From March 5th through March 20th, the 2018 National People’s Congress was convened in Beijing. During its proceedings, China’s Communist Party passed the first amendments to the Constitution of the People’s Republic of China since 2004. The amendments, widely seen as a consolidation of power over the Chinese government in the hands of President Xi Jinping, removed the two-term limit on the Chinese presidency and added sections on scientific development and “Xi Jinping Thought” to the Constitution’s Preamble.
Among the many bureaucratic changes that resulted from the amendments to the Chinese Constitution included the integration of trademark responsibilities with the other intellectual property activities of the State Intellectual Property Office (SIPO). Such responsibilities, including the management of trademark applications, grants and administrative adjudications, were formerly the province of China’s State Administration for Industry and Commerce (SAIC), which has been disbanded. The newly reorganized SIPO will also handle applications and grants for geographical indications of product origin.
The changes also make SIPO a subordinate agency to a newly formed State Market Supervision Administration (SMSA), the agency which will be responsible for the enforcement of patents and trademarks. SIPO will reportedly offer guidance on SMSA activities while retaining the administrative duties of prosecuting patent and trademark applications and issuing grants. The changes at SIPO are reportedly expected to result in a more streamlined management of granting patents and trademarks; the National Copyright Administration of China (NCAC) will remain a separate entity, however.
The enacted changes to the Chinese government’s administration of patents and trademarks come during a time when the U.S. White House has increased its focus on China’s intellectual property practices. On March 21st, news reports indicated that President Donald Trump planned to announce tariffs on China over intellectual property violations perhaps as early as today. Perhaps as much as $60 billion worth of Chinese goods could face trade sanctions in response to allegations that Chinese firms steal U.S. intellectual property, especially through forced tech transfer to Chinese domestic firms under joint venture rules which are requirements for foreign company access to the Chinese market, an enforcement scheme which flies in the face of China’s international trade obligations as a member of the World Trade Organization (WTO).
China’s deceptive practices in IP have been a major focus for the Trump Administration since it authorized the office of U.S. Trade Representative Robert Lighthizer to conduct a Section 301 investigation into such activities last August. Along with unlawful tech transfer measures, China also engages in the facilitation of shipments of counterfeit products into the U.S. and this March, U.S. Customs and Border Protection announced that China was the origin for a total of 16,538 counterfeit shipments seized by law enforcement officials during 2017, making China the single-largest source of counterfeits — accounting for 48 percent of counterfeit seizures that year. Estimates of the costs of IP theft, including counterfeit and pirated goods along with misappropriated IP, on the U.S. economy annually range from $225 million up to $600 million each year according to the IP Commission Report.
Even as China seems to show a serious lack of regard for the importance of IP on the international stage, its domestic activities have provided evidence of a strange dichotomy on IP rights. Beginning last summer, Xi Jinping began ramping up his rhetoric against the infringement of intellectual property, telling officials at an important Chinese economic forum that, “Wrongdoing should be punished more severely so that IP infringers will pay a heavy price.” Analysis of damages awards handed out by specialized IP courts established in Beijing, Shanghai and Guangzhou in 2014 show that average patent damages have “grown aggressively” from $800,000 renminbi (RMB) ($126,488 USD) up to 1.41 million RMB ($221,354 USD), including a record 50 million RMB ($7.9 million USD) award for patent infringement handed out in December 2016. Through July 2016, foreign plaintiffs bringing patent infringement allegations to Chinese IP courts won in each of the 65 such cases handled at those courts by that time. Last August, American shoe and athletic apparel maker New Balance won the largest trademark infringement damages award ever handed out in a Chinese court. The 10 million RMB ($1.5 million USD) award handed out in that case is small by international standards but was multiples higher than the maximum damages award for trademark infringement which had been laid out by recent Chinese statutes.
These recent reforms, which have improved prospects for IP owners operating within China, have not gone unnoticed internationally. This February, the U.S. Chamber of Commerce released its annual version of the IP Index which showed that the score for China’s IP system of rights had improved dramatically over its 2016 score, from 4.35 up to 5.5 (both out of 8). The report notes that China has been a consistent performer and has improved its IP system score across all six IP Index reports issued by the Chamber of Commerce.
“The challenges rights holders face in China are enormous—not least with respect to market access, commercialization of IP, physical counterfeiting, and online piracy—but unlike many of its peers, China is making concrete progress in building a 21st century national IP environment.”
Patent system reforms, including a streamlined patent examination process for Internet and big data inventions and expanded patentability for software and business method inventions, have been supporting a major influx of patent applications being filed at SIPO. In 2016, SIPO received 1.3 million patent applications, one-third of all patent applications which were filed globally and greater than the combined total filed in the United States, Japan, South Korea and Europe that year. Statistics published by the World Intellectual Property Organization (WIPO) last December also indicated that the number of Chinese patent applications filed in foreign patent offices increased to 51,522 such filings in 2016. This was less than one-fourth the number of patent applications filed by U.S. inventors in foreign patent offices, but China’s foreign filings have increased while U.S. foreign filings have decreased. This shift, if continued, would seem to be in line with China’s stated “indigenous innovation” policy which aims to make China the dominant market for tech by 2050.
It will be interesting to see the progress of intellectual property rights in China resulting from the newly organized SIPO under the auspices of the SMSA. Regardless of what results from the potential of trade sanctions from the Trump Administration, it should be clear that China understands the importance of a strong IP system even as it disrespects the rights of foreign IP owners.