Intellectual property: China’s evolution from ‘norm taker’ to ‘norm setter’

06-May-2021 Intellasia | South China Morning Post | 5:02 AM Print This Post

This is the second in a series of reports on Chinese intellectual property as Beijing seeks to make IP protection a central part of its new development strategy.

If the phase one trade deal between the US and China were to be judged on Beijing’s intellectual property protection undertakings neglecting its huge shortfall in buying American goods it could be seen by Washington as a moderate success.

Take civil lawsuits on patent disputes. In 2019, there were 22,722 new cases filed to Chinese courts, while US district courts had 3,280 new patent cases.

Nearly 90 per cent of the 3,176 new intellectual property (IP) lawsuits filed last year to the Supreme People’s Court’s IP court alone were between domestic Chinese parties, underscoring growing awareness of IP at home.

China’s improvements in IP protection long a cause of complaint from its trade partners and foreign firms operating in the country have been driven not only by trade negotiators but also by its growing interests in IP and its innovation strategy.

Growing stakes have prompted China to be more assertive in international or extraterritorial IP disputes, in addition to accelerating advancements in technologies and the digital economy, all of which have shifted IP friction to new battlegrounds.

The Office of the US Trade Representative noted in its annual Special 301 Report on IP protection, released last week, that China published several draft IP-related legal and regulatory measures and finalised over a dozen measures last year. But it added that these steps toward reform require effective implementation and “fall short of the full range of fundamental changes needed to improve the IP landscape” in China, and continued to place Beijing on its priority watch list this year.

High stakes

In an internal speech in November, Chinese President Xi Jinping said “protecting intellectual property is protecting innovation”.

Elliot Papageorgiou, head of IP strategy for China at multinational law firm Gowling WLG and chair of the IP rights working group of the European Union Chamber of Commerce in China, said Chinese companies had learned how to use IP as “shields and swords” for their own interests.

“We have seen a lot of companies closely following the experience of national champions like Huawei Technologies Co. on the international stage, and learning that to become and remain competitive with foreign rivals, they have to secure intellectual property rights,” Papageorgiou said.

China’s patent filings quadrupled in a decade to over 1.3 million in 2019, the year it overtook the US as the top applicant for international patents under the Patent Cooperation Treaty. Meanwhile, the number of trademarks filed by Chinese entities grew almost eightfold in the same period, according to the World Intellectual Property Organisation (WIPO).

Chinese entities have also become major foreign applicants to American and European registrars. In 2020, China was the top trademark applicant at the European Union Intellectual Property Office, followed by Germany, the US, Italy and Britain.

The US Patent and Trademark Office (USPTO) wrote in an analysis this year that a considerable proportion of the growth in IP filings was “influenced by non-market factors such as subsidies, government mandates, bad-faith trademark applications and defensive countermeasures”.

Still, the growing importance of IP to China is shown by a skyrocketing number of cases. According to the Supreme People’s Court, the number of new IP-related civil lawsuits filed at all Chinese courts grew almost tenfold between 2010 and 2019, from 49,766 to 481,793.

Concrete improvements

The trade deal included commitments for China to strengthen legal protection for patents, trademarks and copyrights; act on pledges to remove pressure for foreign firms to transfer technology; and not directly support investment aimed at acquiring foreign tech.

Experts say Beijing has amended all major IP laws, including last year’s Patent Law, and addressed many overdue issues in patents, trademarks, copyrights, trade secrets and information protection.

The judiciary established deterrent-level penalties for IP rights infringement and a new IP court has been set up in the southern province of Hainan, adding to those in Beijing, Shanghai and Guangzhou.

“China has made numerous changes to its intellectual property laws and regulations in response to the phase one agreement,” said Elisabeth Chien-Hale, a veteran expert on IP in China and a partner with Appleton Luff.

“Continuous amendments to the major IP rights laws and regulations, establishment of a national-level appellate court for IP rights under the Chinese Supreme Court, and cracking down on junk patents will no doubt increase the quality and protection of patents in China.”

Clete Willems, who was deputy director of the National Economic Council under the Trump administration, said at a Harvard Law School forum in April that China had been more forthcoming with improvements in traditional IP issues, which are often in Beijing’s interests, despite a significant deterioration in emerging non-traditional concerns, such as online IP theft or state-supported acquisition of sensitive IP.

The National Trade Estimate the USTR’s report on foreign trade barriers, released in March assessed in detail China’s progress on the phase one deal, Willems said. “I would call it a B minus,” he said. “China had done draft regulations, it’s coming into effect, but still sort of work in progress.”

Papageorgiou said there had been improvement in the competence of IP courts and tribunals. “Given the growth [of IP litigation], I think the judiciary has done wonders to be able to keep up with the backlog of cases… the tribunals and courts in China have improved tremendously,” he said.

Mark Cohen, a senior fellow with Berkeley Centre for Law and Technology and a former senior adviser to the director of the USPTO, credited the phase one trade deal for solving some “fairly intractable” issues in China’s IP protection.

“Amending the trade secrets law, the tech transfer provisions, some of these issues on authorisation for foreigners to initiate litigation these are difficult issues that have been long-standing,” he said at the same Harvard forum Willems spoke at.

Foreign litigants

Experts said foreign IP litigants in China had been treated fairly in general and that more foreign companies were considering Chinese courts as part of their global IP strategy.

“Foreign litigants are usually treated pretty well or fairly; this could be a natural outcome of the fact that most foreign litigants only pursue meritorious claims after thorough consideration,” Chien-Hale said. “China is a good possible litigation forum and you do see companies are beginning to file litigations internationally you are filing in the US, Germany and China simultaneously.”

But Chien-Hale said that bringing an intellectual property case to Chinese courts could be “very expensive” due to, for instance, additional costs related to the translation and authentication of materials submitted to the court.

Both Papageorgiou and Willems also cautioned that proceedings could be more complicated if foreign entities were to face off with Chinese entities such as major state enterprises and industry champions especially those in politically sensitive industries including railways or technology-intensive ones.

Even on the much-disputed issue of forced technology transfer, Chien-Hale said few complaints had been heard from foreign companies in China recently.

Beijing last year explicitly banned forced technology transfer in the Foreign Investment Law. December’s EU-China Comprehensive Agreement on Investment also had clear prohibitions on the practice.

‘Weaponising judiciary’

However, China’s intellectual property system continues to have occasional conflicts with those elsewhere.

“Intellectual property has become one of the tools in international trade disputes,” Chien-Hale said. “[Meanwhile] the battlegrounds in international IP have also shifted.”

Cohen said “weaponisation of the judiciary” in handling IP lawsuits across different jurisdictions was one of these new battlegrounds.

“The next big clash is already happening, over standard essential patents’ extraterritoriality,” he said. “This comes at a time when China is increasingly nationalistic.”

Standard essential patents protect technological building blocks of industry standards, such as 4G in smartphones. Owners of these patents usually charge users, including competitors, a royalty fee for their fair usage, known as fair, reasonable and non-discriminatory (FRAND) licensing.

A recent example was seen in a dispute between Xiaomi and InterDigital, which involved courts in Delhi, Munich and the Chinese city of Wuhan. The parties filed counter-injunctions in one court against the order granted by another. Others even evolved into what the legal profession described as a loop of “anti-anti-anti-suit injunctions”.

Courts in Wuhan and Texas also traded counter-injunctions in disputes between Samsung and Ericsson last year.

He Rong, the Supreme People’s Court’s No 2 judge, said last month that the Chinese courts’ handling of recent standard essential patents cases, protecting Chinese and foreign IP owners’ legitimate rights, was a key accomplishment.

“China’s international judicial influence on IP protection has further expanded, and our image as a responsible power in IP protection has been enhanced,” she told a forum in Beijing co-organised by WIPO’s China office.

“A number of jurisdictions like the US have been exercising extraterritorial effect, which I don’t think is right,” said Papageorgiou, adding that China had been following suit.

“Do I expect more of these cases? Unfortunately, yes, because I think these are governments, the big boys, bullying each other. This is not about the companies. This is about national protectionism. It is great to have these wonderful legal constructs, but in the end for companies it means real consequences, money and penalties.”

A court in Shenzhen, southern China, last year ruled that it had jurisdiction to set a global FRAND rate in a dispute between locally based phone maker Oppo and Sharp, which had been acquired by Taiwan’s Foxconn.

“China is trying to exert its influence beyond national borders,” Chien-Hale said. “[Chinese courts are] playing defensive because they feel [Chinese companies] have been treated unfairly and they would like to have a voice, but I think as China gets stronger, it will push its agenda around the world too, just like all strong countries.”

New battlegrounds

Beijing’s increasing emphasis on cracking down on monopolies is another trend closely monitored by IP experts. In the revised Patent Law, a new clause was added against actions “abusing patent rights to exclude or restrict competition that constitute a monopoly”.

The Chinese judiciary’s IP protection five-year plan, released last month, included antitrust and unfair competition objectives.

Papageorgiou said it would be interesting to see where Beijing struck the balance between IP rights protection and anti-monopoly measures. But foreign IP owners could be more exposed, given their Chinese counterparts have not yet amassed a very large number of quality patents, according to Chien-Hale.

“In most countries, the antitrust law is for consumers’ good,” Chien-Hale said. “In China, you can’t say it is not, but antitrust law is also being used to curb the abuse of patent rights. They are very cleverly using anti-monopoly laws to protect domestic players with fewer quality patents.”

Personal data protection and transfer within and across national borders was another emerging IP flashpoint, Chien-Hale noted, amid growing sensitivity over big data, artificial intelligence and national security illustrated by the WeChat and TikTok executive orders issued by the Trump administration.

Enforcement

Despite improved IP regulations, China continues to face issues enforcing them.

Amendments to the Trademark Law that took effect in November empowered authorities to refuse “bad faith” applications filed without intent to use the mark but the country’s IP office remains reluctant to make declarations on bad-faith trademarks, Papageorgiou observed. Then there is administrative enforcement, which remains inconsistent between major cities and less advanced jurisdictions, he said.

Counterfeit goods are unlikely to be eliminated from China any time soon, despite decreasing. According to the Organisation for Economic Cooperation and Development’s 2019 report, mainland China and Hong Kong combined remain the leading origin of global counterfeit and pirated goods seized.

The USTR said in its new National Trade Estimate report that China needed to show it had increased enforcement against counterfeits with health and safety risks and in physical markets. Nonetheless, Cohen said China had been moving from being a “norm taker” to a “norm setter” in IP protection.

“Thirty years ago, the question was whether China would embrace IP,” he said. “No one could have anticipated China would not only embrace IP but really incorporate it into its socio-economic DNA.”

https://www.scmp.com/news/china/politics/article/3131750/intellectual-property-chinas-evolution-norm-taker-norm-setter

 

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