China Update-US Trade Agreement

The US-China trade agreement 2020 was signed on 15 January 2020.¹ It will drastically change the IP laws in China, as it adopts the US IP practice in China in an unprecedented manner. There are many positive changes in this Agreement that are long awaited, and can now be introduced without further discussion. On the other hand, this Agreement also introduces some controversial measures from US practice.

Toby Mak (Overseas Member) discusses the changes. Several aspects will be of interest to UK businesses if they are followed through effectively, in particular the reduction in a requirement for notarized evidence (at least for US businesses), and dropping requirements for effectively mandatory technology transfer when investing in China. The discussion is also interesting in the context of the UK negotiating a trade agreement with the US. Many of the changes are already consistent with UK and EU practice, but the Agreement highlights the US concerns about geographical indications and may already result in constraints on what the UK can negotiate and shows that the US push for effective protection for the pharma industry.²

The US-China trade agreement 2020 signed on 15 January 2020 has eight chapters:Intellectual property (articles 1.1 to 1.36)

1. Technology transfer (articles 2.1 to 2.5)
2. Trade in food and agricultural products (article 3.1 plus 17 annexes)
3. Financial services (articles 4.1 to 4.7)
4. Macroeconomic policies and exchange rate matters and transparency (articles 5.1 to 5.4)
5. Expanding trade (articles 6.1 and 6.2, plus 2 annexes)
6. Bilateral evaluation and dispute resolution (articles 7.1 to 7.6, plus 1 annex)
7. Final provisions (articles 8.1 to 8.8), which defines annexes that are part of the Agreement, how amendments can be introduced, the authentic texts, and so on.

Naturally, this article will focus only on Chapters 1 and 2, which are intellectual property related. The articles in Chapters 1 and 2 will drastically change IP law in China, which adopt US IP practice into Chinese law in an unprecedented manner. (My observations are highlighted.)

Chapter 1 – Intellectual Property

Chapter 1 has 11 sections:

General Obligations – articles 1.1 and 1.2

1. Trade Secrets – articles 1.3 to 1.9
2. Pharmaceutical-related IP – articles 1.10 and 1.11
3. Patents – article 1.12
4. Piracy and Counterfeiting on E-commerce platforms – articles 1.13 and 1.14
5. Geographical Indications – articles 1.15 to 1.17
6. Manufacture and Export of Pirated and Counterfeit Goods – articles 1.18 to 1.23
7. Bad Faith Trade Marks – articles 1.24 to 1.25
8. Judicial Enforcement and Procedure in Intellectual Property Cases – articles 1.26 to 1.31
9. Bilateral Cooperation on Intellectual Property Protection – article 1.32 and 1.33
10. Implementations – articles 1.34 to 1.36

The implementation of this chapter will adapt US IP law and practice in China. Specifically, “The United States affirms that existing US measures afford treatment equivalent to that provided for in this article” is recited in every article with substantive implementation, except the following articles:

• 1.7 – eliminate actual loss requirement to enforce trade secret cases
• 1.19 – China to significantly increase number of enforcement actions in respect of counterfeit goods with health and safety risks
• 1.21 – strengthen border enforcement actions
• 1.27 – impose heavier punishment in IP cases at courts

Of course I will not term this US colonization of its IP law in China.

All of the above will be discussed below, except:

• J. Bilateral Cooperation on Intellectual Property Protection – article 1.32 and 1.33. This section states that bilateral cooperation is to be strengthened.
• Implementations – articles 1.34 to 1.36. This section requires China to produce an action plan within 30 working days after the Agreement comes into force.

General Obligations

These articles lay down the general principles that the importance of IP protection is recognized, and fair, adequate and effective protection and enforcement shall be ensured.

It is interesting to find in this section that China has now committed to these as it believes IP protection is in its own interests when it transforms from a major IP consumer to a major IP producer. Hopefully, this is not just lip service.

Trade Secrets

First, it should be noted that several articles in this section have already been implemented under the Chinese Anti-unfair Competition Law, effective since 1 November 2019. These are:

• Article 1.3 – in addition to business operators, also include natural persons, legal entities, non-legal entities are to be pursued for trade secret infringement.

This illustrates the fact that before the 2019 Anti-Unfair Competition Law, non-business operators like a government department could not be sued for trade secret infringement in China… Anyway, good luck suing a Chinese government organisation for trade secret infringement in a Chinese court.

• Article 1.4 – specifying that the following additional actions that would also amount to an infringement of trade secrets:
  • Electronic intrusion.
  • Violating confidentiality obligations.
  • Instigating, helping others to violate confidentiality obligations or violating the right owner’s requirements for protecting trade secrets, obtaining, disclosing, using or allowing others to use the right owner’s trade secrets.

This means that before this 2019 Anti-Unfair Competition Law, violating confidentiality obligation or assisting to do so could not be sued for trade secret infringement in China…

• Article 1.5 – ease of proof of trade secret infringement. This shifts the burden of proof to the alleged infringer (to show that the trade secret asserted by the trade secret owner is in fact not a trade secret, or the information used is different from that of the trade secret owner). If the trade secret right owner could provide preliminary evidence showing that measures have been taken to maintain the trade secret, and reasonably showing that the trade secret has been infringed by providing the following:
  • evidence showing that the alleged infringer has access to or has opportunity to access to the trade secret;
  • evidence showing that the information used by the alleged infringer is essentially the same as the trade secret;
  • evidence showing that the trade secret has been disclosed or used or is at risk of being disclosed or used by the alleged infringer; and
  • any other evidence showing that the trade secret is infringed by the alleged infringer.

Although the shift of burden of proof could make suing for trade secret infringement in China easier than before, it should be noted that the above preliminary evidence is required to initiate the shift. Readers familiar with my previous articles on how China imposes strict requirements on authentication of evidence by an unrelated third party, usually a Chinese notary, may consider that this is still mission impossible. However, the Agreement has a specific article directed to this, which may help to resolve some present difficulties. These are discussed later.

• Article 1.27 (enforcement related article) – increase compensation for trade secret infringement as below:
  • For a business operator infringing a trade secret in bad faith and being a case of gross violation, multiplying the compensation determined according to the loss of the right owner or profit made by the infringer from one to five times the value. [This is new.]
  • Increasing the cap of statutory damage (i.e., when loss or damage is not proved) to RMB 5 million. [About £550,000. Cap increased from RMB 3 million.]
• Article 1.27 (enforcement related article) – this enhances administrative punishment in respect of trade secret infringement as below:
  • Punishment can be applied additionally against a natural person, legal entity, and non-legal entity. [This parallels the change in article 1.3 above.]
  • Confiscation of illegal income. [This is new.]
  • Increasing fines to RMB 100,000 to 1 million [About £110,000. Cap increased from RMB 0.5 million], and for case of gross violation, increasing fines to RMB 0.5 to 5 million. [About £550,000. Cap increased from RMB 3 million.]

The following articles in the Agreement are to be implemented:

• Article 1.6 – Easier grant of preliminary injunctions with courts identifying trade secret cases as “urgent situation”.

This does not mean that preliminary injunctions will be granted automatically in trade secret cases. Other conditions, notably that irreparable damage would be indicted, are still required.

• Article 1.7 – Lowering the threshold for initiating criminal enforcement by eliminating the requirement on showing actual losses.
• Article 1.8 – Application of criminal procedures and penalties against willful trade secret misappropriation through theft, fraud, and unlawful physical and electronic intrusion.

Willful is the key here. The problem is, how to show this?

• Article 1.9 – Protection against unauthorized disclosure by government authorities by the following measures:
  • Limiting requests for information on a need-to-know basis.
  • Limiting access to submitted information on a need-to-know basis.
  • No access to be given to competing third-party experts or advisors.
  • Establishing mechanisms to challenge requests for exemption of a disclosure to a third party.
  • Provide penalties as below:
    • monetary fines;
    • suspension or termination of employment;
    • amendment of relevant laws; and
    • imprisonment

Article 1.9 above may mean that these issues had happened before, or at least are serious concerns from the US side.

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