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USTR Releases 2023 Special 301 Report on Intellectual Property – China Remains on Priority Watch List

On April 26, 2023, World Intellectual Property Day, the Office of the United States Trade Representative (USTR) released the 2023 Special 301 Report.  The Report focuses on the adequacy and effectiveness of U.S. trading partners’ protection and enforcement of intellectual property rights.  China, along with several other countries, remain on the Priority Watch List.

With respect to China, the USTR stated 

There remain many serious concerns regarding IP protection and enforcement in China. In 2022, China continued implementation of amendments to the Patent Law, Copyright Law, and Criminal Law, as well as previous issued measures, but the pace of reforms aimed at addressing IP issues slowed. While right holders have welcomed some positive developments, they raise concerns about the adequacy and effective implementation of these measures, as well as about long-standing issues like technology transfer, trade secrets, bad faith trademarks, counterfeiting, online piracy, and geographical indications. Also, statements by Chinese officials that tie IP rights to Chinese market dominance still raise strong concerns. 

Excerpts from the report regarding China follow:

In 2022, China continued implementation of amendments to the Patent Law, Copyright Law, and Criminal Law, as well as other previously issued measures, but the pace of reforms aimed at addressing intellectual property (IP) protection and enforcement has slowed. While right holders have welcomed some positive developments, their concerns remain about the adequacy and effective implementation of IP measures, as well as about long-standing issues like technology transfer, trade secrets, counterfeiting, online piracy, copyright law, and patent and related policies. China needs to complete the full range of fundamental changes that are required to improve the IP landscape in China.

As part of the Phase One Agreement, China agreed to provide effective access to Chinese markets without requiring or pressuring U.S. persons to transfer their technology to Chinese persons. China also agreed that any transfer or licensing of technology by U.S. persons to Chinese persons must be based on market terms that are voluntary and mutually agreed, and that China would not support or direct the outbound foreign direct investment activities of its persons aimed at acquiring foreign technology with respect to sectors and industries targeted by its industrial plans that create distortion. In addition, China committed to ensuring that any enforcement of laws and regulations with respect to U.S. persons is impartial, fair, transparent, and non-discriminatory. USTR continues to work with stakeholders to evaluate whether these commitments have resulted in changes in China’s ongoing conduct at the national, provincial, and local levels.

Stakeholders reported that, with implementation of the Criminal Law amendments and other measures, China appears to be taking some steps toward stronger enforcement of trade secrets. For example, stakeholders welcomed improvements under the amended Anti-Unfair Competition Law, the expansion of specialized IP courts, and the granting of preliminary injunctions in a handful of cases. However, further implementation of these measures is still needed, such as finalization of an SPC and Supreme People’s Procuratorate’s (SPP) draft judicial interpretation defining a key term in the Criminal Law and updating of a related standard issued by the SPC and Ministry of Public Security, which together appear to implement the Criminal Law’s changes to the thresholds for triggering criminal investigations. Moreover, stakeholders continue to identify significant enforcement challenges, including high evidentiary burdens, limited discovery, difficulties meeting stringent conditions to enforce agreements related to protection of trade secrets and confidential business information against theft, and difficulties in obtaining deterrent-level damages awards. 

China continues to be the world’s leading source of counterfeit and pirated goods. For example, a 2022 report identified China and Hong Kong as the largest exporters of counterfeit foodstuffs and cosmetics, accounting for approximately 60% of counterfeit foodstuffs customs seizures and 83% of counterfeit cosmetics customs seizures. China and Hong Kong accounted for over 75% of the value measured by manufacturers’ suggested retail sale price of counterfeit and pirated goods seized by U.S. Customs and Border Protection. The failure to curb the widespread manufacture, domestic sale, and export of counterfeit goods affects not only right holders, but also the health and safety of consumers. The production, distribution, and sale of counterfeit medicines, fertilizers, pesticides, and under-regulated pharmaceutical ingredients remain widespread in China.

There was no progress in 2022 on finalizing amendments to the E-Commerce Law, which were issued by SAMR for public comment in August 2021. The draft amendments to the E-Commerce Law include changes that would extend the deadline for right holders to respond to a counternotification of non-infringement, and impose penalties for fraudulent counter-notifications and penalties that restrict the business activities of platforms for serious circumstances of infringement. Although noting improvements under the draft amendments, right holders have raised concerns about the failure to codify the elimination of liability for erroneous notices submitted in good faith, as well as proposed changes that would allow reinstatement of listings upon posting a guarantee.

Right holders welcomed positive changes in the amended Copyright Law in 2021, such as new rights of public performance and broadcasting for producers of sound recordings, protections against circumvention of technological protection measures, and the destruction of materials or tools mainly used to produce infringing copies. However, right holders continue to highlight the need for effective implementation and clarification of criminal liability for the manufacture, distribution, and exportation of circumvention devices, as well as new measures to address online piracy. Right holders also report continuing uncertainty about whether recent amendments to the Copyright Law protect sports and other live broadcasts, and recommend clarification in the copyright regulations.

Although right holders welcomed the implementation of amendments to the Patent Law and Patent Examination Guidelines, some continue to raise concerns about individual patent examiners’ inconsistency in allowing the filing of supplemental data to support disclosure and patentability requirements. Right holders continue to express strong concerns about obstacles to patent enforcement, such as lengthy delays in courts, lack of preliminary injunctions, competition law concepts in the Patent Law, and undue emphasis on administrative enforcement. Right holders have generally welcomed the creation in 2021 of a mechanism for the early resolution of potential pharmaceutical patent disputes but have raised concerns about the cumbersome registration system and difficulties in obtaining preliminary injunctions. Right holders have also continued to express concerns about the scope of patents and pharmaceuticals covered by the mechanism, the length of the stay period, the availability of injunctive relief, the lack of clarity about what could trigger a dispute under the mechanism, and uncertainties with respect to parallel civil judicial and administrative proceedings. The lack of transparency and technical expertise in administrative proceedings is also a concern, as well as the possibility of bias in favor of Chinese companies. Right holders have also expressed concern about the implementation of patent term extensions for unreasonable marketing approval delays, including limits on the type of protection provided. Furthermore, existing obstacles to patent enforcement include lengthy delays in the court system, the reported unwillingness of courts to issue preliminary injunctions, and burdensome hurdles created by parallel administrative invalidity proceedings. China continues to impose unfair and discriminatory conditions on the effective protection against unfair commercial use, as well as unauthorized disclosure, of test or other data generated to obtain marketing approval for pharmaceutical products. The United States and China agreed to address this issue in future negotiations. Stakeholders continue to express concern regarding the 2019 Human Genetic Resources Administrative Regulation and the 2020 Biosecurity Law, which mandate collaboration with a Chinese partner and shared ownership of patent rights arising out of any research generated by using human genetic resource materials in China. According to stakeholders, these measures create uncertainty about the type of exploratory research that would trigger the sharing of IP rights, whether the government would approve any IP arrangements, the risk of forced or pressured technology transfer, and potential conflicts of interest with hospitals conducting clinical trials. These measures also impose non-transparent requirements for government approval before any transfer of data outside of China. Lack of transparency in government pricing and reimbursement processes for pharmaceutical products also needs to be addressed by China. In addition, China should address outstanding patent-related concerns, including regarding the onerous evidentiary requirements for proving patent infringement, ambiguity regarding whether a patentee’s right to exclude extends to manufacturing for export, and lack of harmonization between China’s patent grace period and statute of limitations and international practices. With respect to standards, China should establish standards-setting processes that are open to domestic and foreign participants on a non-discriminatory basis, eliminate unreasonable public disclosure obligations in standards-setting processes, and provide sufficient protections for standards-related copyrights and patent rights. Right holders have raised concerns about application of Anti-Monopoly Law (AML) to the licensing of patents in certain instances. In 2021, a local intermediate court issued the first instance of a decision declaring certain patents of a foreign company to be an “essential facility” and finding the company’s failure to license its IP to Chinese plaintiffs, notwithstanding existing licenses to other Chinese parties, to be an abuse of dominance. The case is currently awaiting decision on appeal to the SPC. Right holders have raised concerns that this decision, if upheld, may lead China’s courts and competition authorities to apply the AML to patent licensing practices in the absence of harm to competition or the competitive process and, more generally, indicate that AML enforcement can be misused for the purpose of depressing the value of foreign-owned IP in key technologies. It is critical that China’s AML enforcement be fair, transparent, and non-discriminatory; afford due process to parties; focus on whether there is harm to competition or the competitive process, consistent with the legitimate goals of competition law; and appropriately tailor competition remedies to the competitive harms. Competition law should not be used when there is no harm to competition or the competitive process to advance industrial policy or other non-competition goals. 

The full text of the report is available here (English only).


Principal, and Director of the China Intellectual Property Practice

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