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Intellectual Property Arrangement in China-US Phase One Trade Deal

Defeng Song
03/02/2020

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China

China and US have recently signed off a Phase 1- Agreement on Economic and Trade Issues (“Agreement”), which signals that the long-lasting trade frictions between two major powers has finally found a way to settle. The Agreement has 8 chapters and 41 articles, involving at least twenty legal instruments in China and covering almost every aspect of intellectual property, from procedure to substance, from civil remedy to criminal enforcement, from online market to off line market and so on.
 
The Agreement is laid out in the form that China commits to implement the provisions of the Agreement while the US ensures that its domestic law is equivalent to the provisions of the Agreement. Throughout the Agreement, both parties are mainly focused on trade secrets, e-commerce platform related issues, pharmaceutical patent application and patent term adjustment, intellectual property litigation and technology transfer.
 
I. Trade Secret Provisions
 
1. Expanded Scope of Actors and Prohibited Acts  

The Agreement requires China to extend actors liable for trade secret misappropriation from natural persons to legal persons and group of persons, and to include into the scope of trade secret misappropriation acts electronic intrusions, breach or inducement of breach of duty of non-disclosure. In effect, this part has been prescribed in the “Anti-unfair Competition Law” issued in 2019.
 
2. Shift of Burden of Proof and Preliminary Injunction
 
The Agreement requires China to apply shift of burden of proof in case of trade secret civil disputes. In particular, when the right holder provides prima facie evidence that his trade secret is misappropriated, burden shall be shifted to the alleged infringer to prove that no misappropriation is committed by him, or when the right holder has proved that measures have been taken to keep trade secrets confidential, burden of proof shall be shifted to the alleged infringer to prove his assertion of defense, if any, that the trade secrets are known to the public.  
 
Preliminary injunction is explicitly provided in Chinese Civil Procedure Law, and is commonly used in judicial practice especially intellectual property cases. Since 2013, Shanghai No. 1 Intermediate People’s Court awarded the first ever preliminary injunction in China’s adjudication history upon request of a China subsidiary of a US company against its former employee, preliminary injunction has then become more widely and more regulated as well.
 
“Provisions on the Application of Law regarding Preliminary Injunction in Hearing Intellectual Property Disputes” issued by Supreme People’s Court at the end of 2018 provides detailed rules on the requirements and procedures of applying preliminary injunction, wherein, Article 6 has explicitly prescribed that disclosure of trade secret is one of the “emergency circumstances” required as a precondition for preliminary injunctive relief by Chinese Civil Procedure Law. Hence, this provision of the Agreement has already been implemented in China’s domestic law.

3. Confidentiality Obligation of Government Agencies
 
The Agreement requires that China’s government agencies shall not disclose trade secrets without authorization, and limits the access of government agencies and staff thereof is strictly restricted to their official capacity.
 
“Foreign Investment Law” and “Implementing Regulations” thereof effective as of 2020 have prescribed rules on the confidentiality obligation of government agencies, but have no equivalent rules regarding exemption of compulsory disclosure of trade secrets to government agencies, and opposition proceedings against government agencies’ disclosure of trade secrets to a third party.  
 
4. Lowering the Threshold of Criminal Liabilities of Trade Secret Misappropriation
 
The Agreement urges China to sharply lower down the threshold of criminal liabilities of trade secret misappropriation, and to clarify that the “loss” element in establishing the criminal liability can be purely consequential loss, such as the costs of enforcing trade secrets, and expenses of mitigating loss or re-securitizing computer or other systems, and the Agreement also prescribes that the amount of “loss” shall be apparently lower than the threshold of other crimes.
 
There has been a long call for reducing the threshold of intellectual property crimes, and strengthening intellectual property enforcement. The “Opinions on Strengthening Intellectual Property Protection” issued by the General Office of the CPC Central Committee and the General Office of the State Council at the end of 2019 explicitly calls for a stronger criminal enforcement mechanism, a reduced threshold for intellectual property related crimes, and heavier criminal liabilities and so on, which has paved the way for the provisions of the Agreement.
 
But specific issues shall be further discussed by the legislators on issues such as how to determine the penalty, how to interpret the “loss” element, what is the amount limit, whether it should differ from the “loss” requirement in other crimes, including solely direct loss or consequential loss shall be included as well and so on.
 
II. Intellectual Property Enforcement within E-commerce Platforms
 
Combating online infringement is another focus of two parties. The Agreement requires China to establish a “notice and take-down” mechanism, which actually has already been clearly prescribed in the “Opinions on Combating Piracy and Counterfeiting in Internet Industry” earlier in 2015 and later in the “E-commerce Law” 2018.
 
The Agreement further prescribes that right holders shall not take any responsibility for erroneous notice made by right holders in good faith. Unlike what the Agreement says, according to the current Chinese E-commerce Law, right holders shall be liable for loss incurred by the operators in the e-commerce platform resulting from right holders’ erroneous notice, regardless of whether or not the erroneous notice is sent in good faith. If the erroneous notice is sent in bad faith, punitive penalty shall be imposed on right holders.
 
The Agreement further regulates on major e-commerce platforms, and imposes heavier liabilities thereon. In particular, if a major e-commerce platform repeatedly fails to curb counterfeiting and piracy, then its license may be revoked.
 
III. Drug Registration and Patent Term Extension
 
1.Pharmaceutical Patent Application 

Pharmaceutical-related intellectual property is one major focus of the US. The Agreement requires that pharmaceutical patent applicants shall be permitted to supplement data after the patent application date to satisfy patentability requirements, including sufficiency of disclosure and inventive step, not only in patent prosecution proceedings, but also in patent invalidation proceedings and judicial proceedings as well.
 
China permits pharmaceutical patent applicants to supplement experimental data after an application is filed, which, however, is strictly limited with respect to both timing and purpose. Now, China only permits applicants to supplement experimental data at the patent prosecution stage for the sole purpose of proving technical effect which an ordinary person in the art can get from the disclosure of the application. So, there is a huge gap in this respect between the Agreement and the domestic rules in China.
 
For the moment, most of the major countries in the world allows for the experimental data to be supplemented after application date, but each has its own examination standard. Generally, the US standard is loose whereas the Chinese standard is strict.  
 
Unlike US, China follows a strict first-to-file system, and has strict limitation on post-file amendment or supplement. To implement the Agreement, China needs to systematically amend its domestic law.
 
2. Patent Linkage Mechanism 

Patent linkage mechanism in pharmaceutical industry is also a major focus of the US. Patent linkage mechanism was created by the US to link the marketing approval procedure of a generic drug and the patent term of the branded equivalent. Patent linkage system is intended to prevent generic drug from infringing a patent by introducing a patent dispute resolution mechanism before the generic drug gets its market approval. Patent linkage system favors intellectual property protection of branded drugs.
  
There has been discussion on whether patent linkage system should be introduced to China as well. Article 16 of “On Deepening Approval and Review System Reform and Encouraging Innovation of Drug and Medical Apparatus” of 2017 has prescribed the general framework of patent linkage system, including the obligation of notifying relevant patentee of the marketing approval process of generic drug, and the court action of patent disputes and so on, but does not specify the cause of action for the lawsuit, and the marketing approval proceeding will not be stayed pending the resolution of the disputes.
 
Theoretically, the marketing approval process has not yet put the drugs on the market, and therefore it is not the manufacturing, sale or other commercial activities that exploits a patent, so there is no possibility of patent infringement. However, to adequately protect the right holder of branded drugs, US patent law provides early resolution of patent infringement and patentability disputes for drug registration activity, and the drug registration process will be stayed for a long time once the dispute resolution mechanism is initiated.
 
Only a few countries around the world fully adopts the US-type patent linkage system. A country’s legislation especially needs to consider the nation’s conditions and the balance of multiple interested parties, which especially holds true for pharmaceutical related patent because it is so closely related to public health. Too much intellectual property protection on drugs may hurt public benefits and may not be good for the overall development of drug industry. 
 
3. Patent Term Adjustment
 
The Agreement urges China to introduce the Patent Term Adjustment system, namely, the term of a patent shall be adjusted based on undue delay of the patent office or the patent applicant, if any, in the patent prosecution process. And, because drugs will go through a rather long time regulatory review process before arrival in market, the Agreement further prescribes that a reasonable extension of the patent term shall be granted.
 
Currently, the patent terms of various types of patents are fixed. Except that the draft version of the Fourth Amendment of Chinese Patent Law provides that the patent term can be reasonably extended for innovative drugs that are simultaneously put on Chinese and oversea markets, no patent term extension mechanism is available in China. The patent term extension mechanism has its point, but it entails a full set of regulations in the US to ensure it works well. So, in order to well implement the Agreement, a whole set of rules shall be designed.
 
IV. Simplifying Judicial Enforcement Procedure and Burden of Proof, Enhancing Judicial Remedy
 
1. Streamlining Enforcement Procedure and Burden of Proof 

The Agreement requires that burden of proof on the copyright ownership shall be simplified in copyright enforcement actions, for example, in the absence of contrary evidence, the person named in the works shall be presumed as the author. This is consistent with Article 10 of the Chinese Copyright Law. Additionally, if the alleged infringer asserts entitlement to use the copyrighted works, the alleged infringer shall bear the burden of proof on the entitlement assertion, which is consistent with the Chinese Procedure Law.
 
Moreover, the Agreement further simplifies the formality requirement of evidence. For example, the Agreement provides that document authentication shall no longer be required, this includes the requirement of a consular official’s seal or chop. Instead, evidence can be introduced or authenticated through stipulation, or witness testimony under penalty of perjury. For evidence that cannot be introduced through stipulation or witness testimony, China shall streamline notarization and authentication procedures.
 
2. Increasing the Costs of Infringing Intellectual Property
 
The Agreement requires enhancing current remedies and penalties, and imposing heavier punishment to the deterrent level as permitted by the law, increasing the range of minimum and maximum statutory damages, increasing the sentences of imprisonment and monetary fines, as well as strengthening judicial and border enforcement endeavors of forfeiture and destruction of pirated or counterfeit goods, materials and implements primarily used in the creation of pirated or counterfeit goods.
 
Increasing penalties, raising damages and enhancing remedies against intellectual property infringement has always been a major direction of intellectual property legislative efforts in China. So the relevant provisions of the Agreement in this respect would be more readily acceptable by Chinese domestic law. For example, the draft version of the Fourth Amendment of Chinese Patent Law has raised the maximum and minimum limits of statutory damages to RMB 5,000,000 and 100,000, from 1,000,000 and 10,000, respectively. And up to five times of punitive damages can be imposed in case of willful infringement.
 
3. Transfer from Administrative Enforcement to Criminal Enforcement and Facilitating Enforcement of Judgments
 
Cases’ transfer mechanism from administration action to criminal action is currently available in Chinese domestic law. It is just that the current transfer mechanism in China is general rather than specific to intellectual property cases. To overcome the difficulty of enforcing judgments is one of the major direction of judicial reform in China.
 
V. Technology Transfer
 
Chapter 2 of the Agreement mainly provides that any technology transfer or license between two parties shall follow the market rules based on the voluntary agreement of the market players. Government shall not interfere with the process of technology transfer either directly or make technology transfer as one of the conditions for administrative review or approval. In addition, any administrative action involving foreign investors shall be fair, transparent and non-discriminatory, and shall be compliant with due-process, and shall respect the foreign investors’ right to counsel.  
 
The issue of technology transfer is one of the major disputes between China and the US. However, the length of Chapter 2 is modest, comprising five articles in total. One major reason is that most of the disputes in this respect has already been resolved through China’s recent legislation. And most of the content in this Chapter can be found in Foreign Investment Law and Implementing Regulations thereof.
 
VI. Closing Remarks
 
The Phase 1 Agreement between China and US was signed in the context of continued trade friction between two major economic powers in the world. The trade friction between two major countries causes huge and wide spread adverse effects to countries, enterprises and individuals, not only to countries involved in the friction, but also to other countries in the world. So, resolution of disputes in the manner of talks and agreements shall be recommended in the first place.
 
The Agreement per se is neither bonus nor shock to China. The commitment made by China in the Agreement generally takes the American standard. Even though it is a foreign standard, it is not strange to China since most of the content has already been internalized in China. In fact, a number of Articles are identical or equivalent to domestic rules.
 
Having said that, there is still gap between Chinese rules and the Agreement, in terms of IP enforcement with e-commerce platforms, pharmaceutical patent application, patent linkage system, and patent term adjustment and so on. Therefore, a lot of legislative efforts need to be done from China’s perspective in order to fully implement the Agreement.

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Intellectual Property