Protecting Trade or Trade Secrets: How Intellectual Property Issues Impact Trade Dispute Between United States and China

01 May 2018

Firm Thought Leadership

Ongoing trade tensions between the United States and China have both dominated mainstream news headlines and thrust debates about intellectual property laws squarely into public focus. The recent developments involving tariffs on certain goods from China grew out of an investigation by the United States Trade Representative (“USTR”) into concern about “violations of intellectual property rights and other unfair technology transfers [that] potentially threaten United States firms by undermining their ability to compete fairly in the global market.”1   The USTR issued its full report on this investigation on March 22, 2018, which concluded that “a key part of China’s technology drive involves the acquisition of foreign technologies through acts, policies, and practices by the Chinese government that are unreasonable or discriminatory and burden or restrict U.S. commerce.”2   This article highlights the key intellectual property issues discussed in the USTR report.

As public debate about potential tariffs continues, it is important to understand what Chinese intellectual property policies are at issue. The USTR March 2018 Report provides a useful guide to specific intellectual property policies driving U.S. concerns, however, it is admittedly difficult to determine the extent to which the report is intended to reach an objective conclusion on Chinese intellectual property policies. In any event, the USTR findings must be understood within their proper context, and in comparison with conclusions from contemporary academic investigations.

According to a notice in the Federal Register, the USTR investigation focused on four types of alleged misconduct by the Chinese government: 
(1) using administrative approvals, joint ventures, foreign investment requirements, and other mechanisms to pressure U.S. companies into transferring technology and intellectual property to  Chinese companies; 
(2) requiring non-market licensing terms in negotiations between U.S. and Chinese companies, such as terms for the ownership of future technology improvements; 
(3) directing systematic investment in U.S. companies to obtain technology and intellectual property; and 
(4) supporting cyber theft of intellectual property.3

The USTR also invited interested parties to submit “information on other acts, policies and practices of China relating to technology transfer, intellectual property, and innovation for potential inclusion in this investigation or to be addressed through other applicable mechanisms.”4

On their face, the four categories of allegations differ substantially as to the degree that the challenged conduct would be a direct intellectual property law violation, at least under existing U.S. law. China’s alleged support of cyber theft would likely be a violation of U.S. intellectual property laws such as misappropriation of trade secrets. In contrast, it is unlikely that targeted investments in companies for their intellectual property rights could run afoul of U.S. intellectual property laws. Similarly, outside of potential antitrust concerns, commercially pressuring companies to transfer intellectual property rights would not necessarily present a legal problem in the U.S. Imposing mandatory undesirable license terms has some surface similarity to licensing disputes in the context of standards essential patents (“SEP”). But, this analogy is limited: disputes about SEP licenses traditionally deal with what terms can be required by the licensors of intellectual property (here, the U.S. companies seeking to do business in China), not what the licensees can require (here, Chinese companies).

Whether or not the conduct raised in the USTR March 2018 Report is a direct violation of U.S. intellectual property rights, the alleged conduct could still impact intellectual property rights for U.S. companies. For example, one central allegation from the report is that China has failed to abide by prior commitments to refrain from conditioning the approval of foreign investments or imports on the transfer of technology and intellectual property to a Chinese entity.5   These technology transfer requirements are often imposed through a joint venture between the foreign company and a Chinese partner.6   The USTR notes that U.S. companies entering these joint ventures often experience problems with Chinese partners wrongly disseminating trade secrets from the joint venture.7   Thus, a key factor in evaluating these Chinese policies is the legal recourse available in China to a U.S. company for a violation of the company’s intellectual property.8

Concerns still remain about the viability of a U.S. company pursuing intellectual property litigation in China.9   For example, as summarized in the USTR March 2018 Report, the American Bar Association (“ABA”) Intellectual Property Law (“IPL”) Section noted several deficiencies in Chinese intellectual property law such as “a lack of trade secret protections” and “copyright laws that fall short of international norms.”10   The ABA IPL Section did note that recent changes passed by the Chinese government have enhanced patent protection in China.11   In particular, the introduction of specialist courts for IP cases in China has generated “more interest in the part of U.S. companies to file patent infringement cases in China.”12   However, the ABA IPL Section also noted that more improvements were needed still to “meaningfully protect the rights of patent holders.”13   For example, damages awards remain generally low in Chinese patent infringement suits, and compulsory license rules in China undermine the ability of patent holders to exclude others from using patented inventions.14

Recent academic surveys of patent litigation in China appear to suggest that protections for foreign companies under Chinese intellectual property law may be improving. A survey of 471 patent litigation cases in China from between 2006 and 2011 concluded that “foreign companies perform as well, if not better, than Chinese firms in patent suits.”15   Another recent survey of over 1600 decisions found that foreign plaintiffs win patent infringement cases in Chinese courts at a slightly higher rate than domestic plaintiffs (84.35% compared to 79.84%).16 The relative success of foreign companies enforcing patents in China appears to contradict some assumptions about protectionism in the Chinese system.17   However, these numbers do not speak to the specific concerns noted by the ABA IPL Section about weak protections for copyrights and trade secrets.

Recently, China has continued to signal its intent to pursue meaningful intellectual property reform. In a speech on April 10, 2018, Chinese President Xi Jinping made comments apparently intended to help ease trade tensions with the U.S., including a statement that China will strengthen its intellectual property laws.18   While these renewed commitments could be an important step—particularly given the very real prospect of extensive U.S. tariffs—it is worth noting that USTR March 2018 Report repeatedly indicates that China has failed to abide by similar prior commitments in these areas.19

Despite some signs of improvement, a degree of skepticism remains for U.S. companies needing to protect intellectual property in China—as demonstrated in part by the entities that voiced such concerns during the USTR investigation.20   In turn, skepticism in the Chinese system may aggravate concerns about Chinese policies pushing intellectual property into the possession of Chinese entities. The question going forward is whether this current skepticism is justified, or whether the recent positive signs in the Chinese system accurately reflect a movement to real change. The USTR March 2018 Report clearly lands on the side of skepticism in this regard, and it remains to be seen whether recent steps by China to placate these concerns will be sufficient to ward off the potential tariffs.

1 https://ustr.gov/about-us/policy-offices/press-office/press-releases/2017/august/ustr-announces-initiation-section, last visited April 7, 2018.
2 Findings of The Investigation into China’s Acts, Policies, And Practices Related to Technology Transfer, Intellectual Property, And Innovation Under Section 301 Of the Trade Act Of 1974, Office of the United States Trade Representative, Executive Office of The President, March 22, 2018 (“USTR March 2018 Report”) at 17.
3 Initiation of Section 301 Investigation; Hearing; and Request for Public Comments: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, 82 Fed. Reg. 40,213, 40,214 (Aug. 24, 2017).
4 USTR March 2018 Report at 6 (quoting Federal Register announcement, supra)
5 USTR March 2018 Report at 19-20.
6 Id. at 23-24.
7Id. at 28.
8 See id. (noting submission by Intellectual Property Law Section of the American Bar Association that many U.S. Companies have ended up suing Chinese joint venture partners in Chinese courts for misappropriation of trade secrets); id. at App’x C, 1 (summarizing ABA IPL Section submission)
9 See USTR March 2018 Report at 179-180.
10 USTR March 2018 Report Appendix C at 1.
11 Id.
12 Section 301 Investigation and Hearing: China's Acts, Policies, and Practices Related yo Technology Transfer, Intellectual Property, and Innovation, October 10, 2017 Hearing Transcript at 137:1-139:2; see also 128:18-129:21.
13 USTR March 2018 Report Appendix C at 1.
14 October 10, 2017 Hearing Transcript, supra, at 116:13-117:7.
15 Brian J. Love, Christian Helmers & Markus Eberhard, Patent Litigation In China: Protecting Rights Or The Local Economy? 18 Vanderbilt J. Ent. & Tech. L. 713, 738 (2016)
16 Bian, Renjun, Many Things You Know about Patent Infringement Litigation in China Are Wrong, at 44 (October 1, 2017). Available at SSRN: https://ssrn.com/abstract=3063566 or http://dx.doi.org/10.2139/ssrn.3063566
17 See Love et al., supra, at 718-721.
18 Michael Martina, “UPDATE 2-China’s Xi Renews Pledges To Open Economy, Cut Tariffs This Year”, Reuters (available at https://www.reuters.com/article/usa-trade-china/update-2-chinas-xi-renews-pledges-to-open-economy-cut-tariffs-this-year-idUSL3N1RN1GT, last visited April 17, 2018)
19 See e.g., USTR March 2018 Report at 6-8 (listing prior commitments), 19-20 (indicating joint venture requirements are imposed informally to avoid breaching prior WTO commitments).
20 USTR March 2018 Report at 179-180; see also Appendix C.