Intellectual property considerations and the path forward
December 2021 marked the 20th anniversary of China’s accession to the World Trade Organization (WTO). The last two decades witnessed an economic miracle; China’s integration into the global trade ecosystems attracted substantial domestic and foreign investment and, as Beijing implemented many of its WTO accession commitments, its international trade expanded dramatically. However, not all commitments have been enforced equally assiduously. On 18th February 2022, the European Union (EU) launched an infraction against China at the WTO, arguing that Chinese courts were preventing European companies from protecting their patents, particularly for telecom technology. Shane Farrelly of D’Andrea & Partners Legal Counsel examines how a lack of intellectual property (IP) enforcement in China may threaten innovation and cooperation with the EU and European companies on more than one front.
Foreign court deterrent and fines
In the latest WTO dispute, the European Commission filed the challenge on behalf of the EU’s 27 member states, claiming that European companies are being deterred from going to international courts outside the Chinese jurisdiction to safeguard their standard essential patents (SEPs)—patents involving a technology or process essential to comply with a standard—that have been used illegally or without appropriate compensation by Chinese companies.
In August 2020, China’s Supreme People’s Court decided that Chinese courts can impose ‘anti-suit injunctions’, which forbid patent holders from pursuing a case outside the Chinese jurisdiction. Several SEP holders that went to international courts for redress were subsequently fined significant amounts (up to Chinese yuan (CNY) 1 million daily until the final judgment in the case) or issued criminal charges by Chinese courts. In addition, it has been alleged that judgments from foreign courts have been ignored.
Licensing Fees
According to the European Commission, Chinese courts have set licensing fees at around half the market rate previously agreed on between western technology providers and manufacturers.[1] In conjunction with the ‘anti-suit injunctions’, this means patent holders have been placed under intense pressure to settle for licensing fees below market rates. Licensing fees are traditionally reinvested into a company’s research and development activities, therefore lower licensing fees ultimately lead to decreased levels of innovation, which is detrimental to the future competitiveness of the EU.
Resolving the issue of forced technology transfers
China has long been accused by the EU and other parties of enacting policies and practices that allow forced / coerced IP disclosures. As far back as 2018, the EU initiated another challenge through the WTO against systemic practices in China that force European companies to give up sensitive technology and know-how (commonly referred to as ‘forced technology transfers’) as a precondition for doing business in the Chinese market.
China’s Foreign Investment Law, an expansive piece of legislation that came into force in early 2020, sought to put an end to such forced technology transfers. Article 22 expressly forbids “administrative bodies from using administrative means to force technology transfer”.
However, according to the European Chamber’s Business Confidence Survey 2021, 16 per cent of respondents still feel compelled to transfer technology to Chinese entities – the exact same share as in 2020. Of that 16 per cent, 65 per cent say the compelled technology transfer took place within the previous two years, and 31 per cent report that the transfer was still taking place at the time the survey was being conducted (February 2021). These findings indicate that little has changed in this area despite the enactment of the Foreign Investment Law.
It is also worth noting that the EU-China Comprehensive Agreement on Investment (CAI) likewise sought to create a legal mechanism to prevent forced technology transfers. Its Section 2, Article 3, Clause 3 states: “Neither Party shall directly or indirectly require, force, pressure or otherwise interfere with the transfer or licensing of technology between natural persons and enterprises of a Party and those of the other Party.” With the CAI seemingly permanently on hold, it is unlikely that this clause will be able to assist in the full implementation of the Foreign Investment Law in the near future.
Moving forward
Beijing has expressed regret that the EU decided to mount this latest WTO challenge, adding that China has always upheld the multilateral trading system. In a press release on the WTO challenge, the European Commission says it has raised the issue on a number of occasions with China, but without resolution. The US and Japan have also expressed similar concerns on forced technology transfers to Chinese companies, and are expected to join the EU’s request for consultations on the WTO challenge.
Meanwhile, an EU-China Summit took place on 1st April. It is likely that this WTO dispute, as well as the EU’s earlier challenge on China’s trade restrictions on EU Member State Lithuania, were discussed, not to mention the CAI. Many stakeholders still hope for ratification of the CAI, a factor that may allow it to act as a potential olive branch between the two sides (with perhaps special attention afforded to Section 2, Article 3, Clause 3).
D’Andrea & Partners Legal Counsel (DP Group) was founded in 2013 by Carlo Diego D’Andrea and Matteo Hanbin Zhi, both of whom have extensive backgrounds in Chinese and EU law. Our firm’s services encompass a full range of foreign direct investment / overseas direct investment-related matters, with a special focus on business relationships between Europe and Asia, inclusive of topics such as cross-border mergers and acquisitions; scouting, relocation and negotiation with local and government authorities; dispute resolution and corporate governance; IP protection, litigation and arbitration; and employment and labour law, among others. DP Group currently has four service entities: D’Andrea & Partners Legal Counsel; PHC Tax & Accounting Advisory; EASTANT Communication and Events; and Chance & Better Education Consulting. DP Group has branches around the world, including in several major developing economies.
[1] EU challenges China at the WTO to defend its high-tech sector, European Commission, 18th February 2022, viewed 29th March 2022, <https://trade.ec.europa.eu/doclib/press/index.cfm?id=2361>
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