USTR 2018 Special 301 Report – Priority Watch List Country – China

In April, the Office of the United States Trade Representative (USTR) released its 2018 Special 301 Report (the Report) identifying trading partners that do not adequately or effectively protect and enforce intellectual property (IP) rights or otherwise deny market access to U.S. innovators and creators that rely on protection of their IP rights.  The Report called on U.S. trading partners to address IP-related challenges with a special focus on the countries identified on the Watch List and Priority Watch List.

Countries identified on the Watch List are:

• Barbados
• Bolivia
• Brazil
• Costa Rica
• Dominican Republic
• Ecuador
• Egypt
• Greece
• Guatemala
• Jamaica
• Lebanon
• Mexico
• Pakistan
• Peru
• Romania
• Saudi Arabia
• Switzerland
• Tajikistan
• Thailand
• Turkey
• Turkmenistan
• United Arab Emirates
• Uzbekistan
• Vietnam

Countries identified on the Priority Watch List are:

• Algeria
• Argentina
• Canada
• Chile
• China
• Colombia
• India (see our previous post at: https://bricsandbeyond.blog/2018/05/29/ustr-2018-special-301-report-priority-watch-list-country-india/)
• Indonesia
• Kuwait
• Russia
• Ukraine
• Venezuela

Priority Watch List Country – China

In this post, we will examine several of the USTR’s concerns relating to China which has been on the USTR’s Priority Watch list for several years.  At the outset, the Report notes that although some positive developments emerged in China’s complex and fast-changing IP environment during the last year, U.S. right holders continue to identify the protection and enforcement of IP as well as IP-related market access barriers as the leading challenges in an already very difficult business environment.  The Report notes that concerns extend not only to gaps in legal authorities and weak enforcement channels, but also to investment and other regulatory requirements that promote the acquisition of foreign technology by domestic firms at the expense of providing reciprocity, a level playing field, transparency and predictability that the U.S. and other countries insist upon.  In fact, the Report suggests that China lacks an underlying commitment to address longstanding problems and its failure to do so undermines any confidence that might stem from any positive developments and high-level statements made by the country in support of IP and innovation.

Initial Positive Developments

Some positive developments that occurred in China during the last year include:

1. A positive conclusion to China’s three-year pilot program for its specialized IP courts located in Beijing, Shanghai, and Guangzhou. Last year, China continued with its IP courts and added specialized IP tribunals which enjoyed cross-regional jurisdiction (sometimes including having jurisdiction over criminal, civil, and administrative enforcement as well), which aided in promoting the quality, efficiency, and consistency of IP adjudications.  The Report notes that according observers, the IP courts generally demonstrated competence, expertise and transparency to a greater degree than that seen in other Chinese courts.  Moreover, in August 2017, China opened the country’s first Internet Court in Hangzhou, with 40 judges and assistant judges.  Additionally, China is considering creating a national-level appellate IP court to lend consistency to outcomes.  Nonetheless, despite these developments, intervention by local government officials, powerful local interests, and the Chinese Communist Party remain obstacles to the independence of the courts and rule of law.  As noted by the Report, a truly independent judiciary is critical to promote rule of law in China.    In addition to the lack of true independence of the judiciary, stakeholders continue to report issues with respect to the onerous authentication requirements for evidence and documentation, lack of means to require evidence production and insufficient damage awards, all of which undermine the effectiveness of China’s court system for addressing IP infringement.
2. Notices issued by China’s Food and Drug Administration. Last year, China’s Food and Drug Administration issued notices for public comment that set out a conceptual framework to protect against the unfair commercial use and unauthorized disclosure of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products and to promote the efficient resolution of patent disputes between right holders and the producers of generic drugs.
3. Approval of government reorganization by the National People’s Congress on March 17, 2018. According to the State Council Reorganization Plan, the reforms place several IP-related government functions under a new State Administration of Market Supervision and Management.  According to Chinese officials, these reforms will increase the efficiency of IP protection and enforcement.  Time will tell whether these reforms will accomplish these goals and improve market access for persons that rely on IP in the country.

Disappointments and/or Failures

1. Trade secrets. China’s 2017 amendment to its Anti-Unfair Competition Law (AUCL) represented a major missed opportunity to address a number of critical issues.  Unfortunately, China did not address major flaws in its outdated legislation, including the overly narrow scope of covered actions and actors, obstacles to injunctive relief, the need to allow for evidentiary burden shifting in appropriate circumstances as well as other concerns.  However, most importantly, despite long-term engagement with the U.S. and others, China chose not to establish a stand-alone trade secret law.  Instead, the government decided to continue to seat important trade secret provisions in the AUCL, which is an unfortunate arrangement that contributes to definitional, conceptual and practical shortcomings relating to trade secret protection.
2. Manufacturing, domestic sale and export of counterfeit goods. In 2017, China failed to take decisive action to curb the widespread manufacture, domestic sale, and export of counterfeit goods.  Unfortunately, during the past year, China, together with Hong Kong (through which Chinese merchandise often transships), accounted for 78 percent of the value (measured by manufacturer’s suggested retail price) and 87 percent of the seizures by the U.S. Customs and Border Patrol.  Interestingly, these figures are similar to those reported by the European Union.  In fact, by one estimate, counterfeits may account for over 12 percent of Chinese merchandise exports.
3. Failure to promote innovation through sound patent and related policies. Currently, China’s fourth amendment to its patent law remains pending.  With respect to this latest amendment, concerns exist regarding:  (i) the presence of concepts involving competition law that belong elsewhere; (ii) an undue emphasis on administrative enforcement; (iii) a one-size fits-all disclosure obligation in standards setting processes; (iv) a failure to clarify that a patentee’s right to exclude extends to manufacturing for export; and (v) the need to harmonize China’s patent grace period and statute of limitations with those of international practices.  For example, effective April 1, 2017, China’s revised patent examination guidelines came into effect that appeared to address, among other issues, the treatment of supplemental data submitted in support of pharmaceutical patent applications.  However, right holders report that Examiners still have not applied the guidelines to all examination questions to which supplemental data is germane which often leads to the denial of such applications on alternative grounds despite the fact that counterpart applications are granted by other major patent offices.  By way of another example, the U.S. was encouraged by the China Food and Drug Administration’s draft Notices 52-55 issued in May 2017.  This draft notice stated that China’s regulatory authorities would define a “new drug” as one that was new to China, including those first marketed outside of China.  However, in November 2017, China issued its draft Drug Registration Regulations (DRR), which failed to reinforce the notion set forth in the draft Notice 55.  Specifically, the draft DRR defined a “new drug” as only one that was new to the world, meaning that if a drug had been marketed outside of China, but had not yet launched in China, it would not quality as a “new drug”.  Unfortunately, only a “new drug” can receive full regulatory data protection in China.  Clearly, this regulation puts foreign pharmaceutical applicants at a competitive disadvantage with domestic counterparts which may have the indirect effect of forcing companies to file first in China, despite the fact that market demand or health needs reside elsewhere.
4. China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation. Unfortunately, despite years of negotiation and other engagement, China has repeatedly failed to address a range of measures and practices that force or pressure U.S. right holders to relinquish control of their valuable IP as a condition for accessing the large and growing Chinese market.  Specifically, the USTR has determined that the followings acts, policies, and practices by China are unreasonable or discriminatory and burden or restrict U.S. commerce: (i) China’s use of foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, and various administration review and licensing processes, to require or pressure technology transfer from U.S. companies; (ii) China’s regime of technology regulations that force U.S. companies seeking to license technologies to Chinese entities to do so on non-market-based terms that favor Chinese recipients; (iii) China’s direct and unfair facilitation of systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies in order to obtain cutting-edge technologies and IP and the generation of technology transfer to Chinese companies; and (iv) conducting and supporting unauthorized intrusions into, and theft from, computer networks of U.S. companies to access their sensitive commercial information and trade secrets.

Thus, for these reasons, the Report states that China “remains a hazardous and uncertain environment for U.S. right holders hoping to protect and enforce their IP rights”.  Therefore, absent a significant commitment by China to address these longstanding problems, it appears that China will remain on the priority watch list for the foreseeable future.

This post was written by Lisa Mueller.