A controversial Chinese tech transfer regulation could become the focus of the Trump 301 probe 12 Sep 17
Last week in Beijing I continued to follow the reaction to the Trump administration’s announced Section 301 probe of Chinese IP practices. Thinking back on five days spent meeting both Western licensing executives and local IP practitioners, what’s striking is that the US Trade Representative’s (USTR’s) looming investigation did not seem to be a topic of great interest, for a variety of reasons. But broadly, I think there are a few key goals US tech will hope to come away with.
Just today, China’s IP authorities continued their official reaction to the investigation. SIPO commissioner Shen Changyu called for a “more objective and honest” evaluation of China’s IP system in an interview published this morning in China Daily. “[D]eveloped countries such as the United States should also give fair evaluation to China’s IPR protection achievements instead of using IP as an excuse to launch trade protection,” Shen said; adding that China has achieved in about 30 years something which took Western countries more than a century.
On the other side, American industry groups like the US China Business Council welcomed the move, placing particular emphasis on “the requirement to transfer technology as a coniditon to gain market access in China”. The American Chamber of Commerce in China echoed that sentiment, noting that while Chinese IP protection advances in consumer goods and entertainment, tech companies are worried about “codified requirements to form joint ventures or provide information for security reviews”.
By the time a public hearing relating to the probe is held at the ITC on October 10th, we will know whether any high-profile US companies have decided to formally air their concerns about the issues raised in USTR Lighthizer’s order. While the industry as a whole may welcome government action on tech transfer issues, individual companies could decide they do not have much incentive to make their cases. Enterprises that already have a major Chinese presence will have presumably already taken some tough IP business decisions about trade-offs; the horse may have left the stable, in other words.
Meanwhile, those companies that do raise issues are likely be at pains to emphasise the progress China has made, IP-wise. Few will envy the headlines that Apple is getting in the Chinese IP press in the follow-up to the testy exchange between its external counsel and Iwncomm’s managing director at the CPAC conference last week (“Is China’s IP system really as miserable as Apple said?”).
But none of this means there isn’t huge frustration with Chinese policies in the private sector. The biggest concern is over policies which allegedly “require or pressure the transfer of technologies and intellectual property to Chinese companies”. Dan Harris has an interesting reaction to this facet of the USTR probe over at his China Law Blog: “We have never been involved in a China transaction where it has been clear to us that the Chinese government has forced our client to relinquish its IP to China.” Harris goes on to say that in many cases foreign companies agree to bad or unenforceable licensing deals either because they don’t understand the risks, or are unwilling to walk away for financial reasons.
An industry group representative I spoke with agreed that companies do often agree to poorly-drafted terms that result in loss of their IP in China; but, he added, that doesn’t mean those deals aren’t a result of government pressure or policy. Oftentimes, ne explained, the decision to make a risky IP arrangement has been taken at a high business level for just those reasons. By the time lawyers are involved in structuring a deal, the trade-off has been made.
One specific policy that corporates might raise in the 301 investigation is China’s Technology Import/Export Regulations (TIER). As the USPTO’s senior China counsel Mark Cohen explains: “These regulations require that a foreigner indemnify a Chinese licensee against third party infringements and that the licensee own all improvements to the technology, while a Chinese domestic licensor can freely negotiate other terms.” There is no way for a foreign licensor to ‘license around’ these rules with their own terms.
Now, it is my understanding that there has never actually been a Chinese litigation case between a foreign licensor and Chinese licensee stemming from these TIER provisions. The Chinese government apparently likes to mention this in negotiations. But I have been told of cases where foreign parties have walked away from a potential technology deal after concluding that the regulations are too much of a burden. The 10th October hearing may give us a chance to hear first hand how TIER and other laws in China have loomed large over major tech deals.
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