China’s intellectual property (IP) protection and enforcement remains inadequate and foreign company market access barriers too strict, according to the Special 301 Report, keeping the United State’s second-largest trading partner on the US Trade Representative’s (USTR) priority watch list for another year.

“China must not invoke security concerns in order to erect market access barriers,” or “discriminate against foreign-owned or developed IP,” USTR said in its 2017 Special 301 Report, which evaluates IP protection and enforcement by US trading partners known to violate international IP laws.

Despite China’s continuing place on the watch list, USTR did recognize some positive developments since its last evaluation. In 2016, China expanded a pilot program for specialized IP courts to include four new IP tribunals. The specialized courts include a variety of cases brought by foreign litigants on evidentiary burdens, low damages, and other matters. Additionally, China’s Supreme People’s Court (SPC) launched a public online database of judicial decisions. The SPC selected the Beijing IP court as its research base on case guidance and precedent. US-China Business Council (USCBC) member companies report the IP courts are staffed by capable jurists with broad technical expertise, however, the limited staffing has created heavy caseloads and long lead times for rulings.  

IP issues remain in China’s business climate

Bad faith trademarks and weak copyright protections in IP-intensive industries continues to impact foreign companies. Administrative and criminal enforcement remain fragmented, IP-related litigation stalls outside of the special IP courts, and administrative judgments inadequately compensate foreign companies seeking damages. Similar obstacles related to China’s implementation of international IP standards were highlighted in USCBC Senior Vice President Erin Ennis’ previous testimony to USTR.  

  • Trademarks   The Ministry of Finance decreased trademark application fees and revised IP investigation guidelines, but a lack of experienced trademark officers and an abundance of registered bad faith trademarks continue to undermine China’s trademark protection system. “Opposition examiners at the China Trademark Office who face very large dockets may have limited training, and their decisions may be unpredictable and too often focus narrowly on whether the respective goods or services in question are found in the same class,” the USTR report notes. Litigating bad faith trademark infringement is an expensive and obscure process.
  • Trade Secrets   American companies face cumbersome regulations regarding information protection and data security and often risk revealing trade secrets. The Special 301 Report asserts that protecting trade secrets is a critical component of a functioning market economy, and are covered under China’s revised General Civil Administration Law, which is a positive reform development. However, these legal protections do not adequately compensate companies that seek damages for trade secret theft. Standalone legislation to criminally prosecute trade secret theft would be beneficial to American companies, per USTR and USCBC recommendations. Forced technology transfers — including government imposed licensing restrictions, hacking, and restrictive national security policies — remain a concern, according to USTR. USCBC recommends the State Intellectual Property Office (SIPO) and the Supreme Court levy stricter criminal penalties to deter trade secrets thefts and welcomes revisions to the Anti-Unfair Competition Law defining trade secrets as punishable by civil and criminal laws.
  • Patents   Patents are one of the most challenging areas of IP protection in China, despite Chinese patent filings with the World Trade Organization surpassing 1 million applications. Protection of foreign inventors’ patents is inconsistent and companies in IP-intensive industries such as pharmaceuticals and information and technology sectors must comply with obscure and protectionist rules. Made in China 2025 and the Cybersecurity Law promote a market environment where “indigenous innovation” and domestic content requirements favor domestic companies. USTR and USCBC recommend that China refrain from using national security concerns as a means to favor domestic products.
  • Copyright    A critical copyright issue addressed by the Special 301 Report is the widespread availability of counterfeit software and goods. State-owned entities pirate software from American technology firms, costing companies millions of dollars in revenue. The lack of a modern copyright law functions as a market barrier for a wide range of industries. USCBC sources stress that without revisions to the national copyright law, central and provincial IP authorities continue to rule inconsistently on copyright cases. For example, it is unclear if media and entertainment broadcasts are protected by China’s national copyright law.
  • Counterfeits   Counterfeit goods cost the US economy $29 billion dollars in direct sales. Fake pharmaceuticals tops the list of products that USTR wants seized and destroyed. Joint programs between US and China customs agencies has led to progress removing counterfeit goods from global markets. More than 16,000 seizures of counterfeit products were conducted in 2016, according to the Special 301 Report. USCBC recommends a multi-pronged approach to stemming the widespread availability of fake medications and other counterfeit goods, such as combining customs raids with enforcement actions that destroy the means of production and factories of counterfeit goods.

While the Chinese government remains committed to IP reform, implementation of international laws and domestic reform has been slow, according to USCBC analysis. IP reform is not high on the country’s national economic priorities list — ranking 82nd, behind even greenfield investment and stimulating entrepreneurship. However, SIPO Assistant Secretary-General Wang Binying announced China’s decision to join the Hague System for International Registration of Industrial Designs at Beijing’s 2017 World IP Day conference, and the State Council tasked provincial authorities with creating strategies to modernize IP institutions.

Posted by Maryan Escarfullett