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INTELLECTUAL PROPERTY CAUGHT IN CROSS FIRE

The words “trade war” and “intellectual property” are practically synonymous now. But the relationship between the two is much more complicated than often portrayed. This article, published in Law360, explores the myths and realities.


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The words “trade war” and “intellectual property” have been practically synonymous

since March of this year, when President Donald Trump first proposed tariffs in response to China’s “unfair trade practices” related to technology transfer, IP and innovation.

Yet imposing tariffs does not have a direct impact on intellectual property. So what is the relationship between the trade war and intellectual property, and what does it mean for those who wish to exploit their intellectual property in China?


A Battle to Secure Control of Future Technology


Fundamentally, the trade war isn’t about intellectual property. It is a response to China’s

growing dominance in new cutting-edge technologies, which challenges the U.S. as the

current global leader. In 2017, China accounted for 48 percent of global funding directed at artificial intelligence development, while the U.S. accounted for 38 percent. In the same year, China held 56 percent of global blockchain patents, compared with the US’s total of 22 percent.


Looking at China’s intellectual property legal system in isolation, there have been great

efforts to create a system fit for the future, ensuring that intellectual property can be

captured, utilized and defended. Both the Chinese government and Chinese companies

see the need for a mature system to drive innovation and value for the Chinese Economy.

The Chinese IP system is well used both domestically and internationally. In 2016, China

accounted for 43 percent of all global invention patents filed, and in 2017, Huawei, an ICT giant, was the first Chinese company to file the most European patents in one year.

While challenges remain in building the system, it can be successfully used by foreign

entities wanting to defend their own IP rights in China. Looking at data from published IP

court judgments in China, the win rate of civil invention patents for foreign plaintiffs between 2006-2017 is 83 percent, compared to domestic plaintiffs with a win rate of 64 percent. In addition, when looking at statutory compensation rates for the same cases, foreign plaintiffs were awarded on average $37,853, compared to domestic plaintiffs’ average award of $26,728.


The Chinese government is aware of its poor international reputation, and is creating a

highly functional system to change it. This can be seen in high-profile court cases involving Eli Lilly and Co., who had the first preliminary injunction granted in China in a trade secrets case, and Ford Motor Co., whose former motor engineer was sentenced to six years in prison for trying to steal design secrets.


Looking Beyond the Intellectual Property Legal Framework


However, all this does not indicate a lack of IP-related challenges in China. To understand the real issues, it is imperative to look at the wider political, economic and legislative framework, and at how that impacts the different types of intellectual assets held by those looking to collaborate with China.


The trade war focus on technology is no surprise, given that that is where the landscape is most complicated. There are four key interacting frameworks dictating how a foreign party can use, create and assign its intellectual property in China.


The foreign investment catalogue sets out the sectors in which foreign parties can

participate, and any specific requirements, such as a need for joint ventures. Should a joint venture be required, rules are applied to how a foreign business may invest in that entity — either through a cash contribution, licensing or technology transfer. Application of these rules are also dependent on whether a state-owned enterprise is a partner.

Should technology be transferred into a joint venture and new IP created as a result, it

could be subject to the Technology Import Export Regulations, or TIER, which includes a

file-first rule in China, and specific implications for IP ownership if any Chinese government funding has contributed to the process. The TIER regulations are heavily criticized in the U.S. Section 301 action for their prescriptive nature of IP treatment and favoritism toward the domestic (Chinese) environment.


Finally, foreign exchange controls dictate how revenue generated from IP can be

repatriated. In general, this is less problematic, as technology licensing finance flows

remain strongly open.


Concerns are real, but understanding how each of these functions operate can help

minimize any impact. While not all conditions can be avoided, it is possible to manage them through intellectual asset strategies, establishing legal protections and contractual

frameworks.


When Is Forced Technology Transfer, Forced Technology Transfer?


“Forced technology transfer” is a term much used in the trade war. But it is a misleading

phrase. While in some cases it is necessary to transfer intellectual property to access the market, this is often willingly undertaken by businesses who see greater benefit in doing so.

There can be cases where the lack of knowledge, and the lack of a strategic approach to

regulatory challenges, creates unexpected surprises. However, rather than considering this a forced action, it can be seen as reflecting an uninformed or poorly structured business deal or research partnership.


Understanding Opportunity and Mitigating Risks


Historical cases provide learning about the importance of assessing the true scale of

opportunities, and managing the risks, by ensuring appropriate safeguards are in place.

The high-speed rail sector is a well-known example, where companies from France,

Germany and Korea transferred their technologies and know-how, lured by the promise of large government contracts. Instead, China National Rail rapidly adopted the learning and know-how, developing the capability to fulfill all domestic contracts.


The wind turbine sector is another example. Foreign companies were drawn by the

attraction of being able to access one of the biggest markets for wind power generation.

Again, access was linked to technology transfer — and, among other things, a requirement that 80 percent of wind turbine parts were manufactured domestically. This allowed Goldwind, now the leading Chinese firm, to catch up with, and indeed leapfrog,

international competitors. But in this case, strong licensing agreements and appropriate

legal structuring of partnerships meant that the foreign firms still benefitted significantly

from royalties on each turbine blade sold by Goldwind.


A Clash of Two Systems


The high-speed rail and wind turbine cases illustrate another deep-seated issue at the heart of the trade war: a conflict between the way the Chinese market operates and Western practices.


The U.S. government would hope to push China into being an open, "free market" economy through trade war pressure. It is unlikely that China will change to that extent any time soon. As we’ve seen since Deng Xiaoping’s era, China’s developments always come with Chinese characteristics. Xi Jinping Thought demonstrates that this tendency is strongertoday than ever before.


We are seeing some reform and moves towards a more liberal approach, but these are a result of China seeing benefits from doing so, rather from than trade war pressure.The

Chinese government has removed formal checks of foreign parties’ contributions into joint ventures where a state-owned enterprise is not involved. This is creating greater freedom for individual partners to negotiate deals on a commercial basis. However, this also serves to highlight that there are still restrictions on partnerships with state-owned enterprises — most critically, on the ability for a foreign entity to license its technology as their equity contribution into a joint venture.


This risk of forcing reform in China through a trade war mechanism is that China will

respond by pushing for even greater domestic dominance of technology. We have already seen China’s semiconductor ambitions following the ZTE action. This would be of global detriment, as innovation barriers will be raised through “China only” IP development and a stricter business environment for foreign entities seeking to utilize their intellectual property in China.


The True Impact


It is hard to predict the full impact of the trade war. However, it will be lengthy, and barriers to trade will continue to rise. Rather than raising barriers to intellectual property exploitation, the trade war should serve to raise awareness about the need for a China-specific strategy. China needs to be approached in a different way than other markets, taking a broad view of intellectual assets and looking beyond basic legal protection.g gives your site a voice, so let your business’ personality shine through. Choose a great image to feature in your post or add a video for extra engagement. Are you ready to get started? Simply create a new post now.

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