Office of the United StateS trade repreSentative

April 2016

 

 

        China remains on the Priority Watch List and subject to Section 306 monitoring in 2016. 

        China continues to present a complex and contradictory environment for protection and enforcement of IPR. Welcome developments include repeated affirmation of the importance of intellectual property by China’s leadership, an ongoing intellectual property legal and regulatory reform effort, and encouraging developments in individual cases in China’s courts. At the same time, progress toward effective protection and enforcement of IPR in China is undermined by unchecked trade secret theft, market access obstacles to ICT products raised in the name of security, measures favoring domestically owned intellectual property in the name of promoting innovation in China, rampant piracy and counterfeiting in China’s massive online and physical markets, extensive use of unlicensed software, and the supply of counterfeit goods to foreign markets.       Additional challenges arise in the form of obstacles that restrict foreign firms’ ability to fully participate in standards setting, the unnecessary introduction of inapposite competition concepts into intellectual property laws, and acute challenges in protecting and incentivizing the creation of pharmaceutical inventions and test data. As a result, surveys continue to show that the uncertain intellectual property environment is a leading concern for businesses operating in China, as intellectual property infringements are difficult to prevent and remediate, and may cause businesses to choose not to invest in China or offer their technology, goods, or services there. Despite these concerns, the United States welcomes the commitment of China’s leadership to intellectual property and innovation, and urges it to seize the opportunity of ongoing legal and regulatory reform to translate policy commitments into an intellectual property environment in China that provides for effective IPR protection and enforcement, incentivizes innovation, and facilitates trade in IPR-intensive goods and services. 

 

        High Level Commitments and Wide-Ranging Legal Reform 

        In 2015, China’s leadership continued to affirm the importance of developing and protecting intellectual property and emphasized that stronger protection and enforcement of IPR are essential to achieving China’s economic objectives. China expressly committed not to “conduct or knowingly support misappropriation of intellectual property, including trade secrets and other confidential business information with the intent of providing competitive advantages to . . . [its] companies or commercial sectors.” China also committed not to “require the transfer of intellectual property rights or technology as a condition of doing business . . . .” As part of its legal reform effort, China continued to develop draft measures on a wide range of subjects, including on copyright, patents, trade secrets, drug review and approvals, Anti-Monopoly Law enforcement as it relates to intellectual property, and regulations on inventor remuneration. To date, the proposed reforms include many welcome changes but also aspects that are of great concern. China continues to review its Copyright Law, and revisions aligned with international norms and best practices would put China on a stronger footing to encourage growth in, and investment by, industries relying on copyright protection. Another positive development is that the Office of the National Leading Group on the Fight Against IPR Infringement and Counterfeiting, established by the State Council and chaired by Vice Premier Wang Yang, continues to play an important and positive role in intellectual property, and it extended its online enforcement campaign into 2015. Also welcome is China’s three-year pilot program to study the merits of specialized intellectual property courts, currently including courts in Beijing, Shanghai, and Guangzhou. 

 

        Trade secret theft remains a serious and growing problem in China. (See Trade Secrets). Although the misappropriation of trade secrets and their use by a competing enterprise can have a devastating impact on a company’s business, remedies can be exceedingly difficult to obtain under current Chinese law and insufficient to match the level of the threat. Enforcement obstacles include deficiencies in China’s primary trade secrets law (found in the Anti Unfair Competition Law, or AUCL) that limit the law’s application; unresolved weaknesses in China’s civil enforcement system including limited injunctive relief and low damage awards; and difficulties in pursuing criminal enforcement, including the need to prove actual damages caused by the theft of a trade secret. Without changes to address these limitations and weaknesses, some of which are not specific to intellectual property but relate to China’s civil process generally, effective enforcement against misappropriation of trade secrets in China will remain challenging. 

        The United States welcomes China’s effort to reform the AUCL, including through the release of draft amendments for comment that made notable progress in several areas. The revision to the AUCL presents an opportunity to address important obstacles, although other necessary changes fall outside the scope of the law in its present form. The United States urges China to consider drafting a stand-alone trade secrets law, which would provide an opportunity to address a broader range of concerns than possible as part of a reform to the AUCL. Other continuing concerns include the issue of misuse of confidential information submitted to Chinese authorities for regulatory purposes. In addition to engaging with China on the AUCL, the United States will also continue to work to ensure other important JCCT commitments are realized, including that “China…intends to issue model or guiding court cases; and intends to clarify rules on preliminary injunctions, evidence preservation orders and damages.” 

 

        “Secure and Controllable” ICT Policies 

        Starting in 2014, a number of Chinese measures and draft measures have invoked security as a putative justification for mounting barriers to foreign ICT products and services and for requiring disclosure of critical intellectual property as a condition of access to the Chinese market. The troubling trend emerged in late 2014, when China issued a series of measures applying to banking sector purchases of ICT products and services. Collectively, the measures would over time require financial institutions operating in China to purchase an increasing share of ICT products, services, and technologies from suppliers whose IPR are indigenously Chinese. The rules also would require foreign firms to conduct ICT-related research and development (R&D) in China and to divulge proprietary intellectual property as a condition for the sale of ICT products and services in China. In response to strenuous objections from the United States, other foreign governments, and the private sector, China suspended these measures in 2015, and at the 2015 JCCT meeting clarified that, as China solicits policy revision advice from concerned parties, the banking sector is free to purchase ICT products of their choosing, regardless of the country of origin of such products. These remedial actions are welcome, but they have not yet resulted in a rebound in sales of non-Chinese ICT products and services to Chinese banks. An additional example of this unwelcome trend is China’s draft counterterror law, which included provisions that appeared to require telecommunications business operators and Internet service providers to, among other things, disclose critical proprietary intellectual property to regulators. After the United States and others raised objections, China removed some of the most troubling provisions from the final version of the counterterror law. It is critical that these concepts not be reintroduced in implementing regulations or other measures. Similar concerns have arisen in China’s National Security Law and draft insurance sector regulations. During President Xi’s September 2015 visit to the United States, China committed that “generally applicable measures to enhance ICT cybersecurity in commercial sectors (ICT cybersecurity regulations) should be consistent with WTO agreements, be narrowly tailored, take into account international norms, be nondiscriminatory, and not impose nationality-based conditions or restrictions, on the purchase, sale, or use of ICT products by commercial enterprises unnecessarily.” Going forward, it is critical that China adhere to its commitments not to simply invoke security concerns in order to require the disclosure of critical intellectual property. 

 

        Technology Transfer Requirements and Incentives

        Right holders in China must contend with government measures, policies, and practices that are purportedly intended to hasten China’s development into an innovative economy, but that disadvantage foreign right holders. The United States is concerned about reports that many of China’s innovation-related policies and other industrial policies, such as strategic emerging industry policies, may have negative impacts on U.S. exports or U.S. investors and their investments or IPR. Chinese regulations, rules, and other measures frequently call for technology transfer and, in certain cases, appear to include criteria requiring that certain IPR be developed in China, or be owned by or licensed to, in some cases exclusively, a Chinese party. Such government intervention, including imposed conditions or incentives, may distort licensing and other private business arrangements, resulting in reduced innovation and a disincentive for relevant firms to participate in the Chinese market. 

        Through sustained bilateral engagement with China, the United States has secured commitments including that: 

        “Technology transfer and technological cooperation shall be decided by businesses independently and will not be used by the Chinese government as a pre-condition for market access”;

        China must “treat intellectual property rights owned or developed in other countries the same as domestically owned or developed intellectual property rights”; and 

        “Enterprises are free to base technology transfer decisions on business and market considerations, and are free to independently negotiate and decide whether and under what circumstances to assign or license intellectual property rights to affiliated or unaffiliated enterprises.” 

        The United States looks forward to China’s full implementation of its commitments, and the revision of measures as needed to ensure that they are consistent with such commitments, including with respect to ICT and elements of the High and New Technology Enterprise tax incentive. At the same time, the United States will continue to push back against existing measures that distort technology transfer, including Regulations on Administration of Import and Export of Technologies, as well as new calls to localize foreign technology, such as by limiting certain regulatory incentives to those foreign pharmaceutical products that are produced in China.

 

        Widespread Piracy and Counterfeiting in China’s Massive E-Commerce Markets 

        Widespread online piracy and counterfeiting in China’s massive e-commerce markets result in great losses for U.S. right holders involved in the distribution of a wide array of trademarked products, as well as legitimate music, motion pictures, books and journals, video games, and software. Online piracy extends to unauthorized access to, or unauthorized copies of, scientific, technical, and medical publications as well. According to estimates, China has the largest Internet user base in the world, at around 650 million, with nearly 560 million mobile web users, and annual sales of goods of the Internet projected at nearly half a trillion U.S. dollars. In 2014, China’s State Administration for Industry and Commerce (SAIC) reported that more than 40 percent of goods that SAIC purchased online during a survey were “not genuine,” a classification that it described as including fakes. Although some leading online sales platforms have streamlined procedures to remove offerings of infringing articles, right holders report that the procedures are still burdensome and that repeat infringers are not deterred by penalties. Reports indicate that unauthorized camcording of movies in theaters, one of the primary sources for online audiovisual infringements, remains a serious problem in China. The United States urges China to accelerate the development of its E-Commerce Law and to ensure that it addresses online piracy and counterfeiting, while providing appropriate safeguards to Internet service providers.

        While these very substantial problems continue, right holders noted progress in enforcement against online piracy, particularly as to unlicensed music. In 2015, the National Copyright Administration of China (NCAC) ordered online music platforms to remove unlicensed works, resulting in declarations of compliance from various online platforms, the reported removal of over 2.2 million unlicensed works, the deletion of such works from 129 websites, and the closure of 42 websites. Right holders were also encouraged by an October 2015 notice from NCAC to service providers regarding unlicensed works. Right holders reported that ISPs are generally responsive to takedown notices and that right holder revenues increased in 2015 relative to 2014 but remain very low compared to a range of other markets, even after accounting for differences such as in population and gross domestic product. 

        Parties in China are facilitating online infringement, in China and third countries, through media box piracy. Manufactured in China and exported abroad, media boxes can be preloaded with infringing content or links to content sources and plugged directly into televisions. Industry reports that China is the home to the media box manufacturers and many of the servers that connect media box users to infringing content. These media boxes enable the users to stream and download infringing online music and audiovisual content. The vast majority of the infringing websites and third party apps to which media box users connect are also reportedly owned or operated by entities in China. Action by the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) reportedly led to the banning of 81 such apps in 2015. The United States applauds this action by SAPPRFT and urges appropriate action against the manufacturers of media boxes in the appropriate venue. 

        Regulations related to SAPPRFT review of foreign television content present a serious market access concern for the online distribution of imported films and television series. Legitimate video streaming websites such as those operated by Sohu, Tencent, and others have represented an important gateway for U.S. and other foreign television content providers to reach consumers in China. The regulations have curtailed legitimate commerce through the imposition of a number of onerous registration requirements, while creating an incentive for consumers to search for content from unlicensed sources. The United States urges China to suspend the new regulations and to further consider the potential impacts of these far-reaching regulatory changes.

 

        Software Legalization 

        The United States continues to urge all levels of the Chinese government, as well as SOEs, to use only legitimate, licensed copies of software. China reported that from 2011 to 2014, software legalization was completed at government offices of all levels. Despite this effort, industry reported that in 2013, the commercial value of unlicensed software in China stood at almost $8.8 billion. In 2014, inspection teams dispatched by the Inter-Ministerial Joint Conference on Promoting Use of Authorized Software Inspections identified problems among local governments, including the continued use of unauthorized software and incomplete implementation of software asset management tools. Despite China’s attention to the concern, U.S. software companies have seen only a modest increase in sales to government agencies. China should provide specific information about the relevant procedures and tools used to ascertain budget and audit information. 

        While software legalization efforts have extended to China’s SOE sector, losses by software companies due to piracy at SOEs and other enterprises remain very high. To the extent that Chinese firms do not pay for the software that runs many of their operations, they reap a cost advantage relative to competitors who pay for legally acquired software. The United States remains committed to working with China to continue to address these challenges. 

 

        USTR’s 2015 Notorious Markets List reported that China is the manufacturing hub of counterfeit products sold illicitly in markets around the world. Counterfeit goods produced in China that are shipped to the United States include: food and beverages; apparel, footwear, and accessories; consumer electronics, computers and networking equipment; entertainment and business software; batteries; chemicals; appliances; pharmaceuticals; auto parts; and other commodities. As described in Border and Criminal Enforcement Against Counterfeiting, the effects of these counterfeit goods go beyond lost sales volume and harm to the reputations of U.S. trademark owners. Counterfeit pharmaceuticals potentially threaten the health of consumers around the world, and faulty or substandard goods that enter the supply chains of U.S. and other manufacturers are dangerous as well. For example, higher defect and failure rates among counterfeit semiconductors may cause malfunctions in medical devices and vehicle safety and braking systems. In China, counterfeit pesticides and fertilizers present potential health hazards to agricultural workers and consumers. 

        During Fiscal Year 2015, products from China accounted for an estimated 52 percent of the total value of the IPR infringing products seized at U.S. ports. Products transshipped through, or designated as originating in, Hong Kong, many of which also were produced in China, accounted for an additional 35 percent of the estimated total value of seizures at U.S. ports. China is also the largest producing economy of counterfeits when relying on detailed analysis of EU seizure 34 

data.[4] The United States and China have committed to strengthened cooperation on IPR border enforcement. 

        As China implements the 2013 amendments to the Trademark Law, long-standing concerns, such as bad-faith trademark registration by Chinese applicants, onerous documentation requirements, and difficulty in obtaining “well-known” trademark status create a negative impact for legitimate right holders, particularly those first filed outside of China. Further, changes to trademark opposition procedures have eliminated an appeal process and have resulted in longer windows for bad-faith trademark registrants to use their marks before a decision is made in an invalidation proceeding. On geographical indications (GIs), the United States has welcomed important commitments made by China in 2014 and 2015 regarding China’s rules and procedures concerning GIs registered under China’s existing systems, as well as those registered pursuant to an international agreement, and has continued to work with China to ensure that U.S. products with generic terms do not face displacement in the Chinese market due to GI registrations. 

        In another welcome development, in July 2014 at the S&ED, China committed to develop regulatory amendments to assert better regulatory control over manufacturers of bulk chemicals that can be used as active pharmaceutical ingredients in counterfeit drugs. China recognized the goal of fighting against the illegal manufacture, distribution, and export of counterfeit and substandard pharmaceutical products. In the June 2015 meeting of the S&ED, China further agreed to publish revisions to the Drug Administration Law in draft form for public comment and to take into account the opinions of the United States and other relevant stakeholders. The United States will continue to work with China to ensure that it fulfills its commitments in this important area. 

 

        The growing importance of IPR and technological standards in China heightens U.S. concerns regarding a range of Chinese government policies and practices. Whereas open, voluntary, and consensus-based standards best promote economic development, efficiency and innovation, standards development bodies in China have reportedly often denied membership or participation rights to foreign parties based on opaque and exclusionary practices, and effectively prevented foreign parties from participating in the standards setting process. In addition to the problem of excluding foreign firms from standards setting, there is also the concern that patent holders may be forced to contribute proprietary technologies to standards (and to license them to implementers) against their will, based on a number of provisions found in existing and proposed measures pertaining to technical regulations, standard essential patents, and Anti-Monopoly Law enforcement. It is critical that China ensure that a patent holder’s determination of whether to contribute technology to a standard and to make attendant licensing commitments are voluntary and without government intervention. 

        To address these concerns in part, the United States secured commitments in the 2015 JCCT where China stated that it welcomes U.S.-invested firms in China to participate in the development of national recommendatory and social organization standards in China on a non-discriminatory basis and that licensing commitments for patents in voluntary standards should be made voluntarily and without government involvement in negotiations over such commitments, except as otherwise provided by legally binding measures. These commitments represent progress and are welcome, but China will need to definitively address, including through the standards reform process that was set in motion in 2015, concerns that foreign entities are being excluded from standard-setting processes, as well as concerns that patent holders and other participants are involuntarily forced to contribute technology to standards or license on certain terms. 

 

        Anti-monopoly Law (AML) Enforcement

        Based on a limited number of investigations conducted to date, there is ongoing concern among U.S. companies that Chinese competition authorities may target for investigation those foreign firms that hold IPR that may be essential to the implementation of certain technological standards. Reports of intimidating and non-transparent investigative conduct contribute to these concerns. To promote improvements in AML enforcement policy, the United States has secured a number of commitments from China at the 2014 and 2015 meetings of the S&ED and JCCT. In addition to important commitments on procedural fairness and transparency, and access to counsel, China confirmed that the objective of competition policy is to promote consumer welfare and economic efficiency rather than promote individual competitors or industries; that enforcement of competition laws should be fair, objective, transparent, and non-discriminatory; and that China’s AML enforcement agencies are to be free from intervention from other agencies in enforcement proceedings. China also committed that, taking into account the pro-competitive effects of intellectual property licensing, it attaches great importance to maintaining coherence in the rules related to IPR in the context of the AML. 

 

        The United States has engaged intensively with China to address obstacles to obtaining and maintaining patents on pharmaceutical innovations. Although the State Intellectual Property Office guidelines governing the review of patent applications were once generally consistent with those of the United States and leading patent offices in other countries, a subsequent revised interpretation of the guidelines severely restricted a patent applicant’s ability to provide supplemental data in support of an application. As a result, China has, in some cases, denied pharmaceutical patent applications and invalidated existing patents, while the United States and other jurisdictions have generally granted patent protection in similar cases.

        China’s departure from its prior practice and that of other major patent offices was the subject of great attention during Vice President Biden’s visit to Beijing in November 2013 and the annual meeting of the JCCT the following month. These engagements resulted in China’s revision of its policy on data supplementation in late 2013, and a commitment to work with the United States to follow up on implementation, including the examination of individual cases. However, industry generally reports only partial progress as a result of the change, and that continued unjustified denials of patent applications and invalidations of existing patents create great uncertainty and potentially undermine incentives to innovate, including for China’s nascent pharmaceutical innovators. 

        The United States continues to have concerns about the extent to which China provides effective protection against unfair commercial use of, as well as unauthorized disclosure of, and reliance on, undisclosed test or other data generated to obtain marketing approval for pharmaceutical products. China has undertaken commitments to ensure that no subsequent applicant may rely on the undisclosed test or other data submitted in support of an application for marketing approval of new pharmaceutical products for a period of at least six years from the date of marketing approval in China. However, there are reports that generic manufacturers have, in fact, been granted marketing approvals by the China Food and Drug Administration (CFDA) prior to the expiration of this period, and in some cases, even before the originator’s product has been approved. 

        The United States was encouraged by China’s 2012 JCCT commitment to define “new chemical entity,” a term that is central to the application of data protection in the marketing approval process, in a manner consistent with international R&D practice. However, on March 4, 2016, China put into effect a Work Plan for the Reform of Chemical Drug Registration Categories, which limits the definition of “new drugs” to only those drugs for which marketing approval is first sought in China. This approach is inconsistent with the harmonized practice of the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use. The lack of effective implementation of its 2012 JCCT commitment is a continued concern that China should address. 

        The United States has engaged closely with China to increase efficiency in regulatory approval processes for pharmaceuticals and medical devices to accelerate patient access and incentives to innovate and market new products in China. The United States welcomed China’s commitment at the 2014 JCCT to reform its authorization processes and to add personnel and funding. However, some proposals related to the implementation of these reforms have raised serious concerns. For instance, the proposals appear to contain provisions that would provide regulatory incentives for companies to shift manufacturing capacity to China or participate in selected national projects and programs. Proposals such as these may have lasting negative effects on promoting global innovation and would appear more consistent with forced technology transfer industrial policies. The United States urges China to consider its current approach and adopt rules and procedures that are aligned with international best practices. 

        The United States looks forward to continuing to work with China to resolve these and other issues.