Policy Announcement No. 55. The effort would create a system similar to the Hatch-Waxman Act in the U.S. Although one can say that discussions around this policy have been moving slowly since 2017, it will still require some time to align more than one law. Such major reform has taken years in many other countries. China will certainly compare elements of the U.S. system with the Supplementary Protection Certificate system in Europe before shaping its own IP rules.”
Lutze also says that access to cheaper medicines in the past in the absence of extended patent rights for communities outside the modern cities may have also delayed the decision making on a new pharmaceutical IP system.
“If the agreement spurs China into progressing faster on this track, it would be beneficial. One can however assume that China will not copy U.S. laws one-to-one,” he says.
So can Section 1 of the agreement effectively address the IP challenges faced by both U.S. and China?
Yang believes so.
“I think the agreement indeed addresses many issues faced by both countries. The U.S. always has a concern, whether reasonable or not, about enforcement of IP rights in China. China also needs to make the system work better for the domestic industry which is getting increasingly innovative day by day. Therefore, an improved system should work better for both countries,” says Yang.
Lutze says that if the agreement is established within the context of the Chinese IP system with new checks and balances, it will create progress.
He explains that the American and Chinese IP systems represent two extremes in many ways. Patent litigation in the U.S. involves jury trials, discovery proceedings and expert witnesses. Whereas, that of China consists of a panel of judges mostly reviewing documentary evidence.
“The current agreement tries to significantly reduce the difference by working to include elements taken from the U.S. system into the China system. In the above mentioned litigation example, a move to increase the focus on witness statements in courts whilst removing the often cumbersome notarization and legalization requirements would serve to better align the two systems. Such changes would prevent IP owners from the U.S. being frustrated in litigations when relying on inadmissible or late submitted evidence or attempting to unsuccessfully use key experts as witnesses,” says Lutze. “In the litigation example, it may be preferable to increase the admissibility of witness statements in the courts, but this must be done in the context of the existing system.”
However, Lutze adds that a full reliance on witnesses’ statements may also prove unfavorable to the U.S. side as one can be on both ends of litigation.
For Rourk, implementation of the agreement is important.
“In the U.S., China is seen as being weak on IP protection because it is easy for infringers to avoid liability. The agreement addresses some of the main reasons for this situation, and depending on how it is implemented, there could be an improvement in IP protection in China as far as intellectual property rights owners in the U.S. are concerned,” he says.
“The concerns of China include limiting the circumstances under which criminal prosecution can be instituted for trade secret theft and also preventing pharmaceutical companies from using IP to exert undue market power to control the availability and price of their patented medicines. While the first concern has generally been addressed, it remains to be seen whether that provision will be implemented by the U.S. in a manner that is consistent with the express language. The second concern is likewise ultimately up to China to implement, but if pharmaceutical companies are dissatisfied with that implementation, they may resort to other measures to try to prevent third parties from making and selling their patented medicines in China,” Rourk explains.
According to him, it should be anticipated that those who contribute to creating a scenario with weak IP protection in China, from the perspective of U.S. IP rights owners, would be resistant to change.
“That will result in lower revenues or even closing of markets for the goods and services that they have been selling to date. For example, a Chinese consumer who is used to buying unlicensed software for a fraction of its normal cost from an unlicensed seller might be unable or unwilling to purchase it for its full price from a licensed seller,” explains Rourk. “If enforcement is weak or inconsistent, then the implementation scenarios will be more complicated.”
Lutze agrees that implementation will not be easy.
“The trade agreement provides more of a wish list of results but they must be achieved in sound changes in many intertwined laws. It can only be hoped that China commits to these reforms and that the U.S. side understands the time constraints to deliver a well-balanced reform. If action plans are to be published, we all need to assess that they are realistic and well considered. This is a chance to lay the foundations to shape the future system whilst overcoming the existing historic system differences,” he says.
Chan specifies Articles 1.5, 1.6 and 1.7 in relation the trade secrets under the IP chapter of phase one. These require China to reduce the burden of proof on the trade secret holder. They also scrap any requirements for the trade secret holder to establish actual losses as a prerequisite to commencing criminal investigation.
He also mentions Section E, which covers piracy and counterfeiting on e-commerce platforms. Section E states that the parties shall reduce piracy and counterfeiting. This is to be achieved by reducing barriers and effectively implementing enforcement activities against these online marketplaces.
“To fully implement the agreed terms of the phase one agreement, especially with respect to the aspect of enforcement, China will need to formulate and promulgate regulations and rules which will need to be approved and adopted by the relevant authorities such as National People's Congress,” says Chan. “This process of implementation may take more time than the U.S. will appreciate.
Add to this the fact that China and the U.S. have different legal systems, says Chan. Hence, this may lead to difficulty in understanding and implementing of laws and regulations.
Yang, however, does not foresee much difficulty in implementing the agreement.
“I don't expect much difficulty in implementation. Most if not all of the agreed changes to the Chinese IP system have been proposed and discussed in Chinese IP community already. In other words, China has had the plan of making most of the promised changes already on its own initiative before the trade war started. This is particularly true on the patent side. Almost everything related to the changes in the patent system, prosecution and enforcement have been included in various versions of draft amendment to China’s patent law,” Yang says.
Nevertheless, Rourk believes that the implementation of the agreement will not only benefit China and the U.S.; it will have an impact on the Asia Pacific region as well.
“Stronger protection of intellectual property rights in China should benefit Asia Pacific as it will foster the creation of more intellectual property that is targeted to the markets in China from other Asia Pacific countries. Many of these countries are trading partners with China and are in position to identify inventions and software that might benefit consumers in China,” says Rourk. “But weak intellectual property protection in China would create a disincentive for them to develop and market the goods and services associated with those inventions and software.”
For Chan, with IP rights being territorial, the ability to extend China’s IP protection outside Chinese soil is quite limited. He takes exception, though, to OEM for exports.
“China may attempt to crack down on goods that are ordered by buyers from Asia Pacific countries that have contracted for the OEM of goods bearing another person’s trademark that is registered in China. We have seen the Supreme People’s Court apply this type of protection in the recent Hondakit case,” he says.
Signing Phase One of the new economic and trade agreement is indeed a milestone step in this exercise of improving IP protection and trade relations. Yet, putting it on paper and signing it is one thing. To actually do things on the ground, effectively and with the interplay of other factors, is another. Implementation, indeed, will create the difference for U.S. and China.
Previously partner at Mallesons Stephen Jaques.
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