The U.S. increased tariffs to 25% on $200 billion worth of Chinese goods starting on May 10 due to China’s pull back on trade promises. It looks like the trade war would continue brewing.

At the center of the trade war is U.S.’s concerns on China’s alleged theft of IP and forced technology transfer. So far, China has amended several laws relating to IP in response to the US concerns. In this article, we will outline the amendments and its practice tips.

From March to April 2019, four laws and regulations were amended. Among them are the Regulation on the Administration of Import and Export of Technologies (hereinafter referred to as the Technology Import/Export Regulation) and Regulation on the Implementation of the Law on Sino-Foreign Equity Joint Ventures (hereinafter referred to as the Joint Venture Regulation), the Trademark Law and the part in the Anti Unfair Competition Law related to trade secrets.      

I. The Changes in the Technology Import/Export Regulation and Joint Venture Regulation – Removing Restrictions unfavorable to Technology Licensors         

The revisions are in accordance with the newly passed Foreign Investment Law, which sets forth the high-level requirements of IPR protection for foreign right holders.

-          Deleting provision that required foreign licensor bear responsibility for Chinese licensee’s IP infringement

The old Article 24(3) of the Technology Import/Export Regulation, now deleted, stipulated that “Where the licensee in a technology import contract infringes another person's legitimate rights and interests by using the technology supplied by the licensor under the contract, the licensor shall assume the liability therefor.” Despite how this provision was applied in real practice, the plain language of this regulation required the foreign licensor to be liable for Chinese licensee’s IP infringement. This provision trumped the parties’ free will to negotiate. After its deletion, parties now are free to negotiate how to allocate their infringement risks in the contract and greatly alleviate foreign licensor’s concerns.

-          Deleting provision requiring the party who made the technical improvement to own the IP on the improvement

The old Article 27 of the Technology Import/Export Regulation designated that the party who made the technical improvement owned the IP on the improvement. This limitation was one of the mostly hotly debated provisions during IP licensing negotiations and had caused uneasiness and frustrations on the foreign licensors.

-          Deleting other restrictions

The old Article 29 of the Technology Import/Export Regulation, which declared the invalidity of certain restrictions in technology import contract, is completely wiped out. These restrictions included:

a. requiring the licensee to accept any unnecessary condition, including bundle purchase of any unnecessary technology, raw material, product, equipment or service;

b. requiring the licensee to pay licensing fee for invalid or expired patent;

c. restricting the licensee from improving the licensed technology or using the improved technology;

d. restricting the licensee from obtaining a similar or competing technology from other sources;

e. unduly restricting the licensee from purchasing products, equipment, etc. from other sources;

f. unduly restricting the licensee’s product quantity, variety, or sales price; or

g. unduly restricting the licensee from exporting its products.

Despite their deletion, Article 329, 353, and 354 of the Contract Law and article 10 of the Interpretation of the Supreme People's Court concerning Some Issues on Application of Law for the Trial of Cases on Disputes over Technology Contracts still have similar limitations. But, those provisions mainly attempts to address antitrust concerns and are applied indiscriminately to foreign or domestic companies. With the National Development and Reform Commission’s draft Anti-monopoly Guidelines on the Abuse of IP hanging in the air since 2016, how the laws and regulations in this area would change should be closely watched.

II. The Changes in the Joint Venture Regulation– Removing Provision That Mandated Term of Technology Transfer and Continued Use of Technology by the Chinese Transferee after Expiry of the Technology Transfer Agreement

Additionally, two notorious provisions from the Joint Venture Regulation related to technology transfer were also deleted which mandated that the term of technology transfer contract did not exceed 10 years, and after the expiry of the contract, the joint venture was entitled to continue using the transferred technology. This provision had also caused a lot of issues in the technology transfer negotiations based on our experience. These deletions allow parties to freely negotiate technology license and are widely applauded.

III. Trademark Law Amendment – Tacking Malicious Application and Improving Remedies for Trademark Infringement

-          Tacking Malicious Applications

The Trademark Law is amended to specifically tackle the “malicious trademark registration” by adding “malicious application for trademark registration with no intention to use shall be rejected, “and requiring that trademark agents may not accept engagement for submitting such malicious application. Other relevant provisions on public opinion objecting the application, invalidation procedure against registered trademark and administrative penalty for malicious application and malicious lawsuit have also been adaptively amended to effect this prohibition. 

Before this amendment, many businesses were forced to file trademark preemptive registrations in all classes mainly to prevent such malicious registrants who want to free-ride the goodwill of the brand name or sell the registered trademark for quick cash. Its implementing rules and effects in practice should be observed to further evaluate its implications.

-          Improving Remedies for Trademark Infringement

Another good news for foreign brand owners is the improvement of remedies available against trademark infringers. First, the damages are increased: the punitive damage against willful infringement is increased to 1-5 times of the regular compensation; the statutory maximum compensation, is increased to 5 million CNY.

-          Destructing infringing goods and the materials and tools mainly used for manufacturing the infringing goods by court orders

In addition, now the court may order to destruct the infringing goods and the materials/tools mainly used for manufacturing the infringing goods, and even order to ban them from entering the market. Some smaller infringers, after found to be infringing, may change to a different name and move their tools and materials to a new facility. Enforcing trademark rights against these infringers causes serious headaches and huge enforcement expenses to foreign businesses. This new type of remedy could significantly enhance the value of a winning judgment and injunction order, and if used properly by experienced Chinese local IP attorneys, could considerably ameliorate this whack-a-mole problem.

IV. Anti Unfair Competition Law Amendment – Strengthening the Trade Secret Protection            

The newly amended Anti Unfair Competition Law expands the definition of “trade secret” to include commercial information, in addition to the old definition of technical information or business information, that is unknown to the public, which has commercial value and has been protected by the rights’ holder with correspondingly confidential measures.

-          Expanding misappropriation of trade secret to include “electronic intrusion” and aiding or abetting of misappropriation

First of all, misappropriation of trade secret through “electronic intrusion” is added as one type of misappropriation. In addition, liability for aiding or abetting is also clarified by expanding the scope of misappropriation to cover “instigating, inducing, and aiding others to acquire, disclose, use or allow others to use the rights holder's trade secrets in violation of the confidentiality obligations or the rights holder's requirements for protecting trade secrets.” The Amendments shows how pervasive “electronic intrusion” and aiding and abetting are in trade secret theft cases.

-          Increasing statuary damages and alleviating right owner’s burden of proof

Two extensively criticized aspects of trade secret enforcement are also improved significantly: (1) low statutory damages which could not sufficiently compensate the right holder and deter tortfeasors has been increased; (2) plaintiff’s burden of proof has been lessened.

The Law added a punitive damage of 1-5 times of the actual loss or illegal gains for willful misappropriation, and the statutory maximum compensation is also increased to 5 million from 3 million CNY. The upper limits for administrative penalties are also increased to 1 million CNY from 0.5 million for ordinary violation, to 5 million CNY from 3 million for aggravated circumstances, and illegal gains now must also be confiscated.

Article 32 of the Law provided a new evidentiary rule that alleviates the trade secret owner’s burden of proof in trade secret misappropriation civil cases:

“In the civil trial procedure for misappropriation of trade secrets, where the trade secret right holder proffers prima facie evidence that it has taken confidential measures against the claimed trade secrets and reasonably indicates that the trade secrets have been misappropriated, and the alleged tortfeasor shall prove that the trade secrets asserted by the right holder are not trade secrets defined under this law.”

After plaintiff’s prima facie showing of confidential measures, the new provision shifts the burden to the defendant to show that the claimed information does not qualify as trade secret. To meet the burden, the defendant usually needs to show that this piece of information is “known to the public.” This provision cures the right holder’s inability to show that the alleged “trade secret” is unknown to the public, which is a negative element that used to pose great difficulties for the plaintiff to prove in practice.

Additionally, when the trade secret right holder proffers prima facie evidence which reasonably indicates that the trade secrets are misappropriated, the burden shall shift to the alleged tortfeasor to prove that she did not misappropriate the trade secrets. The amended Law further exemplifies prima facie showing of misappropriation:

a. there is evidence showing that the alleged tortfeasor has channels or opportunities to obtain the trade secrets and that the information she used is substantially identical to said trade secrets;

b. there is evidence showing that the trade secrets have already been disclosed or used by the alleged tortfeasor, or are under the risks of being disclosed or used;

c. there is other evidence showing that the trade secrets are misappropriated by the alleged tortfeasor.”

However, how much evidence should be required from the plaintiff in order to trigger the shift, and how much burden the defendant is to assume in order to be fair, remain questions for the courts and call for interpretations from the Supreme People’s Court in the future.

With the increasing damages allowed under the law, the new evidentiary rules and other changes, the revisions create a much better IP enforcement environment for foreign trade secret right holders trying to protect their IP in China.      

V. Practice Tips   

A stronger protection for the foreign and domestic intellectual property owners can be seen from the newly amended laws and regulations.

Foreign IP owners who are licensing and intend to license their IP in China should know that most of the restrictions on their ability to freely negotiate the agreement are gone. However, other mandatory obligations remain in place for now, such as foreign licensor’s obligation to warrant that their ownership in the technologies are free of defects, the obligation to warrant that the completeness, correctness, effectiveness of the licensed technology. Foreign licensors are advised to watch for these as well as other mandatory rules under Chinese law.

Those who are waiting for the right timing to act should be aware of the changes to Trademark Law and Anti Unfair Competition Law, and their improved position. Among others, the unique administrative enforcement under Chinese law and its improved efficiency under the amendments offer another feasible and creative solution for certain IP right holders. An experienced local IP counsel may help the right holders navigate through the administrative enforcement procedure and even pursue criminal enforcement if warranted.

Draft Amendments to the Patent Law have already been submitted to the SCNPC for consideration. It is possible that the long-waited new patent law and copyright law might be promulgated soon to complete China’s blockbuster of upgrading IP laws and improving IPR protection.