Deep Dive Episode 164 – How Will the Biden Administration Handle China’s Intellectual Property Practices?
The Biden administration faces a variety of issues when it comes to China, from trade policy to aggression in the South China Sea. Not to be overlooked, however, is how the new administration will handle China’s policies and practices regarding intellectual property.
In this live podcast, experts from across the political spectrum discuss the key considerations at play regarding China and intellectual property and debate the best path forward for the new administration.
Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.
[Music and narration]
Introduction: Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.
Jack Derwin: Hello and welcome to The Federalist Society’s Fourth Branch Podcast for the Regulatory Transparency Project. My name is Jack Derwin, and I’m Assistant Director of RTP at The Federalist Society.
As always, please note that all expressions of opinion are those of our guest speakers on today’s call. If you’d like to learn more about each of their bios and their interesting work, you can visit www.regproject.org to view their full bios. After opening remarks and discussion between our panelists, we will go to audience Q&A, so please be thinking of any questions you’d like to ask our speakers. If you’d like to enter your questions into the chat function, please feel free to do so, and we’ll address them as time allows.
Today we’re pleased to host a conversation titled “How Will the Biden Administration Handle China’s Intellectual Property Practices?” To discuss the topic, we’re pleased to feature Mark Cohen, Justin Hughes, and today’s moderator, Brian O’Shaughnessy. Brian, who will introduce our other speakers before we get started, is a partner at Dinsmore & Shohl LLP where he chairs the firm’s IP transactions and licensing group. Previously, he was President of the Licensing Executive Society in the United States and Canada where he remains a Senior Vice President for Public Policy. Brian, the floor is yours.
Brian O’Shaughnessy: Thank you, Jack. Well, it’s a pleasure to be here today, and thank you all for joining us. We’ve got two distinguished and highly experienced panelists with us today, Mark Cohen and Justin Hughes.
Mark is the Director and Senior Fellow at the Berkeley Center for Law and Technology at the University of California at Berkeley. He has served as Senior Counsel, China, in the Office of Policy and International Affairs at the U.S. Patent and Trademark Office, and among other distinguished roles, has also served as Senior Intellectual Property Attaché at the U.S. Embassy in Beijing. So welcome, Mark.
And Justin Hughes is the Hon. William Matthew Byrne, Jr. Chair and Professor of Law at Loyola Law School at Loyola Marymount University. And from 2009 to 2013, Professor Hughes also worked in the Obama administration as Senior Advisor to the Undersecretary of Commerce for Intellectual Property. Justin has also served as the chief negotiator for various international treaties.
So with that, I would like to kick off today’s teleforum with a few minutes of remarks from each of our panelists, and then we’ll get into some specifics with questions. So Mark, let’s start with you.
Mark Cohen: Okay, sure. So the topic here is where will the Biden administration go on Chinese IP issues? And I think probably the best place to start and to make sure we have a common denominator is where the Trump administration was on Chinese IP issues. And that might seem like kind of a dumb question. Gee, we all know there was a trade war, and there were a lot of sanctions that went back and forth, and a lot of rhetoric, and some very hot negotiations.
But actually, it’s a little bit more complicated than that. There was the Phase One agreement that was signed on January 15, 2020. And that agreement was intended to help lower the temperature, reduce some of the tariffs, but it was only a partial agreement. And in fact, there were many things that were omitted, some of the things that I think were old wine in new bottle, re-requesting, re-asking, recommitting to things that had been discussed sometimes for over two decades.
But there were some good things there. Most significantly, commitments on trade secret protection or forced technology transfer, which may have been a little bit exaggerated in the view of some academics, but nonetheless got the attention of many people around the world. And also, commitments of substantive trade secret reform, on patent linkage, on some special campaigns, and on proving damages in court cases, etc. So those were all good things.
But there were huge things that were not there, and the Biden administration has to look now not only at how to populate its IP team. And thus far, we really don’t know who will be leading IP related issues in the administration. We know some of the high-ranking officials from some of the other agencies at the cabinet level, but USTR, for example, is typically a deputy USTR level position.
We don’t know the head of the PTO, nor do we know what their perspective will be towards the Trump commitments, the Phase One agreement, how they’ll handle trade-related IP issues, whether the U.S. will get back into negotiating plurilateral trade agreements, and whether they’ll pick up on some of what I would call the orphaned issues, which I think are extremely important, like transparence in the courts, like compensatory damages, like dealing with high-tech patents, like some of the implementation issues in the Phase One agreement which are often unclear, whether the Patent Office will decide that there’s infringement for patent linkage or whether it should only be the courts, for example as one important issue.
To close this out, in my view, there were no real structural changes, notwithstanding the rhetoric of the Trump administration. And frankly, I doubt the Biden administration would be reaching for those kind of structural commitments unless it wanted to go into an even deeper trade war. But we may see more plurilateral engagement with China, perhaps, if we decide to turn on the lights, the appellate body at the WTO, or through other mechanisms. It’s clear that this administration thinks we need to do things with our partners with some of the hot issues in China like in human rights.
There are plenty of other China issues on the table, how IP fits into the chess game, if you will, with China, on things like human rights, on the South China Sea, on Taiwan, on the coronavirus, on U.N. agencies, on Burma, on a range of issues. It may not be at the top of the list, although I suspect it will nonetheless be important.
Brian O’Shaughnessy: All right. Thanks, Mark. Justin?
Prof. Justin Hughes: Well, first of all, thanks, everyone, for inviting me to join today’s discussion. Mark and I have worked with each other a long time, and we generally agree on most of these issues. And I will say, for anything about China, Mark is truly the expert, the expert, the expert, whereas I am more of an amateur who does international stuff.
But I think the most important thing for people interested in IP in China to recognize is that for all its warts, what the Trump administration achieved in the last two years in a total reset in the Washington consensus on China. Through the Clinton and Bush and Obama administrations, we had had a Panglossian view that if you simply bring China into the international trading system fully and get them to adopt all these property protective norms that eventually market forces will produce a greater system of individual rights and representative democracy, and we’ll have an amazing partner on the world stage.
And the Trump years really forced a reset on that. And if you read foreign affairs and you read foreign policy, you realize that the foreign affairs community now accepts that no, that’s not our immediate future with China. Our immediate future is, as President Biden has said, extreme competition. And in that extreme competition, we need to recognize that things like intellectual property are pretty much going to be at the back of the bus in terms of important issues.
So I think that where we are right now is those in the business community who are interested in intellectual property and interested in China need to realize that the relationship is no longer primarily an economic relationship. It is now primarily a geopolitical relationship. It is perceived that way by Secretary Blinken. It is perceived that way by Jake Sullivan. It is a competitive relationship. And so if you’re playing the guessing game of who will head the PTO or who will be in charge of IP at USTR, personnel doesn’t matter much in terms of where the overall Biden administration is going to be.
Now, is that a terrible thing? No, because I think the one thing you see that’s different between the Trump administration and the Biden administration is that the Biden team realizes that even if you’re in tremendous competition with another power, that doesn’t mean that all bridges are burned. It’s not a scorched earth policy as it seemed to be, a chaotic scorched earth policy as it seemed to be under the Trump years.
So on the one hand, President Biden has said, though, the extreme competition, but on the other hand, he has said, quote, he’s “committed to pursuing practical results-ended engagements when it advanced the interests of the American people and those of our allies.” And that’s the kind of statement that really counts when we’re looking at what Mark will talk perhaps more about is that during the Trump years, the U.S. PTO was not allowed to engage in the normal kind of collaborative activities, the full range of collaborative activities it has with its Chinese counterpart, which is, in fact, the larger patent office now than the U.S. PTO.
And so intense competition or extreme competition doesn’t mean that you can’t have collaboration at those levels, functionary levels, and those working group levels where it can make a difference, and it can make a difference for the business community. So pursuing practical results and oriented engagements sounds to me exactly what the PTO and the IT community wants to hear.
And that’s good because in China, we need to recognize that one difference between now and 2000 and 2005 is that there is just huge constituencies of Chinese businesspeople who do care about intellectual property. There is a much larger, much more robust legal community that cares about intellectual property. There is a much more effective court system for intellectual property. Those people have been a little bit adrift in the Trump years without having American correspondence to work hand in hand with.
So I’m hopeful that, although we will not be going back to the way things were in 2015 or 2010, that we will see a lot more on the ground functional cooperation on intellectual property issues. So I guess I’ll stop there, Brian.
Brian O’Shaughnessy: Great. Well, thanks, Justin.
So in order to know where we’re going, I think it might help to drill down a little bit on where we’ve been. And so we’ve talked a little bit about the Phase One agreement. It seems that the Trump administration took a lot of heat and criticism for perhaps overbalancing its approach on a trade-related type of approach. So Mark, I’d appreciate hearing your thoughts a little bit more on the details of what the Phase One agreement is and what your view is on its strengths and weaknesses.
Mark Cohen: Sure. I appreciate that question. So the Phase One agreement is kind of a classic 301 USTR type agreement emerging out of bilateral discussions, albeit one under tremendous pressure, responsive a lot to these annual 301 reports from USTR, hearings and the like that come from industry, and some other pressures that I think the Trump administration generated on its own. And I don’t mean that in a demeaning way. I think the Trump administration was interested, as Justin mentions, in a total reset.
And I think it’s really important to note that the focus on technology that the Trump administration brought to the bilateral relationship was one that China always expected was a part of the relationship but was really rarely a part of that discussion. So if you go back to 2007 when the U.S. filed the WTO case on China’s enforcement environment, there was nothing involving patents in that case, nothing involving trade secrets, in fact, nothing involving civil remedies. It was focused on counterfeiting and piracy, willful trademark and copyright infringement. So the Trump administration really brought a new focus.
I think this is really important to keep in mind because there is this assumption within the media, certainly even propagated by Trump administration officials, that somehow the U.S. had been hammering China on issues involving trade secret theft or patent infringement or standards or any other high-tech related issue, and we had been getting nowhere. The answer is really not. If you go back to congressional testimony 15, 20 years ago when people said even IP theft, what they meant was copyright infringement and trademark infringement, nothing to do with technology. The tech community doesn’t tend to be the most vocal on international issues. The trademark and copyright communities traditionally were much more vocal.
So that was brought out. The U.S. actually filed the WTO case almost contemporaneously with the 301 report on China’s tech transfer policies. That actually went very well. Again, something the media did not cover. The case is suspended because China largely made the legislative changes we wanted, and I guess we’re supposedly in some kind of observer status.
And the Phase One agreement was also selective. So some of the really core issues, to me, which would have some kind of structural impact in terms of China’s IP regime, are not there. The key one for me is transparency. I would put that as my first, second, and third choice because absent transparency where you have the courts publishing all decisions, ideally publishing their dockets so that we have access to information other than the final decision, is really critical to know what is going on in the courts.
And transparency in China is really a political act. Courts may not publish cases because they’re embarrassed by them, because they’re too political, because foreigners lose, or they may publish them because they want to show how wonderful they are, how balanced they are, how thoughtful they are. And unless you understand that, you’d be unwilling to bring transparency into the political discussion.
The other thing about the Phase One agreement, and I’m a bit of singular critic in saying this, is that in many respects, I view it as a very socialistic type of IP agreement. Now, what do I mean by that? I realize this may sound very grating to people who are on the right side of the political spectrum or favor free market forces. The administration, perhaps for the right motivations, although I think it was the wrong strategy, felt like the only way to change China around is by getting China’s leadership to commit to certain reforms. And so whether it was buying more wheat or U.S. products, or reducing the trade deficit, or improving the IP regime, the focus is very much on public law and public mechanisms.
So the Phase One agreement talks about three or four special campaigns that China was going to bring to deal with counterfeit pharmaceuticals and software piracy and counterfeit goods. And those were relics from 20 to 30 years ago, and they reemphasized the engagement of the state in managing IP. You get a fine for infringement, you don’t get compensation out of those efforts, and frequently, it’s highly non-deterred.
And we had given up on those, by the way, around 2005 in the Bush administration when several times the Commerce Department asked me, “What should we do? China wants to have a special campaign.” And I told then Secretary Gutierrez, “You know, Mr. Secretary, another week, another campaign. If you need it politically, go ahead. But basically, this is non-durable, non-deterrent, and it’s inconsistent with rule of law.”
So you have, really, a structure out of Phase One that relies—and this is kind of ironic—more on government involvement and management on both sides than almost any other agreement we had with China. That is, you want to know what is happening in terms of a special campaign, you want to know whether China is bringing more criminal cases, and there’s no obligation to be transparent about these cases, how foreigners are doing, winning or losing, whether they’re getting damages, how big the fines are, etc., then you’re just going to have to sit around a big table with your counterparts in the Chinese government, from the U.S. government, and say, “Okay, how did we do this past quarter?”
In an effective, efficient IP system, what you do is you get on Westlaw or Lexis or the China judgements online, which is a big database but incomplete, and you search and say, “Okay, how are American plaintiffs doing in patent infringement cases? How many SEP cases are there?”, or standard essential patent cases. You would find today that actually, the number of SEP cases, to give one example of a hot topic internationally, in China are but a handful. But that’s based on published cases. If you want to find out how many cases there really are, you’re going to have to call up every significant court in China, and you find out that over the past 10 years, there’s been about 160.
But that’s the kind of thing we did not get out of the Phase One agreement. We’re going to still depend on running around with sneakers from one courthouse to another, so to speak, or making the phone calls, or conjecturing based on newspaper articles, and 10-Ks and 10-Qs, whether people are suing and what the consequences of those cases are.
So in a way, for me, I’ve got a — the Phase One agreement was a tremendous stimulus to other reforms in China. I also give credit to that. China changed every IP law on the books in the past year or two. There were many significant changes, many of them unrelated to the Phase One agreement. In many respects, I feel like China did more outside of the Phase One agreement than it did inside of the Phase One agreement.
And that’s one of the reasons I wholeheartedly agree with Justin that we really need to let some degree of cooperation and collaboration go forward because all these really interesting things have happened, incorporation of bad faith concepts into patent prosecution and trademark prosecution, a degree of discovery in IP litigation, reversals of burden of proof, etc. But we have not been deeply engaged in them.
And what we do have is an agreement that is a little bit awkward to manage in terms of our own goals where we should be looking at incentivizing private markets, letting the government have a much lighter touch on IP, whether it’s enforcement or commercialization or antitrust, and having greater transparency so individual companies and regs holders can understand what’s going on. And you get the government out of the business of managing what the public knows about its system, but rather committing wholeheartedly to letting the public be able to evaluate how well it’s doing.
Brian O’Shaughnessy: Well, thanks, Mark. That’s very illuminating.
Justin, let’s turn to you. I’d love to hear your thoughts on the strengths and weaknesses of the Phase One agreement, but then if you would take us into a different perspective in terms of what does it mean going forward? How is the Biden administration approach likely to differ from the approach that the Trump administration has taken?
Prof. Justin Hughes: Okay. Well, I think Mark and I largely have the same analysis of the Phase One agreement, but Mark just called it socialist. And I’m going to assume our Federalist Society crew is ideologically sensitive. And I’ll say that the Phase One agreement is not the most socialist thing we’ve ever done. It’s the most statist thing we have ever done. And it’s statist in the sense that that could occur for many reasons. It could occur because Donald Trump had a vision of countries as giant companies. And he was in charge of one giant company, and Xi Jinping was in charge of one giant company, and let’s just do a deal. So what USTR did in the Phase One agreement kind of fit with President Trump’s mentality.
But it’s statist also in the sense that we — you could say the United States is increasing recognition of two things. One, we are dealing with a command and control society. We are not dealing with a society that is evidently moving in the direction of individual rights and market activity that we expected and was happening for a while.
And second, Mark used the phrase, and we both know this really well, old wine in new bottles. There is an abiding, very, very strong sense among American negotiators of the Chinese make a promise to you, and nothing happens. And they make a promise again, and nothing happens. And they make the same promise again, and nothing happens. And I’m not saying that in a blame way because there is actually — in one way of looking at it, the Chinese economy is command and control. In another way, it is wildly uncontrolled.
But there is an abiding frustration, and I think the Phase One agreement in its statist form manifests that frustration with the U.S. saying, essentially, the enforcement mechanism is, if we find that you are not abiding by any term and conditions of this agreement, we can drop it at a moment’s notice. It’s kind of, we can cancel the contract at any moment.
So the other thing I’d say is while the Phase One agreement had things that did allow China to push forward, or some Chinese legislative and reforms to push forward, everybody needs to know that the Phase One agreement, if the Biden team wants to, can be treated as a dead letter because China had made—and this is prior to the pandemic—China had made tremendous state-driven commitments to increase imports into China from the U.S., $200 billion worth over the 2017 importation levels, which was considered the base year because that was the last year before trade tensions erupted.
And according to the Peterson Institute, China’s 2020 purchases of products covered by the agreement reached only about 59 percent of the agreement’s targets. And in some areas that was lower, some areas that was higher. In agricultural areas, the increase was only a 30 percent increase in agricultural purchases, whereas the Chinese had promised a 60 percent increase in agricultural purchases. So if the Biden team want to, they can treat Phase One as a dead letter, like we have to start over again. I don’t think they will, but I also don’t think that we’re going to see any rollback on tariffs.
As Mark said, there is a tremendous amount of reform going on in the Chinese IP scene already. I agree with him. We need transparency, but everyone needs to appreciate that developments of Chinese legislation and intellectual property and regulation and court developments are not something Americans’ hand can have huge sway over under the best of circumstances.
We can have only limited sway, and that’s because there is a very large constituency for all IP issues in China now, and also because there are other players. If you look where China has gone in a very small area of intellectual property called geographical indications, it’s not what the U.S. would want. It’s what the European Union would be happier with. So there’s a lot of competition for attention in the development of Chinese IP law.
I don’t know, Brian, if I even answered your question at all.
Brian O’Shaughnessy: Well, it was a great commentary, nonetheless. But I guess you referred to the possibility that the Biden administration might treat Phase One as a dead letter, and you don’t think that it will. So care to hazard a guess in terms of how it’s likely to treat the IP policies of its predecessor?
Prof. Justin Hughes: I’m not sure there was much in the way of IP policies of its predecessor. Mark, do you think there was much in the way of IP policies of its predecessor?
Mark Cohen: On a granular level, there are some interesting questions. There is this WTO case that was filed that I just mentioned that’s been suspended, whether the Biden administration will continue that case and/or file others since they’ve talked about plurilateral efforts. And obviously, all these kind of statutory changes that the Phase One agreement brought out, linkage, burden of proof reversals and the like, they’re available on a national treatment basis to all other trading partners and most favored nation basis. So they’re certainly something that we could talk about with China. It doesn’t mean that you require sanctions to do it.
And I think it’s hard for the Biden administration to back off of at least the rhetoric and some of the strategies absent some change in public opinion, impression, congressional oversight, etc., that says China isn’t stealing our stuff, stealing our technology, and also poses a strategic threat. So I think there’s an opportunity for the Biden administration to act smarter. I don’t know if it can act that differently, though. And maybe it will be kind of a back burner, as Justin says.
But in the smarter category, for example, I would say if I was sitting there advising the president, let’s pick up on high-tech patenting, which was not in the Phase One agreement. Let’s talk about standard essential patents and what looks like an increasing weaponization of the Chinese judicial system. Let’s talk about transparency and revive some of the dialogues around the judiciary. But not making it seem like we’re getting soft on human rights and all these other issues is a little bit of a difficult needle to thread there. But I think it’s possible, and I think it’s been done before.
The U.S. continued bilateral discussions even when we filed the WTO case back in 2007, which was considered quite a threat to China. And they were about patent prosecution and trademark prosecution and copyright issues and the like. And it was largely done between IP office to IP office, Patent Office to the Chinese state intellectual property office, but also between customs and DOJ and Chinese law enforcement, criminal enforcement, etc.
And so I think those things can continue. And frankly, why shouldn’t they? U.S. investment has continued in China. U.S. patent filings have continued in China and trademark filings. U.S. companies are suing and being sued in China, more and more cases on transnational and scope. So business needs it, and I don’t think, frankly, that it hurts our concerns about rule of law. I think it helps if we can engage on those issues where they’re perhaps a little bit less politicized than, let’s say, whether there’s genocide going on in Xinjiang and talk about things that really hurt our pocketbook.
I think it helps to say, gee, we want transparency. We want judges who are independent. We want to stop having the party make decisions on judicial cases. We want to really know what’s going on with the cases that aren’t published. We want to have clear standards that make it difficult to deviate from.
We’re really impressed with China’s efforts to develop a case law system, which has actually been one of the more significant developments, which was intended, really, to thwart, in part, political interference and corruption, make judges decide cases consistently with each other and explain why they deviate. All those things are really good, and they provide an opportunity to engage.
And in a way, it was given to the Biden administration on a silver platter because they were ignored for the past four years, and they’re extremely important. So I think the Biden administration could do things smarter. I think it’s pretty hard to do anything if you’re perceived as being weak on what might be core issues or issues that are of great concern. But it is possible to go forward.
Prof. Justin Hughes: Can I jump in? I actually agree with Mark on all that. I think, though, the one thing is when you want to affect the behavior any — when you want to affect any structures, norms, activities in China, you have to decide the level at which you’re going to do that. So Mark and I would probably agree that the thing about judicial independence and greater transparency in the courts is if Americans want to gently push that, they probably have an ally. And the ally are Chinese judges.
Mark Cohen: Absolutely.
Prof. Justin Hughes: The judges would like to be free of party interference. And so as long as you don’t do it in a way that you’re smacking the party in the face, you actually can exploit that kind of differentiation and interest within Chinese society and work toward your end.
But also, everyone should realize that the United States’ interest in IP in China is not strictly what is best for American business. And an example of that, which Mark knows even better than me, is the U.S. Patent and Trademark Office basically has a problem in its finances. And the problem in its finances stems from Chinese applications. And China has had a policy of subsidizing patent applications—and Mark, you’ll know better than me—subsidizing trademark applications.
And for various reasons which I could go into—I don’t know if we have time—that creates a problem for the economic model of the Patent Office, our Patent Office as an agency, as a $3 billion self-funded agency. So what the U.S. government puts on its lists of what we would like to get done in IP in China may not have — it may not be the best interests of U.S. business one, two, three, and four. It may be other interests are in there.
Mark Cohen: Yeah, that’s absolutely true. Part of that is because the government was subsidizing applications and not maintenance fees or grants. The result is you could file for a patent in China if you were a Chinese entity, to give one example, and your costs would not only be covered, but you could make a profit; that is, the subsidies exceeded the cost of applying. And the result is a lot of low quality patents. And in terms of overseas applications, the result has been a lot of low quality, even fraudulent trademark applications that are not being maintained. And a lot of the revenue is in the maintenance of the applications.
And frankly, you if you did a chart, if you could visualize a chart of what Chinese trademark filings looked like in the U.S., let’s say, five years ago, you would see big bubbles of big companies, like a Huawei, a ZTE, a Hiya, or whatever, as the principal filers. When you get back down to last year or so, you’d see lots of tiny bubbles, individual companies filing one or two trademark applications, but thousands of them because they’re all getting subsidies, and they’re almost all from particular localities that got the subsidies. Now, whether they will be maintained or not, hard to say.
These are not necessarily, by the way, abusive trademark filings. That’s the problem that American companies have experience in China where you’re General Electric and you find someone else filed on the General Electric name. These are typically, in many cases, anyway, trademarks that almost make no sense in English, ZXYY USB connectors. You don’t even know how to pronounce it because they want to get a mark in order to sell on Amazon or Alibaba or whatever into China, and probably some abusive ones in the lot as well, but they probably filed the falsified specimen.
In one case at the U.S. PTO—there have been several of them—something like over a thousand trademark applications were invalidated because the specimens would just photoshop one to the other. They were never really used in commerce. And not only that, the applicant’s “lawyer”—I say that in quotes—was also disbarred from further practice before the PTO. And PTO had to change rules about pro se applications from overseas as a consequence.
But these are also kind of writ large—and I kind of put on perhaps too academic a hat when I say this, but bear with me—writ large. The bigger story here, it goes back to the same thing as the Phase One agreement. This is an IP environment that, whether you want to call it statist or socialist, has a very active involvement of the state in managing, creating, protecting, commercializing intellectual property. And it does not rely adequately enough on market mechanisms, that when you have huge subsidies going into trademark and patent filings, you’re going to get low quality. You’re going to build up frustration internally in China.
Gee, we’re the biggest patent office in the world. I don’t know the numbers, last year at probably six, seven times of the U.S. The Trademark Office has been the biggest for 12 or 13 years. How come we’re still spending so much money on royalties from Qualcomm, and Intel, and wherever else, Ericsson and Nokia, when we have the most filings, the most SEPS, etc.?
Well, the problem is you’ve actually cluttered up the registers. A lot of that is junk. And we’re stuck trying to weed out the good from the bad. And I’m not saying China isn’t innovating. I’m saying it’s become much harder using patent information to determine how China is innovating because it’s so cluttered up with other stuff.
And this is just another sign of what happens when you merge a socialist or communist economy and China. This is really interesting because when you go back to the TRIPS agreement and you look at Article 60-something, which talked about transition periods, it was expected that if you were a communist economy, and they were mostly thinking of Eastern Europe, you would need a transition period to embrace private property rights and understand intellectual property. It wasn’t going to happen overnight. You’re probably going to have to revive your civil code, your courts. You’re going to have to break up state ownership of land and factories, let people own their apartments, corporate ties, state owned enterprises, etc.
No one thought at that time, and I think no one really thought through in 2001 when China joined the WTO, what the consequences would be when an economy that is — whether it’s mixed or state dominated or has a big state imprint, would embrace intellectual property, not find it to be a foreign thing, but say, “You know what, I can have 5-year plans around this. I can have a 15-year plan on this. I can talk about how I want to manage my technology purchases and sales. I can talk about how the patent system is going to benefit my core strategic and emerging industries or Made in China 2025 or China Standards 2035 plans.” That was utterly unanticipated, and we’re seeing the fruits of that.
Now, the smart people in this whole discussion, as best I can tell, who understood this or might have understood this, I think, was the Hong Kong delegation to the Uruguay Round because they inserted in the preamble to the TRIPS agreement that IP is a private right.
Prof. Justin Hughes: Well, Mark, the history of that actual insertion in the preamble is the Hong Kong delegation did that because they didn’t want to require — they wanted to create a presumption against prosecutorial enforcement. They wanted to create a presumption that it was the private party who had to enforce their rights.
And Mark, I was going to ask you, tell us how you really feel.
Mark Cohen: [Laughter] I’ve just started, Justin.
Prof. Justin Hughes: Brian, this is really — Mark is right that this is really interesting because what happened is on this part, on this kind of subsidization of patents is such a bizarre and interesting story about central government efforts because some very thoughtful people in Beijing realized that Western academics and Western analysts use patent filings as a way to try to measure, knowing it was a very rough measure, innovation.
And they responded by saying, “Okay, let’s get more patents.” And the result was a distorted system where patents are no longer as good a metric of innovation as they once were. And that’s kind of a bizarre feedback loop, but a really interesting one.
Mark Cohen: Xi Jinping in a recent speech—and he said it eleven times; it was just published in the end of January—that they need to improve the quality of China’s IP regime. This is going to be the issue for the next three to five years as they’ve committed to back off of subsidies in the patent context in particular, and as they’ve also looked in terms of scientific work at improving quality and not simply quantity because China’s also flooded the world with scientific publications.
Will China increasingly turn towards qualitative metrics, and how will that be implemented? And we’re seeing that in scientific work where China increasingly wants to have a cohort of scientists who belong to that ultra-high quality, mega-sided group. So that would mean, for example, providing laboratories to leading scientists, bringing talent back to China to do that, not necessarily a direct subsidy for filing, for writing a scientific publication, but giving a lot of support to those people who will really lead the world to say, “Gee, China is really innovating and creating.”
Will that happen in patents? What will the consequences be? Is this going to be one of those things where we have to be careful what we wish for when China moves from quantity to quality? I can’t say, but it’s an interesting development.
Brian O’Shaughnessy: Well, Justin, let me come back to you for a moment. So you’ve said that in the Biden administration, the IP is likely to be a back-of-the-bus issue. At the same time, we’ve sort of taken task of the Trump administration, taken to task for mercenary or tariff-related approach.
Is there likely, in your view, that the Biden administration is going to take a little bit more of a collaborative approach with the other market-based economies? And you’ve used the term IP norm setting. How are we going to deal with China in terms of bringing them into what most of the rest of the market-based economies think of as typical IP norms?
Prof. Justin Hughes: Well, everyone knows that Joe Biden is — in many ways, Joe Biden is an extraordinarily internationalist person to have been elected president when you think about his resume compared to Barak Obama’s resume or George Bush’s resume or Bill Clinton’s resume. And so he’s — obviously, it’s hardwired into his DNA to mix metaphors that, for Joe Biden, that collaborative effort with our allies is what it needs to all be about.
What can be done? Well, again, I have to — I sound like a broken record, but when it comes to the WTO, it’s not the IP that we’ve got to figure out. It’s that the most fundamental issue we’ve got to figure out is how does the China-U.S. trade relationship, which right now is wildly, rabidly inconsistent with WTO rules, how can it be made to fit as a sui generis relationship into the WTO system?
And that’s not about IP. That’s about a quarter of a billion dollars in tariffs that — or billions of dollars in tariffs that the Trump administration put on that the Biden people are not going to get rid of. And whether or not the Phase One agreement, if it has legs still going into the future in terms of the trade purchasing commitments, whether they’ll be WTO compliant is another big issue. But that’s going to be the first issue is if we believe — if our position is multilateralism and work with our allies, how do we take what we have done, and without backing down totally, make it kind of fit into the system. And that’s going to take a while.
At the WIPO, or the World Intellectual Property Organization, which is the other place where international IP norms are formed and where a lot of important stuff happens in terms of cooperation and trademark multilateral filings on the grid system, the Chinese and the Americans are not nearly as much at loggerheads as you would read from newspapers. So I don’t think that it will be hard to work with China. In the WIPO particularly, what President Xi Jinping has said and what President Biden has said, I think that you will get functionaries working together.
But maybe I’m being an optimist about this, or maybe colored by my past. I had a very tough night one night negotiating in Geneva, and the Chinese delegate had disappeared. And I called an American ambassador, and it was very late at night. And I said, “Just call the Chinese ambassador and wake him up and get the person down here.” And the person appeared and voted with us. So I’m pretty optimistic that at the functionary bureaucratic level a lot can be done collaboratively.
And we do need to do things collaboratively because China — let me just finish and say one thing everybody needs to know that when it comes to Geneva, when it comes to the World Trade Organization, when it comes to the World Intellectual Property Organization, China has this kind of intermediary position of wanting to be identified in the developing world, be perceived as a leader there instead of developed countries, but on the other hand, realizing that its interests are in many ways more aligned with the developed countries than everyone else.
Mark Cohen: If I can add something, I think Justin made some very good comments. I don’t personally view the U.S. relationship with China, whether in IP or on all issues, as a binary of collaboration versus competition. And maybe Biden and his team are smart enough to recognize that there’s a lot of space in that frenemy kind of calculation.
And in terms of IP specifically, I can see certain areas where there’s low-hanging fruit on multilateral cooperation, particularly things like export controls and CFIUS, and building up alternatives to China-based 5G standards, and whatever. I think that all offers a lot of potential.
When you start imposing unilateral sanctions against China for things that might have been handled by the WTO, just kind of looking in the rear view mirror where we all have 20/20 vision, then you easily start losing the possibility of plurilateral consensus. The TPP was invented to set a new bar and in large part drawn heavily from our experience with engaging China to create some plurilateral mechanisms.
Interestingly, if you go to the WTO case the U.S. filed around 2018, and the E.U. filed a similar case a few weeks later, there was about a dozen countries that have joined that case or are observers to that case. And I show that there was some kind of plurilateral interest in what both the U.S. and E.U. were looking at.
I think the WTO was abandoned as a mechanism too early by the Trump administration. There were a lot of things that could have been pursued that were not. Whether we would come back to the WTO to pursue them or not, I don’t know. I think that’s going to depend on some of the things that Justin just mentioned in terms of the sanctions and where we want to go with unilateral mechanisms.
But I personally prefer, if a perspective were taken of what is in the United States’ interest, not what is in the U.S. interest in terms of a particular ideology or effort to affect regime change or structural change, what will advance our commercial interest in the short term and the long term. And in some cases, we may find China to be a willing cooperator. In some cases, we may find other countries will work with us to put the pressure on China. And in other areas, it just may be far too difficult.
Brian O’Shaughnessy: Well, if I may, we’ve got a couple of questions lined up in the chat in the Q&A. But one of our listeners asks if you can address the Made in China 2025 initiative and how this is likely to affect the IP relationship with the United States. Mark?
Mark Cohen: Yeah, I should take that. But again, I have to give the advance notice that the information I’m providing is my own opinion, and it’s probably not the dominant opinion on Made in China 2025.
Made in China 2025 was one of many IP and manufacturing and investor plans in China. I mentioned China Standards 2035 as another one, the medium and long range science and technology plan which is a 15-year plan, extremely important. The annual Five Year Economic Plan is a national IP strategy which I think informs Xi Jinping’s speech at the end of January and the underlying laws up for revision this year, which is the science and technology promotion law, and a wealth of dozens if not hundreds or thousands of industrial and economic plans about the national and local level and sub-provincial level as well as industrial sector level.
So if you’ve only kept your eyes on Made in China 2025, you’ve been missing a lot of the landscape along the road to that destination. And some of them are far more important than high-level broadly worded national plans, the kinds of subsidies that are going to go into a manufacturing enterprise in Taizhou in Jiangsu province which is trying to be a China pharmaceutical city, or the places in Zhejiang province that manufacture auto parts, or the kinds of support that are being given for mega-sided researchers in highly competitive technologies. Don’t lose your eye on those really important issues.
And that was, frankly, one of the reasons I differed with the Made in China 2025 approach. I thought it was unduly emphasized, it was overly broad, and we were not looking at the range of other factors. China incorporates IP into its industrial policies. And if you haven’t noticed that, it’s been going on for a very long time. China never wanted to be the center of global counterfeiting and piracy, even though that may have helped lift its trade surplus some. It always viewed itself as being a major innovator and that it wanted to return to that status which it had before the industrial revolution.
So the long range view of things, and if you listened to Xi Jinping’s speeches over the years, it’s often replete with references to 8th century China, 12th century China, China’s dominance in the world, China’s trading relationships, China’s scientific and industrial prowess with the last 400 years as a bit of a bleep on that issue.
I had done some experiments when I was in the PTO, companies coming through with problems of various types. And we’re talking about this was 10, even 15 years ago. And they would come in. I remember one company had a technology for high-voltage transmission that preserved the power over long distances, so it was kind of a low carbon technology.
And I said to them, “Have you looked up if there was an industrial policy in this area, because that would give you a sense of what your competition is and what China wants to do.” And they already invested in China and said, “What do you mean?” I said, “Well, there’s probably a 5-year plan, or a 15-year plan, or a science and technology plan, or a local plan where you’ve invested.” They said, “Really?” And within 5 minutes, using Chinese, I located a plan that was exactly on point. And I repeated that many times over.
So if you’re going into the Chinese market with a sense that this is all Shanghai with all these skyscrapers popping up all over the place and people making millions overnight because it’s a free market economy, you’re probably quite deluded.
Made in China 2025, to the extent the administration brought it forward as an industrial policy that people need to think about, that was a good thing. To the extent people thought it was the only industrial policy, that was a very bad thing. Those policies continue to exist. They also offer opportunity.
So not to make it all of this ominous threat, but if you realize that China is headed in a particular direction on a particular technology, and you own that technology, or you have the possibility of being dominant in it—maybe you’re a Tesla, maybe you’re a Qualcomm or a semiconductor company—you may have a great opportunity in the Chinese market to sell, to manufacture, to conduct R&D, to leverage the talent, etc. And that could be extremely important.
That works across many industrial sectors. Qualcomm did very badly in an antitrust decision that said it was charging too much for licensing its technology, but once the National Development and Reform Commission said, “You know what, X dollars per chip or X dollars per handset is the appropriate price for Qualcomm’s technology,” they were able to line up a lot of companies to license their technology. The state determined that was fair. That was leveraging the state mechanism to set prices and determine what is competitive and to determine what is necessary for the Chinese economy in order to drive a positive outcome, despite a very heavy fine, in licensing technology.
So it’s a complex issue. It’s something that, fortunately, is highly transparent, if you read Chinese, and that you could leverage that either for ominous consequences, and there often are ominous consequences, or also for commercial opportunities.
I would hope the Biden administration, whether it’s through the science advisors or the PTO or USDR or agencies like NAH and science agencies at DOE, pays more attention to these policies to understand competitive threats and does its own forecasting based on patenting and scientific publications and R&D money and exports and other efforts with China in order to come up with our own sense of what the competitive threats are from China in the future.
Prof. Justin Hughes: Brian, although the views are very complex, we need to try to really reduce them down to short answers for you. And the thing about the Made in China 2025 in terms of U.S. policy is that, to me, the biggest problem is not IP issues. The biggest problems are subsidies issues. And the current international trade mechanisms to deal with this are totally inadequate. The WTO Subsidies Agreement and the GATT provisions on subsidies just don’t address the kind of massive, centrally driven subsidization in a mercantilist economy that — in a continent-sized mercantilist economy that we’re seeing with China.
So the United States needs to formulate a right response to the subsidization aspect of the Made in China 2025 and other programs of R&D and industrial development in China. And the problem is the WTO rules [inaudible 57:20].
Brian O’Shaughnessy: Well, thank you both. We only have a couple of minutes left. You both have advised administrations at senior levels. Take a moment, if you would. I’ll start with you, Justin. If you had the opportunity, what would you tell President Biden about what he should do with IP with respect to China?
Prof. Justin Hughes: Well, let me start by trying to answer one question Amy Wang asked in the Q&A. And she asked, “What has collaboration between U.S. PTO and China counterparts on the ground looked like in the past?”
Well, one way you can collaborate is if you both get the same patent application, you can collaborate on prior art and understanding what the existing technology is. There’s a lot of practical collaboration that can be done. So President Biden, on the ground for IP, to use your own words, there’s just a huge amount of practical results-oriented engagements we can engage in with China that we should do, that will not detract from our appropriate moral and ethical positions on a lot of what China is doing in other areas. That would be it.
Brian O’Shaughnessy: Thank you. And what about you, Mark? What would be your recommendation and advice?
Mark Cohen: I would — I don’t disagree with anything Justin just said, but I would actually not ignore, not underemphasize the importance of investing in the right structures within the U.S. government. I think even if you brought on a brilliant U.S. trade representative or PTO director or others, unless you can really integrate smart decision making, smart forecasting into U.S. government mechanisms, they’re only going to be ephemeral.
So in my mind, there are three things that would make a difference from a structural sense. I would like to see increasing depth and coordination in U.S. government agencies on these issues, and not just coordination in name only. People have to be incentivized to really work across agency lines. The China experts, the trade experts, the IP experts, the tech experts, the defense establishment, the economists, they all have to start working together.
I think what we’ve seen in some of the policymaking, not limited to the Trump administration, has been the consequence of the phenomenon of a river a mile wide and an inch deep, a lot of issues but inability to go to a high level of depth. And that’s what happens when you have multiple agencies with similar portfolios but limited human resources. People have to work together to share and work across agency lines.
Training, also extremely important. The level of Chinese language knowledge is very low in U.S. government negotiators, and the level of Chinese law knowledge is extremely low. And that’s part of the reason you have this phenomenon of constant frustration because many times what we get out of China are commitments that are a policy. “Yeah, we’ll work on improving X,” and they’re rarely expressed in legally binding language. Phase One agreement was a little better on that, but we really have to have a core of trained negotiators who understand the Chinese legal system, especially critical in IP because it’s an intangible right, so it’s very hard to figure out what’s going on.
So coordinate, train, and the last thing I would say is plurilateralize. I think that can be used effectively, whether it’s WTO, plurilateral agreements, or specific issues like export controls. I think those are the three institutional efforts I would like to see.
And if you were able to do that, then the U.S. could leverage what is a lot of talent in this country on China, on tech issues, on IP issues, certainly compared to most other countries, perhaps every other country in the world except China itself. And if you could start leveraging that and educating our allies, we could all begin to move in a better informed and long-term direction. That’s the only way, in my view, to really create the roadmap towards successful, smart engagement with China in the future, particularly in IP and technology.
Brian O’Shaughnessy: Well, we’ve actually not just come to the end of our hour, but we’ve actually exceeded it a little bit. This has been a fascinating conversation, and it’s obvious that this could go on for quite some time. And so perhaps a further follow-up would be in order. But I want to thank you both, Justin and Mark, for your input today. It’s been a fascinating conversation. I’ve enjoyed it tremendously, and just thank you very much. So Jack, I’ll turn it back over to you for any closing comments.
Jack Derwin: Thanks so much, Brian. And thanks to Justin and Mark for joining us today as well. I think it was a great discussion on a complicated but quite important topic. And we really appreciate you lending us your time and your expertise. A big thank you to our audience as well for tuning in to today’s live podcast. We welcome any listener feedback by email at [email protected]. And with that, we are adjourned.
Conclusion: On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcasts, Google Play, and Spreaker. For the latest from RTP, please visit our website at www.sregproject.org.
This has been a FedSoc audio production.
Director and Senior Fellow
Berkeley Center for Law and Technology, University of California at Berkeley
Hon. William Matthew Byrne, Jr. Chair Professor of Law
Loyola Law School, Loyola Marymount University
Partner, Dinsmore & Shohl LLP and
Past President, Licensing Executives Society, USA & Canada