By Tina Tai[1], Ben Ni[2], Xinyue Song[3], Wanli Ye[4], King and Wood Mallesons

On January 15, 2020, China and the United States (“U.S.”) entered Phase One Economic and Trade Agreement (hereinafter “Phase One Agreement”).  Chapter 1 of Phase One Agreement stipulates undertakings made by China in terms of Intellectual Property.  This article gives some insights from Chinese practitioners about improvements articulated in Phase One Agreement.

1.Trade Secrets

Section B of Chapter 1 of Phase One Agreement refers to protections against trade secret misappropriation.  Some of the improvements as defined in Section B were already written into Articles 9 and 32 of the latest P.R.C. Anti-Unfair Competition Law effective as of April 23 2019, while the others are to be introduced yet.  The improvements mainly encompass (a) more reasonable distribution of burden of proof between the plaintiff and the defendant, (b) an easier chance to get a preliminary or interim injunction in trade secret misappropriation cases, and (c) lowering the criminal enforcement threshold for trade secret misappropriation cases.

1.1 More Reasonable Distribution of Burden of Proof between the Parties

The applicable rule to decide trade secret misappropriation is “contact + substantial similarity – legitimate source” in China.  In other words, under the general evidencing rule about “who claims who proves”, the plaintiff is on the onus to prove (a) the defendant contacted or had a chance to contact its alleged trade secret and (b) the technical or business solution used by the defendant is substantially similar to the alleged trade secret of the plaintiff, and then the defendant has to prove that it acquired the accused technical or business solutions in a legitimate approach to walk away from the accusations.  Aside from the aforesaid (a) and (b), the plaintiff still has to prove the alleged trade secrets satisfy the requirements as prescribed in Article 9 of the P.R.C. Anti-Unfair Competition Law, i.e., the alleged trade secrets are not known by the circle, have business value and are subject to reasonable confidentiality measures.  Since there is no discovery in China, the plaintiff is in an extremely difficult position to prove such factors as listed above and even loses its case for not meeting the burden of proof sometimes.

Section B and the amended P.R.C. Anti-Unfair Competition Law echo with each other to alleviate the plaintiff’s burden of proof in two facets:

  • According to the old law, the plaintiff has to prove the alleged trade secrets are not known by the circle – which is actually a negative fact – by submitting a search report or ex-parte appraisal report to meet its burden of proof. According to the new law and Article 1.5 of Section B, the court will order the defendant to prove the alleged trade secrets are not secret when preliminary evidence shows the alleged trade secrets are already subject to confidentiality measures.
  • The plaintiff will not have to prove the ”contact” element when the evidence shows that the accused trade secrets have already been disclosed or exploited, or are subject to the risk of being disclosed or exploited. This new rule will release the plaintiff’s burden to proof to a large extent as the defendant actually is in possession of the so-called “contact” evidence.

These improvements will harmonize all the courts’ practice putting the plaintiff in a relatively easier and more reasonable position in terms of the burden of proof, even though a few courts, in practice, already shifted the burden of proof to the defendant before the law was amended and ordered the defendant to prove the alleged trade secrets are already known by the circle and/or to prove it acquired the alleged trade secrets out of a legitimate means..

1.2 Preliminary or Interim Injunction

Article 1.6 of Section B provides provisional measures to be taken against trade secret misappropriation in civil proceedings.  In particular, the use or attempted use of the alleged trade secret will be identified as an “urgent situation” for courts to grant a preliminary or interim injunction.  There are still doubts about how this provision could affect the chance for the plaintiff to get a preliminary or interim injunction in practice, as the most difficult element for the court to decide whether or not to grant a preliminary or interim injunction, i.e., irreparable loss to be suffered by the plaintiff without such an injunction, may still remain to be the largest obstacle.  We will wait and see how the law or judicial interpretations will be amended to localize this provision.

1.3 Lowering Criminal Enforcement Threshold

According to the P.R.C. Criminal Law[5] and its pertinent Judicial Interpretations[6], when the losses suffered by the trade secret owner or licensee exceeds RMB 500,000, there could be criminal sanctions available against the party misappropriating the alleged trade secret, including imprisonment and fines.  Not surprisingly, the trade secret owner assumes the burden to prove its actual loss is no less than RMB 500,000, in order to seek criminal relief.  In practice, the Public Security Bureau (“PSB”) in charge of initiating investigations against the alleged trade secret misappropriation crime, requires the owner to submit clear and convincing evidence to prove its loss – which is not an easy task particularly when the alleged trade secret is only acquired and not used for business operation yet.

Article 1.7 of Section B substantially lowers the threshold by eliminating the prerequisite of “actual loss” for initiation of criminal investigations by PSB at the end of the day, and as an interim step, allowing the trade secret owner to use its remedial cost, like the cost to mitigate damages to business operations, as the “actual loss” proof.  It is foreseeable that more and more trade secret misappropriation cases could be docketed by the PSB and criminal investigations could be initiated in the future, which on the other hand could also assist the trade secret owner to collect evidence to be used in civil proceedings.

2. Pharmaceutical-related Improvements

Sections C and D of Chapter 1 of Phase One Agreement refers to pharmaceutical-related improvements.  The preamble particularly points out protection on undisclosed test or other data submitted as a condition of marketing approval.  Aside from that, Section C also provides (a) allowance of supplemental data to satisfy patentability requirements, (b) set-up of a patent linkage system and (c) patent term extension arising out of marketing approval.

2.1 Supplemental Data

CNIPA and Chinese courts have a quite demanding requirement on acceptance of supplemental data submitted in the course of substantive examination, invalidation/reexamination proceedings, or judicial proceedings to overcome patentability challenge.  In particular, supplemental data is only allowed to strengthen original data already depicted in the patent specification according to the current practice, and will not be allowed if the specification only describes the technical effect and does not record any data.  Many patentees have complained such a stringent rule which is inconsistent with practices in other developed countries and regions like the United States and Europe.

Article 1.10 of Section C has addressed this issue by allowing the patentee to submit such supplemental data.  For now this Article is only directed to pharmaceutical patents and hardly applicable to non-pharmaceutical patents, like patents in chemistry and material science sectors, in view of previous reluctance of CNIPA and courts to accept supplemental data.

2.2 Patent Linkage System

The patent linkage system originates from the Orange Book an ANDA systems of the Hatch-Waxman Act of the United States.  China’s FDA once issued a draft for public comments about relevant policies to encourage innovations of pharmaceuticals and medical devices and safeguard innovators’ rights and interests, of which Article 1 stipulates that the new drug applicant shall disclose the pertinent patent information when submitting its registration application with the CFDA, and a junior registration applicant of the same drug shall assert non-infringement and inform the new drug applicant in 20 days, and then the new drug applicant shall file a patent infringement lawsuit against the junior applicant within 20 days upon receipt of the notice from the junior applicant.

Article 1.11 of Section C prescribes a similar patent linkage system, aiming to impart the new drug applicant who armed with a patent claiming the approved drug or its approved method of use with an opportunity to seek for judicial or administrative relief swiftly against the junior applicant, including preliminary injunctions or equivalent effective provisional measures.  This system will definitely increase the marketing certainty and accessibility of generic drugs.  We understand this system, being in position, will increase the number of patent infringement disputes in the pharmaceutical sector.  It is still unknown if the patent linkage system is also applicable to veterinary drugs.

2.3 Patent Term Extension out of Marketing Approval

Not surprisingly, Article 1.12 of Section D further prescribes patent term extension (“PTE’) as a result of the marketing approval process related to the first commercial use of a new drug product in China.  The PTE system coexists with the Bolar exemption under the U.S. law.  However, the Bolar exemption has been firstly recognized by court precedents in China and then written into Article 69 of the P.R.C. Patent Law effective as of October 1 2009, while the PTE system did not appear until the latest draft of the fourth amendment to the Patent Law in early 2019.  Similar to this Article 1.12, the draft also imposes two limitations to PTE, including (a) the extension being no more than five years, and (b) the resulting effective patent term being no more than 14 years from the date of marketing approval in China.

In addition to the aforesaid PTE system available to a new drug product, its approved method of use or a method of making the product, Article 1.12 of Section D also stipulates a term adjustment to a patent which is subject to an undue delay in CNIPA’s substantive examination not attributable to the applicant.  The undue delay will be recognized when the issuance of a patent occurs more than 4 years from the filing date or three years after a request for substantive examination, whichever is the later. This adjustment is applicable to all the patents filed at CNIPA.

3. Online Counterfeiting

Section E of Chapter 1 refers to piracy and counterfeiting on E-commerce platforms, which focus on the concerns raised after the promulgation of P.R.C. E-commerce Law in August 2018.  While this new law signifies a major progress of China’s efforts in improving IP protection in the e-commerce markets, such as codification of the notice-and-takedown procedure in the first time, some of its provisions appear to be worrisome to IP right holders, especially to foreign brands.  This section is likely to have the P.R.C. E-commerce Law, which came into effect on January 1, 2019, amended in a rush schedule.

3.1 Improvement on the Notice & Takedown Procedure

One of the most worrisome provisions of the P.R.C. E-commerce Law is Article 43, which requires an IP right holder files administrative or civil complaint within 15 days after receiving a counter-notice. This arrangement is favorable to platform operators and infringers, as foreign IP right holders are almost unable to initiate the legal action due to the time-consuming legalization and notarization of the authorization documents.  Article 1.13 of Section E requires China to extend the period to 20 business days, which is fairly sufficient for a foreign IP right holder to prepare necessary documents.  Another concern arises from the “undifferentiated” punishment for erroneous takedown notices under Article 42, and China is likely to amend it – by removing punishment against brand owners filing notice in good faith and clarifying penalties against bad-faith complainants, such as trademark pirates.

3.2 Pressure to E-commerce Platforms to implement Strict, Transparent and User-friendly IP Protection Mechanisms

While the primary Chinese e-commerce platforms have implemented IP protection measures, including some strict rules such as Alibaba’s “three-strike”, IP protection in smaller platforms are still of concerns.  Inefficiency and ineffectiveness are also a big problem for online content platforms, which normally lacks of a sophisticated mechanism to track user’s unauthorized online distribution of copyrighted works.  Under the current legal framework, the only effective way to pursue platform operators is to file a civil action claiming joint or secondary infringement for injunctive relieves and recovery of damages.  The Phase One Agreement requires China to introduce administrative punishment against platform operators for failure to curb counterfeiting goods, including revocation of operating license, which is not mentioned in any existing laws at this point.  The e-commerce law is likely to be amended with administrative punishment against platform operators, according to which IP right holders may file complaints with local authorities.  The platform operators are also likely to improve its IP protection, e.g., by initiating voluntary anti-counterfeiting campaigns as Alibaba has been doing in the past years.

4. Bad-faith Trademark Registrations

Section H of Chapter 1 refers to measures against bad faith trademark registrations, which is a longstanding issue that has vexed foreign and domestic companies in China.  This section does not include as many details as other sections, as most of the measures against bad-faith registrations have been implemented into the most recent amendment to the PRC Trademark Law, which was announced in April 2019 and came into effect on November 1, 2019.  An implementation rule – Several Provisions on Regulating Trademark Application and Registration Behavior (“Provisions”) – was then released by the PRC State Administration for Market Regulation (“SAMR”) and came into effect on December 1, 2019.  With effectiveness of the new Trademark Law and the Provisions, a genuine brand owner can be protected from bad-faith trademark registrations in the following perspectives:

4.1 New Legal Basis against Bad-faith Trademark Registrations

Bad-faith trademark application without actual intent to use now can be directly rejected during the CNIPA examination stage.  Genuine brand owners can also refer Article 4 of the P.R.C. Trademark Law to oppose bad-faith application after published for opposition (Article 33) or to invalidate a registration (Article 44).  This is a major improvement in China’s efforts on resolving this longstanding issue, as genuine brand owners generally had no recourse against those bad-faith applications that were filed without actual intent to use but do not fall into any particular bars to registration.  For example, the genuine brand owner might not be able to prove “certain degree of influence” of its senior mark under Article 32 even if the pirate’s bad faith is ostensible.  And it was required that Article 44 Paragraph 1 can be applied only if certain number of bad-faith registrations had been filed without actual intent to use.  Now the CNIPA will consider number/nature of trademarks filed by the applicant, its industry/business status, relevant administrative/judicial decisions in effect, etc. to decide a bad faith trademark application/registration, referring to Article 8 of the Provisions.  These new measures are applicable against those bad-faith registrations filed after November 1, 2019.  CNIPA also disclosed in several occasions that they are working on a blacklisting mechanism against those repeated bad-faith applicants.

4.2 Sanctioning of Trademark Agency that assists with Bad-faith Registration

The new trademark law forbids a trademark agency from representing an applicant in bad faith when the agency has actual knowledge or should have known the application or registration falls under any circumstances under Articles 4, 15 or 32 of P.R.C. Trademark Law.  Violation could result in warning or administrative fines, and even suspension of trademark agency service in serious circumstances.  For those violations after November 1, 2019, a genuine brand owner may file an administrative complaint with a local office of the Administration for Market Regulation (AMR) that has jurisdiction over the area where the agency is registered.

4.3 Sanctioning of Malicious Assertion of Bad-faith Registration

In addition to the SPC’s rulings that assertion of a registered trademark in bad faith should not be supported in Wang v. Shenzhen Ellassay (2014) and Guangzhou Compass v. Uniqlo (2018), the new trademark law also introduces judicial sanctions against the bad-faith registrant who files malicious lawsuits against the genuine brand owner in its Article 68. How the judicial sanction will function in practice remains an open question.

5. Miscellaneous

Chapter 1 of Phase One Agreement also prescribes some other improvements, covering Customs/AMR seizure measures, enforcement of court judgements and also legalization of court documents in China, which are summarized below for your reference:

  • Article 1.20 of Section G requires the counterfeit or pirated goods that have been seized and forfeited by the Customs shall be destroyed rather than subject to removal of a counterfeit trademark to enter the channels of commerce. The same requirement is also applicable to enforcement of court judgments in civil and criminal proceedings.  Article 1.21 further requires China to increase the number of trained personnel to take customs seizure measures and to provide more trainings.  As the trademark or copyright holder, without access to Customs database, usually does not have any clue on importation/exportation of counterfeit or pirated goods, it is extremely important for the Customs personnel to locate the counterfeit or pirated goods by themselves, for which the number and knowledge of personnel will play a quite important role.
  • China has made a lot of efforts to enforce IP-related judgments, e.g., by putting the defendant who fails to enforce the judgment on a discredit list and restricting the same from having high-end consumptions. Honestly speaking, such measures have deterred a large number of defendants.  However, there are still some problems remaining.  In particular, some defendants purposefully transfer assets to a third party before the court rules, and sometimes change the legal person of the company so that the true person in charge will not be on the discredit list and not be subject to the restrictive order for high-end consumptions.  Additionally, most of the courts still find difficulty to enforce injunctions against unscrupulous defendants even though most of the defendants will proactively stop infringement.  Article 1.28 of Section I particularly requires China to take measures to safeguard enforcement of IP-related judgments.  We believe stricter measures against disobedient defendants will be taken and more resources will be allocated in the future to enforcement of judgments.
  • According to the current evidence rule in China, all the documents arising out of China, including authorization documents, will have to be subject to notarization and legalization to meet formality requirements on evidence admissibility of Chinese courts. The legalization conducted by Chinese embassy or consulate could take around one to several months, which is both time and cost consuming and is burdensome on the parties, and could even make the party miss the deadline for case filing from time to time.  Article 1.30 of Section I requires China to revoke the legalization requirement to the largest extent, which will significantly reduce the aforesaid burden on the parties.
  • Article 1.31 of Section I emphasizes the role of witness in court proceedings. In the current Chinese legal system, documentary evidence significantly outweighs witness testimony, largely because the judges opine the witnesses cannot be impartial as they are invited to the court proceedings by one of the parties.  By the same token, the expert witness invited by the parties in IP-related litigations does not have a significant role either and the court largely relies on its own technical investigators and outside forensic appraisal centers to address technical issues.  We are a bit conservative about significant changes to witness system.

The pertinent laws and judicial interpretations shall be amended soon to localize the requirements of Phase One Agreement in China.  China is to set up a specific plan for such localization by middle of March 2020 according to Phase One Agreement, which might be deferred to some extent by outbreak of the coronavirus in China.  We have strong confidence that an IP system more friendly to IP holders will be established in China thanks to these improvements.

[1] tinatai@cn.kwm.com, https://www.kwm.com/en/cn/people/tina_tai

[2] ben.ni@cn.kwm.com, https://www.kwm.com/en/cn/people/ni-zhenhua

[3] songxinyue@cn.kwm.com, https://www.kwm.com/en/cn/people/song-xinyue

[4] yewanli@cn.kwm.com

[5] See Article 219.

[6] See Article 7 of Judicial Interpretations [2004] No. 19.