China’s IP System was Improving Even Before the Trade War

On October 11, President Donald Trump announced a “phase one” trade deal with China, agreeing that the United States would not increase tariffs on Chinese imports while China would increase purchases of US agricultural products. However, the agreement has yet to be put in writing and the details that have been shared publicly are quite limited in scope.

Even as the trade war drags into its eighteenth month, negotiations have led to little progress on the Trump administration’s core complaints about the US-China relationship — namely, China’s lack of protection for US intellectual property (IP) and its policy of forced technology transfers. Despite initial reports stating that the “phase one” agreement would include additional protections for enforcing IP rights in China, officials have yet to clarify what these protections may include.

Continued pressure from the Trump administration and the lack of progress on the core issues of trade war belie the fact that China has become increasingly serious about promoting stronger protections for intellectual property domestically. This shift has grown in importance as China’s economy continues to slow and the Chinese Communist Party (CCP) seeks new avenues to promote growth.

But even as Chinese companies demand stronger IP protections as they push into high-tech industries and focus on global market expansion, systemic change—even under the increasingly centralized leadership of Xi Jinping—is not as simple as it may appear at first.

On paper: China’s intellectual property framework

Recognizing that the demands of economic reform required new legal frameworks to protect property rights and attract foreign investment to a newly opening country, China’s top leadership began implementing new laws to strengthen its economic performance back in the 1980s. China introduced the Trademark Law in 1982, the Patent Law in 1984, and eventually the Copyright Law in 1990 and trade secrets protection under the 1993 Anti-Unfair Competition Law. As rapid economic growth continued through the 1990s, China sought to further integrate with the global economy by acceding to a number of international treaties that set standards for IP protections. Yet, even as China implemented new laws and regulations to protect IP rights on paper, in practice, China’s IP system has long been stymied by the lack of effective enforcement mechanisms and rampant infringement.

In practice: the problem of enforcement

The problem of enforcing IP rights in China can best be understood as a problem of central-local relations. Since the founding of the People’s Republic, China’s central leadership has always kept a tight grasp on political power. However, even as the CCP central leadership sets the policy agenda, it still relies on local authorities to implement and enforce it. While this decentralized system helped promote reform and competition during China’s economic transition, it also left sufficient space for local authorities to pursue their own objectives or avoid compliance with central initiatives deemed to be at odds with local interests.

While this decentralized system helped promote reform and competition during China’s economic transition, it also left sufficient space for local authorities to pursue their own objectives or avoid compliance with central initiatives deemed to be at odds with local interests.

At the same time, the CCP has long used the Party apparatus to enforce its policy objectives, even in the courts. Unlike many countries that place a high value on judicial independence, China’s judges are more like bureaucratic actors implementing the CCP agenda than independent arbiters impartially ruling on disputes. All judges are selected by local CCP officials, are appointed by local people’s congresses, and are supervised by local CCP political and legal affairs committees. The current Chief Justice of the Supreme People’s Court, Zhou Qiang, has even gone so far as to denounce judicial independence and constitutional democracy as “erroneous western notions that threaten the leadership of the ruling Communist Party.”

The two competing forces of local autonomy and central control have resulted in mixed outcomes in terms of IP protection. When local autonomy prevails, there can often be strong incentives to impede enforcement of IP rights, particularly when they conflict with local economic interests. The case of US-based ABRO taking on a Chinese counterfeiter in the mid-2000s provides a stark example of some of these challenges. This lack of judicial independence encourages courts to protect local firms and state-owned enterprises as the basis of their political and economic power, often to the detriment of central-level policy imperatives.

Positive Trends?

There is no doubt that attempting to reform a system with such entrenched interests, especially through bilateral negotiations with hard tariff deadlines, is a distinct challenge. To the current leadership, the solution to overcome this appears to be increased central oversight.

Just in the last few years, China has engaged in a number of judicial reforms to centralize authority, create uniformity, and build professionalism within its IP system. In 2014, the Supreme People’s Court launched specialized IP courts in Beijing, Shanghai, and Guangzhou. Since 2017, they have also launched 18 specialized IP tribunals across China. While local courts used to hear IP cases as well, these new specialized IP courts and tribunals now have exclusive jurisdiction. This means that local courts have been stripped of their authority to influence case outcomes, an effective tool for combating local judicial protectionism. The creation of the national-level IP appellate court, similar to the US Court of Appeals for the Federal Circuit, provides further central oversight over IP cases.

These courts and tribunals have also been successful at implementing changes to substantive rules and procedures within China’s IP system, such as the use of injunctions to stop infringement during court proceedings, more robust evidence preservation techniques, and increased damage awards.

In addition to court reform, China has also begun to introduce technical investigators, expert assessors, and specialized IP judges to its system. These experts are recruited from universities and research institutions and play an active role in court proceedings and assist judges with understanding complex technologies and scientific processes. The specialized IP judges also have high standards for selection and must have at least 6 years of IP trial work experience. These reforms have strengthened the fact-finding capabilities of the courts and tribunals and have increased the level of professionalism and fairness of trials.

Finally, in order to promote greater uniformity of outcomes, the Supreme People’s Court formed the IP Case Guidance and Research Base at the Beijing IP Court. In common law systems such as in the United States, lower courts are bound by the precedents set by higher courts meaning that judges can create law. In countries with civil law systems like China, judges are only supposed to apply the law set out in statute and are not bound by the decisions of higher courts, making it difficult to ensure that lower courts rule in a way that supports the central government’s policy objectives. The new IP Case Guidance system attempts to fix that by allowing the courts to compile IP “guiding cases,” which can guide judges as they rule on cases in IP litigation. Importantly, these reforms clarify the hierarchy of the precedent system in the guiding cases, establish frameworks for selecting and citing guiding cases, and provide rules for when judges should follow or disregard guiding case “precedent” in a trial.

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Even if the trade talks do not directly resolve disputes over forced technology transfers and economic espionage campaigns, recent trends in China’s domestic IP system bring good news for US companies operating in China. Going forward, it is not only crucial for US negotiators to recognize China’s progress as a point of concession, but also for US businesses to use these tools to protect their inventions and their brands against increasingly innovative Chinese competitors.

This article is adapted from a law review article by the author forthcoming in the UIC Review of Intellectual Property Law.

William Weightman is an Analyst at Kobre & Kim LLP where he works on matters involving government enforcement defense and China. Previously, he was a Fulbright Fellow based in Chengdu, China, where he researched Chinese intellectual property law, innovation policy, and judicial reform.