Background

The Economic and Trade Agreement between the United States of America and the People’s Republic of China (the "Phase 1 Agreement"), was signed in January 2020 and has entered into force in February 2020, and contains commitments and compromises on a variety of issues, ranging from purchases of agricultural products to undertakings to reform IP policy and legislation.

While many commentators have hailed it as a ground-breaking development for IP law in China, the Phase 1 Agreement is likely not a panacea for IP issues in China. The Phase 1 Agreement needs to be read in its context of attempting a first step in reaching an encompassing trade deal, thereby aiming to amend legislation but also appeasing stakeholders in the trade conflict. Part of the provisions of the Phase 1 Agreement directed at China are not new, and at least already partially exist under current Chinese legislation. For these provisions, what should be focused on is how effectively they will be enforced in cases involving US IP right owners. Below we will analyse which of the measures are new, partially new or not new, and how and by when they will be implemented under the newly issued IP Action Plan.

Key highlights of the Phase 1 Agreement:

• Permitting pharmaceutical patent applicants to rely on supplemental data to satisfy patentability requirements: this change was already reflected in the 2017 amendments to the Patent Examination Guidelines, but the Phase 1 Agreement requires to take this a step further, bringing the Chinese patent practice generally in line with practice in the EU and US, to allow sufficiency of disclosure, inventive step (and even the requirement of support of the claims by the description) to be supported by supplemental data (for example: data gathered in product development research could be used to support the  inventiveness requirement). These data could be used both during patent examination (before grant) and invalidation proceedings (after grant). It is likely to bring down the amount of rejected/invalidated patents, which is currently relatively high in China.
• Establishing a patent linkage system: this means that, loosely similar to existing practice in the US, the patentee would be notified of the application for a marketing authorization of potentially infringing products (such as generics) by a third party, and would be given adequate opportunities to obtain remedies (such as a preliminary injunction) aimed at preventing the grant of a marketing authorization. This change had been proposed by the Chinese Food and Drug Administration before.
• Patent term compensation:  a patent term 'compensation' would be granted if the grant of a patent was delayed more than four years from the date of filing of the application, or three years after a request for substantive examination, and such delay is not attributable to the applicant.
• Patent term adjustment (or extension): patentees of pharmaceutical patents could qualify for a patent term adjustment of up to 5 years, if the effective term of the patent after obtaining marketing approval is less than 14 years. This system is somewhat similar to the system of Supplementary Protection Certificates in the EU.
• Removing the requirement of proof of actual loss to initiate criminal trade secret theft investigations: China's Criminal Law stipulates that whoever commits the illegal act of infringing on trade secrets, and thus causes “serious” or “exceptionally serious” losses shall be deemed to have infringed trade secrets.  However, there are different views from local enforcement agencies on whether the loss should be limited to actual loss and how to calculate such losses. Narrow reading of the losses as a criminal threshold contributes to severely insufficient protection of IP right owners in trade secret cases, as it is very difficult in practice to provide evidence of such actual losses before criminal investigation.  It is anticipated that the Criminal Law and relevant judicial interpretations will be amended to lower (if not removing) the threshold for criminal investigations into IP theft.
• Revocation of the operating license of an e-commerce platform repeatedly failing to curb counterfeits: this provision would mean that IP owners could potentially obtain a 'nuclear bomb' in fighting sales of counterfeit products via e-commerce. Currently, under the E-Commerce Law, only fines can be imposed on such e-commerce platforms. However, it is as yet unclear what sort of conduct will qualify as a "repeated failure to curb" the sales of such counterfeits, and it is likely that a revocation of the operating license will only be imposed in last resort/extremely serious cases. 
• E-Commerce notice-and-takedown rules tweaked to protect right holders: The Agreement also contemplates some changes to China's E-Commerce Law, to tweak the current notice-and takedown regime: IP right holders will get 20 (instead of 15) days to respond to counter-notifications and good faith incorrect takedown notices will no longer be punishable.

Which of the key Phase 1 Agreement IPR undertakings are new, which are partially new and which are not new?

The new China IP Action Plan: highlights.

Very recently, on 20 April 2020, China’s National Intellectual Property Administration ("CNIPA") released its 2020-2021 Implementation Plan (“IP Action Plan”), which includes a list of no less than 133 specific actions, sometimes including deadlines for those actions, to be taken to amend China's IP legislation and practice, presumably to comply with China’s obligations under the Phase 1 Agreement (Article 1.35 of Chapter 1 requires China to promulgate the Action Plan within 30 working  days after the date of entry into force of the Phase 1 Agreement). Some highlights of the IP Action Plan are:

• Before the end of August 2020, new Provisions of the Supreme People's Court on several issues concerning the trial of administrative cases concerning patent authorization and confirmation will be issued (likely to allow for more liberal use of supplemental data);
• Amending the Patent Law, to allow for patent term extension and adjustment (see above), and to strengthen the protection of pharmaceutical patents (no specific deadline set);
• Before the end of October 2020, an "early resolution mechanism" for pharmaceutical patent disputes will be established (probably to address China's undertakings relating to the patent linkage system);
• Amending the Criminal Law to improve trade secret protection, likely removing the current requirements of proof of actual losses to initiate criminal trade secret infringement cases (no specific deadline set);
• Before the end of August 2020, a judicial interpretation will be released addressing online infringements, (likely addressing e-commerce platform liability for IP infringements).

We note however that not all IP undertakings listed in the Phase 1 Agreement are addressed in the IP Action Plan (e.g. burden shifting in trade secret cases or copyright undertakings as provided for in Article 1.29 of the Phase 1 Agreement). It seems that this is notably the case for undertakings that are currently already addressed in existing Chinese legislation (e.g. trade secrets, see chapter above) or that will be addressed soon in specific standalone legislation (e.g. new draft Copyright Law which is expected to be issued soon). More progress is also needed from the National Medical Products Administration in implementing pharmaceutical data exclusivity, which is mentioned in the Phase 1 Agreement.

Next steps and impact on IP owners.

It is likely that the Phase 1 Agreement and the IP Action Plan will have a profound impact on the Chinese IP practice and legislation, especially in key areas such as pharmaceutical patents, enforcement of IP rights on e-commerce platforms and criminal trade secret cases. However, neither the Phase 1 Agreement nor the IP Action Plan are directly applicable, and we will need to wait for the concrete drafts or updated versions of the legislation to come out to be able to assess the concrete consequences of the measures on the ground.

While the world is putting eyes on China waiting to see more progress in IP protection, IP right owners should start thinking how they can benefit from the above-mentioned changes in China and make a plan to get the benefits materialized.  For example, if an IP right owner has an ongoing trade secret case for which the actual loss is not obvious, but a criminal investigation in China seems to most obvious next step, it would be advisable to contact its local counsel and evaluate whether, and how, to present the case to the police or prosecutors in China, so that the latter can take on the case even before the criminal threshold is officially lowered through legislative changes.

In any event, we do note that both the Phase 1 Agreement and other measures taken by the Chinese government before the execution of the Phase 1 Agreement (such as guidelines issued by the General Office of the CCP and the State Council from November 2019) create a lot of momentum, and increased pressure on the Chinese courts and administrative authorities to provide more efficient and effective IP protection. In our view, it is therefore possible to leverage these developments, and include the new legislative changes and policies in tailored China IP protection and enforcement campaigns, which should be timed to coincide with the planned changes.

Should you have further questions, or should you like to receive the full text or translation of some of the measures discussed in this article, please contact our Hogan Lovells contacts listed on the right-hand side.

Authored by Stefaan Meuwissen, Zhen (Katie) Feng, Andrew Cobden and Grace Guo