On April 26, the Office of the US Trade Representative (“USTR”) released its Special 301 Report on Intellectual Property Protection and Enforcement (“the Report”). The Report describes China as a “priority watch list” country, consistent with prior years.1 In a press release announcing the report, the USTR’s Office stated, “[t]here remain many serious concerns regarding IP protection and enforcement in China,” noting that while the country has continued implementing legal reforms, “the pace of reforms aimed at addressing IP issues slowed” and there are “concerns about the adequacy and effective implementation” of the newly introduced measures.2
Background on the Special 301 Report
Under Section 182 of the Trade Act of 1974, the USTR’s Office releases the Special 301 report on an annual basis, consistent with the Act’s requirement to develop “an overall strategy to ensure adequate and effective protection of intellectual property rights and fair and equitable market access for United States persons that rely on protection of intellectual property rights.”3 The USTR’s Office receives comments regarding the IP protection and enforcement regimes of various countries, and reviews these comments to draft the report.
The report is structured into two sections: an introductory section describing global trends in IP protection, and country-by-country analyses of IP protections.4 China features prominently in both sections.
The global issues section of the report discusses China in several sections. In its discussion of counterfeiting, the Report notes that goods originating from China and with Hong Kong have made up 85 percent of counterfeit goods seized globally between 2017 and 2019, and added that China made up the largest number of seizures of counterfeit pharmaceutical goods at the US border in the last year.5 The report highlights the role of e-marketplaces in the counterfeit goods trade, stating that their smaller packages make it easier to evade customs enforcement.6
In the context of and in addition to both online and broadcast piracy, the Report discusses optical disc counterfeiting, illegal rebroadcasting through illicit streaming devices, and “camcords” or high-quality live recordings of copyrighted material, originating from China.7 The Report also highlights China as a country of concern with regard to trade secret protection and enforcement, though it notes that the “Phase One” agreement between the US and China attempts to remedy these concerns.8 Finally, the Report discusses Chinese trademark enforcement issues, noting that the country “largely lacks effective tools to combat widespread bad faith trademark applications.”9
China-Specific Section of the Report
The China-specific section of the Report expands on some of the issues identified in the global section of the Report. On a country-wide level, the Report notes China worked to implement amendments to the Patent Law, Copyright Law, and Criminal Law in 2022, but the Report stated concerns that the “pace of reforms aimed at addressing intellectual property (IP) protection and enforcement has slowed.”10 Combined with statements from the Chinese government that IP is a “’strategic resource’ for China’s international competitiveness,”11 the Report expresses concern about China’s IP protection on a global level.
In its discussion of technology transfer issues, the Report notes that the Phase One agreement was designed to prevent forced technology transfer to the Chinese government. The Report mentions that the “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,”12 though it does not provide an evaluation of its work with stakeholders on technology transfer issues specifically.
The Report also discusses issues related to the protection of trade secrets. It describes the implementation of amendments to the Criminal Law and the expansion of IP courts associated with this implementation as “some steps toward stronger enforcement of trade secrets,” but calls on China to more fully implement the Criminal Law.13 The Report notes that procedural hurdles, like heightened evidentiary standards, in trade secrets cases make trade secret violations difficult to enforce in China.14
The Report includes several sections discussing copyright issues. As with the global section, it highlights again that China and Hong Kong are responsible for 75 percent of the value of counterfeit goods seized by US Customs and Border Protection (“CBP”), and expressed concern about alleged “de-prioritization” of IP-related crimes.15 The Report also discusses the role of e-commerce channels in counterfeiting, and notes that “there was no progress in 2022 on finalizing amendments to the E-Commerce Law” that would improve copyright enforcement.16 The Report says that strict copyright application rules make it difficult for foreign right holders to launch their products in China, as well.17 However, the Report praises China for allowing foreign investment in online music services, despite other restrictions on foreign investment contained in the Foreign Investment Negative List.18 The Report also praises amendments to the Copyright Law passed in 2021, but called on China to implement amendments to clarify various terms.19
On patent issues, the Report praises amendments to the Patent Law and Patent Examination guidelines, particularly the 2021 mechanism for early resolution of pharmaceutical patent disputes.20 However, the Report expresses concern with enforcement of the law, including inconsistent application of the law, court delays, a lack of technical expertise in certain issues, and high evidentiary burdens associated with proving a patent infringement claim.21 The Report also expresses concern over the 2019 Human Genetic Resources Administrative Regulation and the 2020 Biosecurity Law, which, in the Report’s view, remain unclear as to whether a rights holder in certain technology-sensitive fields is required to share information with the government.22 The Report is also concerned that a pending court case on the Anti-Monopoly Law will lead to a decision that will allow the Chinese government to apply the Anti-Monopoly Law to patent licensing transactions in the absence of real anti-competition concerns, which may cause the AML to “be misused for the purpose of depressing the value of foreign-owned IP in key technologies.”23
Turning to new developments in Chinese law, the Report highlights amendments to the Trademark Law proposed in 2023 that would reduce the use of bad-faith trademarks. However, the Report still describes bad-faith trademarks as “one of the most significant” issues facing trademark holders in China, and called on the country to adopt intent-to-use requirements for trademark applications and improve consistency in enforcement actions targeting trademark “hoarders” that preemptively register large numbers of trademarks at once at the Chinese National Intellectual Property Agency (CNIPA).24 The Report also expresses concern about onerous documentation and use requirements needed to register a brand or use a brand across multiple products and services.25
The Report notes that China passed no new IP legislation or amendments in 2022, though it did accede to the Convention of 5 October 1961, Abolishing the Requirement of Legalization for Foreign Public Documents (Apostille Convention), and announced a government reorganization that will subject the CNIPA to state oversight.26 The Report states that the USTR will monitor implementation of both proposals. The Report also expresses concern over a lack of transparency in enforcement and court proceedings related to IP, and highlights that the use of the “social credit” system in IP proceedings will only contribute to uncertainty and a “lack of procedural safeguards” in IP proceedings.27
Continuing on due process concerns, the Report also notes a lack of transparency before the CNIPA in issuing patents, noting that “large quantities of poor-quality patents continue to be granted” in spite of reforms aimed at reducing the practice.28 The Report states that patent holders are often not informed of third-party submissions against them in patent prosecutions, and the issuance of anti-suit injunctions by Chinese courts in standard essential patent (SEP) proceedings lead to due process issues in the patent space.29
The Report highlights the proliferation of new laws, like the Cybersecurity Law (CSL), the Cryptography Law, and encryption laws that may require rights holders to turn over intellectual properties to the Chinese government in the name of security.30 The Report states, “Going forward, China must not invoke security concerns in order to erect market access barriers, require the disclosure of critical IP, or discriminate against foreign-owned or -developed IP.”31
Consequences of the Report
Consistent with past years’ reports, the 2023 Report indicates that the US considers several elements of China’s IP regime as deficient while noting positive aspects in limited areas. Parties with operations in or with China should evaluate whether, and if so how, the issues identified in the Report may impact its business, particularly those related to the implementation of non-IP laws which may affect IP protection in China.