by: Jiao Hongbin   Liu Yuxin    King & Wood Mallesons

On January 15, 2020, China and the United States signed the phase-one Economic and Trade Agreement (“Agreement”) in Washington. The Agreement covers issues that range from freeing compulsory transfer of technology, expanding bilateral trade in such sectors as agricultural products and manufactured goods, opening up financial services markets and also, enhancing the protection of intellectual property rights, etc. Consensus is reached in various areas in the intellectual property chapter, including trade secret and confidential business information, pharmaceutical-related intellectual property, patents, piracy and counterfeiting on e-commerce platforms, geographical indications, manufacture and export of pirated and counterfeit goods, bad-faith trademarks, judicial enforcement and procedure in intellectual property cases, bilateral cooperation on intellectual property protection and implementation. This article aims to introduce the intellectual property part of the Agreement and its potential influence over the current legislation and judicial practice in China.

I. Protection of Trade Secret

The protection scope of trade secret as indicated in the Agreement is broader than the traditionally defined “trade secret” as it also includes confidential business information, which refers to information of commercial value and the disclosure of which is likely to have the effect of causing substantial harm to the competitive position of such person from which the information was obtained. Such scope is actually consistent with the newly revised Anti-Unfair Competition Law of the P.R.C (“AUCL”), which has already broadened the definition of “trade secret” from “technical and operational information” to “business information such as technical information and operational information”. In fact, most of the requirements raised in the Agreement are met in the newly revised AUCL. For example, under the current AUCL, all natural or legal persons can be subject to liability for trade secret misappropriation and the scope of prohibited acts subject to liability for trade secret misappropriation does include electronic intrusions, breach or inducement of a breach of duty not to disclose information that is secret, or intended to be kept secret, etc. Furthermore, the newly revised AUCL also takes a great step forward in respect of shift of burden of proof towards the accused party under the circumstance that the holder of a trade secret already presents preliminary evidence of the misappropriation. However, the Agreement lowers the threshold for initiating criminal enforcement as it calls for no establishment of actual losses by the trade secret holder whereas the current Laws of China requires a minimum RMB 500,000 of damages in order to establish criminal offence. In practice, the Public Security Bureau in China wou7ld generally set such amount of damages as a prerequisite for the initiation of criminal enforcement. The Agreement also demands that government authorities in China shall take various measures to further strengthen the protection of trade secrets and shall impose penalties on the unauthorized disclosure of a trade secret by government personnel or third party experts or advisors in any criminal, civil, administrative, or regulatory proceedings conducted at either the central or sub-central levels of government in which such information is submitted.

Given the above, most of the protective measures specified in the Agreement are already taken from the perspective of legislation, though the signing of the Agreement will further facilitate the protection of trade secret in judicial practice, especially in criminal enforcement level.

II. Protection of Pharmaceutical-Related Intellectual Property

The Agreement presents relatively greater challenge to the protection of pharmaceutical-related intellectual property rights in China. According to the Agreement, China shall permit pharmaceutical patent applicants to rely on supplemental data to satisfy relevant requirements for patentability and establish pharmaceutical patent linkage system. Under the current laws of China, the National Intellectual Property Administration (“NIPA”) will examine experimental data submitted after the date of filing, but only under the premise that technical results proved by the supplemented experimental data shall be accessible from patent application publication by people skilled in the art. Therefore, it remains uncertain how the Agreement will affect the examination of supplemental experimental data.

For pharmaceutical patent linkage system, the Agreement specifically requires that as a condition of approving the marketing of a generic drug, China shall provide: (a) a system to provide notice to a patent holder or an interested party that a third party is seeking to market the relevant product during the term of an applicable patent claiming the approved product or its approved method of use; (b) adequate time and opportunity for such a patent holder to seek, prior to the marketing of an allegedly infringing product, available remedies in subparagraph (c); and (c) procedures for judicial or administrative proceedings and expeditious remedies, such as preliminary injunctions or equivalent effective provisional measures, for the timely resolution of disputes concerning the validity or infringement of an applicable patent. This is totally brand new to Chinese patent system both legislatively and judicially. However, policy documents in China have repeatedly advocated to explore the establishment of such pharmaceutical patent linkage system since the year 2017. In this regard, the Agreement is also consistent with the policy trend of China, though it still needs detailed implementation measures to reduce such policy into legislation level. We expect that the forth revision of the Patent Law of the P.R.C may reflect such changes and if so, it will exert substantial and profound influence over the protection of pharmaceutical related patents.

III. Extension of Patent Terms

According to the Agreement, the Parties shall provide patent term extensions to compensate for unreasonable delays that occur in granting the patent or during pharmaceutical product marketing approvals. Specifically, such unreasonable delays shall at least include a delay in the issuance of the patent of more than four years from the date of filing of the application in China, or three years after a request for examination of the application, whichever is later. For pharmaceutical-related patent, China shall also make available an adjustment of the patent term or the term of the patent rights, which shall limit to no more than five years and may limit the resulting effective patent term to no more than 14 years from the date of marketing approval in China.

As China is now expediting the examination period of patent applications, patent term extension due to unreasonable delays may not have substantial impact on the review and grant of patent rights in China. However, considering the great value of pharmaceutical-related patents and the tremendous market profits of the ensuing drug products, the extension of pharmaceutical-related patents will surely revolutionize the current patent protection system for drug products.

IV. Combat against Piracy and Counterfeiting

Section E of Chapter 1 of the Agreement provides that China shall combat online infringement and infringement on major e-commerce platforms by way of introducing effective notice and takedown system as well as imposing penalties on major e-commerce platforms that fail to take necessary measures against the infringement of intellectual property rights.

In fact, Article 42 to 44 of the newly launched E-commerce Law of the P.R.C (“E-commerce Law”) already introduces the notice and takedown system for e-commerce platform. However, the provisions in the Agreement obviously adopt a friendlier attitude towards the rights owner. First, the Agreement provides to eliminate liability for erroneous takedown notices submitted in good faith while the E-commerce Law still demands civil liabilities if damages are caused to the platform operators. Secondly, the Agreement requires to extend to 20 working days the deadline for right holders to file a judicial or administrative complaint after receipt of a counter-notification whereas only 15 days are granted as per the E-commerce Law. Thirdly, bad-faith counter-notification is not regulated in the E-commerce Law but the Agreement calls for penalizing notices and counter-notifications submitted in bad faith. Last but not least, e-commerce platforms may also have their operating licenses revoked for repeated failures to curb the sale of counterfeit or pirated goods under the provision of the Agreement.

As for combating the manufacture and export of pirated and counterfeit goods, the Agreement advocates that China shall take sustained and effective action to stop the manufacture and to block the distribution of pirated and counterfeit products, including those with a significant impact on public health or personal safety. Statistics regarding the above enforcement actions shall be shared online periodically. In addition, destruction instead of confiscation or other means, of the pirated and counterfeit products shall be the principal resort regardless in border measures, civil judicial procedures and criminal procedures. What’s more, all government agencies and all entities that the government owns or controls in China shall install and use only licensed software. Annual audits by qualified third parties shall be conducted and the results shall also be published online.

Generally speaking, the current laws of China, for instance, the Drug Administration Law, the Product Quality Law, the Trademark Law and the Regulations on Customs Protection of Intellectual Property Rights, are in line with the above provisions though the Agreement raises specific requests with respect to the number of such enforcement actions and online publication of the same. As a result, the Agreement may contribute to strengthening the law enforcement efforts on combating the manufacture and export of pirated and counterfeit goods and increasing publicity and transparency of such efforts simultaneously.

 V. Protection of Geographical Indications

The Agreement requires that China shall ensure that any measures taken in connection with pending or future requests from any other trading partner for recognition or protection of a geographical indication pursuant to an international agreement do not undermine market access for U.S. exports to China of goods and services using trademarks and generic terms. Oppositions against such geographical indications shall also be available to trading partners.

For recognition and cancellation of geographical indications, the Agreement sets out explicit criteria of recognizing geographical indications, including (a) competent sources such as dictionaries, newspapers, and relevant websites; (b) how the good referenced by the term is marketed and used in trade in China; (c) whether the term is used, as appropriate, in relevant standards to refer to a type or class of goods in China; and (d) whether the good in question is imported into China, in significant quantities, from a place other than the territory identified in the application or petition, and in a way that will not mislead the public about its place of origin, and whether those imported goods are named by the term. The Agreement also makes it clear that any geographical indication, whether granted or recognized pursuant to an international agreement or otherwise, may become generic over time, and may be subject to cancellation on that basis.

For multi-component terms, the Agreement stresses that an individual component of a multi-component term that is protected as a geographical indication in the territory of a Party shall not be protected in that Party if that individual component is generic. Also, when China provides geographical indication protection to a multi-component term, it shall publicly identify which individual components, if any, are not protected.

In fact, the newly released Measures on Protection of Overseas Geographical Indication, the revised Trademark Law of the P.R.C (“Trademark Law”) as well as its relevant judicial interpretations have basically provided all the above guidelines. Therefore, the Agreement will have limited impact on the adjustment of laws and judicial regulations in relation to geographical indications.

VI. Rein in Bad-Faith Trademark

In Section H of Chapter 1, the Agreement provides that with a view to strengthening trademark protection, the Parties shall ensure adequate and effective protection and enforcement of trademark rights, particularly against bad faith trademark registrations.

In fact, China has attached high importance to striking bad-faith trademarks nowadays. Article 4 of the newly revised Trademark Law stipulates that any application for trademark registration that is bad-faith and is not filed for the purpose of use shall be rejected. In addition, the State Administration of Market Regulation, to which the NIPA belongs, also published Several Provisions on Standardizing Application for Trademark Registration in October, 2019, which mainly concerns deterring bad-faith trademark applications. Therefore, this section of the Agreement is consistent with the legislative and judicial trend of trademark protection in China.

VII. Facilitation of Judicial Enforcement and Procedure in Intellectual Property Cases 

The Agreement altogether numerates six aspects to facilitate the judicial enforcement and procedure in IP cases.

First of all, China shall require the administrative authorities to transfer a case for criminal enforcement, if, under an objective standard, there is “reasonable suspicion” based on articulable facts that a criminal violation of an intellectual property right has occurred. This is, in fact, already provided in Article 3 of the Provisions on Reference of Suspected Criminal Cases by Administrative Law-enforcement Organs issued by the State Council in 2001.

Secondly, The Parties shall provide civil remedies and criminal penalties sufficient to deter future intellectual property theft or infringements. As an interim step, China shall impose a heavier punishment or near the statutory maximum permitted under its laws related to intellectual property to deter intellectual property theft or infringements. Subsequently, China shall increase the range of minimum and maximum pre-established damages, sentences of imprisonment, and monetary fines.

Thirdly, China shall execute work guidelines and implementation plans to ensure expeditious enforcement of judgments, publishing its work guidelines and implementation plans within one month after the date of entry into force of the Agreement, as well as publishing online quarterly reports of implementation results.

Fourthly, for copyright protection, the Parties agree that in the absence of proof to the contrary, the person whose name is indicated as the author or rights owner of relevant copyrights is the designated right holder. Under this presumption, the rights owner shall be exempt from the liability of establishing ownership and related rights in the absence of rebuttal evidence presented by the accused infringer. The accused infringer shall also bear the liability to prove that its use of the copyrighted works are legitimate. The current Copyright Law of the P.R.C (“Copyright Law”) are basically in compliance with the above agreements. However, under the current Copyright Law, it is still the copyright owner that shall bear the primary burden of proof regarding its ownership over the copyrighted works. Such burden may shit to the accused infringer but only on the condition that the accused infringer is a publisher, producer, distributor or lessor of the replicas. In this scenario, the accused publisher, producer, distributor or lessor needs to prove that the replicas are from legitimate source.

Fifthly, for document authentication, the Agreement advocates that the Parties shall not require formalities to authenticate evidence, including requiring a consular official’s seal or chop, that can be introduced or authenticated through stipulation, or witness testimony under penalty of perjury in civil judicial procedures. When stipulation or witness testimony under penalty of perjury is not an option, China shall streamline notarization and authentication procedures. As legalization and notarization are still statutory requirements for authenticating foreign sourced evidence under the current Civil Procedure Law of the P.R.C (“Civil Procedure Law”), such requirements will surely hold sway over future judicial practice on document authentication.

Last but not least, China shall also afford a party a reasonable opportunity to present witnesses or experts in its case and cross-examine any witness testifying in the proceeding. In fact, the current Civil Procedure Law does endow a party such opportunity.

VIII. Enhancement of Bilateral Cooperation on Intellectual Property Protection

The Parties agree to strengthen bilateral cooperation on the protection of intellectual property rights and promote pragmatic cooperation in this area. China National Intellectual Property Administration and the United States Patent and Trademark Office will discuss biennial cooperation work plans in the area of intellectual property.

It is also noteworthy that within 30 working days after the date of entry into force of this Agreement, China will promulgate an Action Plan to strengthen intellectual property protection aimed at promoting its high-quality growth. This Action Plan shall include, but not be limited to, measures that China will take to implement its obligations under this Chapter and the date by which each measure will go into effect.

Based on the above, although the Agreement poses quite a number of challenges to the current legislation and judicial practice of intellectual property, the execution and performance of this Agreement actually echoes with the political and judicial trend of strengthening the protection of intellectual property in China. The agreement is in the interests of both China and the US and will not only benefit bilateral trade and cooperation, but also domestic prosperity and technological innovation.