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USTR Highlights New and Long-standing IPR Concerns in Special 301 Report

The Office of the U.S. Trade Representative released on 27 April its annual Special 301 report, the result of its review of the intellectual property rights protection policies and enforcement measures of 73 trading partners. The report identifies a range of concerns including (i) the deterioration in IPR protection and enforcement in a number of trading partners; (ii) reported inadequacies in trade secret protection in mainland China, India and elsewhere; (iii) troubling indigenous innovation policies that may unfairly disadvantage U.S. right holders in markets abroad; (iv) the continuing challenges of on-line copyright piracy; (v) measures that impede market access for U.S. products embodying IPR and U.S. entities that rely upon IPR protection; and (vi) other on-going, systemic IPR enforcement issues in many trading partners around the world. The report also highlights actions by Beijing to pursue a broad-ranging overhaul of mainland China’s IPR-related laws and regulations as well as a pilot study of specialised IPR courts.

The report places 34 countries on the Priority Watch List or the Watch List. Countries on the PWL do not provide an adequate level of IPR protection or enforcement or of market access for persons relying on IPR protection. The countries on the PWL in this year’s report in addition to mainland China are Algeria, Argentina, Chile, India, Indonesia, Kuwait, Russia, Thailand, Ukraine and Venezuela. Pakistan and Ecuador were both upgraded from the PWL to the WL. Pakistan took significant steps to improve IPR protection and enforcement, including establishing specialised IPR courts, establishing a timeline to draft and implement amendments to IPR laws, improving border enforcement procedures, undertaking public awareness programmes on IPR protection, and committing to regular action-oriented engagement with the U.S. government and stakeholders. Ecuador reinstated criminal procedures and penalties for commercial scale counterfeiting and piracy.

Countries on the lower-level WL, which merit bi-lateral attention to address underlying IPR problems, are Barbados, Bolivia, Brazil, Bulgaria, Canada, Colombia, Costa Rica, Dominican Republic, Ecuador, Egypt, Greece, Guatemala, Jamaica, Lebanon, Mexico, Pakistan, Peru, Romania, Switzerland, Turkey, Turkmenistan, Uzbekistan and Vietnam. Mainland China, Chile, India, Indonesia, Thailand and Turkey have been included on either the PWL or the WL every year since the report’s inception in 1989.

USTR also announced that it will launch several out-of-cycle reviews to enhance engagement with trading partners and encourage progress on IPR issues of concern. The agency will conduct a review of WL countries Colombia and Pakistan and as well as of two countries not currently listed, Spain and Tajikistan. USTR may conduct additional reviews of other trading partners as circumstances warrant or as requested by a trading partner.

As expected, concerns regarding mainland China continue to feature prominently throughout the report. On the positive side, USTR believes that at least some portions of the draft revised laws and regulations that Beijing issued in 2015 appear to be consistent with recommendations offered by the United States and statements by mainland Chinese authorities expressing a commitment to protect and enforce IPR, allow industry and entrepreneurs a greater voice in policy development, and enable market mechanisms to play a greater role in guiding research and development efforts.

Also worth highlighting is an IPR addendum signed in June 2015 by the U.S. National Intellectual Property Rights Coordination Center and the China Customs General Administration that expanded on a 2011 memorandum of understanding to collaborate on the enforcement of customs laws. USTR observes that the IPR addendum will help both mainland China and the United States combat IPR infringement by tracking violations, sharing information, and monitoring the illicit importation, exportation or trafficking of counterfeit trademarked merchandise. The United States and mainland China will also conduct joint training operations targeting counterfeit products sent between the two countries that pose a health and safety risk. Further, in December 2015 U.S. Customs and Border Protection, U.S. Immigration and Customs Enforcement’s Homeland Security Investigations and the GACC participated in a bi-lateral working group meeting and agreed to an ambitious agenda of “customs authority-to-customs authority” co-operation for the upcoming year.

Despite these and other encouraging steps, USTR believes that mainland China continues to present a “complex and contradictory environment for protection and enforcement of IPR.” The agency notes that progress toward effective protection and enforcement of IPR in the mainland is undermined by unchecked trade secret theft, market access obstacles to information and communications technology products raised in the name of security, measures favouring domestically owned intellectual property in the name of promoting innovation in the mainland, rampant piracy and counterfeiting in mainland China’s massive on-line and physical markets, extensive use of unlicenced software, and the supply of counterfeit goods to foreign markets. Additional challenges arise in the form of obstacles that restrict the ability of foreign firms to fully participate in standards setting, the unnecessary introduction of inapposite competition concepts into intellectual property laws, and acute challenges in protecting and incentivising the creation of pharmaceutical inventions and test data. According to USTR, surveys continue to show that the uncertain intellectual property environment is a leading concern for businesses operating in mainland China, as intellectual property infringements are difficult to prevent and remediate and may cause businesses to choose not to invest in the mainland or offer their technology, goods or services there.

As in previous years, U.S. authorities are particularly concerned about the theft of trade secrets for the competitive advantage of mainland Chinese state-owned and private companies. USTR contends that remedies to address this crime can be exceedingly difficult to obtain under current mainland Chinese law and insufficient to match the level of the threat. Enforcement obstacles ostensibly include deficiencies in mainland China’s primary trade secrets law (found in the Anti Unfair Competition Law) that limit the law’s application; unresolved weaknesses in mainland China’s civil enforcement system including limited injunctive relief and low damage awards; and difficulties in pursuing criminal enforcement, including the need to prove actual damages caused by the theft of a trade secret. U.S. authorities contend that without changes to address these limitations and weaknesses, some of which are not specific to intellectual property but relate to mainland China’s civil process generally, effective enforcement against misappropriation of trade secrets in the mainland will remain challenging.

The report calls on mainland China to consider drafting a stand-alone trade secrets law that provides an opportunity to address a broader range of concerns as part of a reform to the AUCL. Another outstanding issue that needs to be resolved involves the misuse of confidential information submitted to mainland Chinese authorities for regulatory purposes. In addition to engaging with mainland China on the AUCL, the United States will continue to work to ensure other important JCCT commitments are realised, including those related to the issuance of model or guiding court cases and the clarification of rules on preliminary injunctions, evidence preservation orders and damages.

Washington also remains concerned about reports that many of mainland China’s innovation-related policies and other industrial policies, such as strategic emerging industry policies, may have negative impacts on U.S. exports or U.S. investors and their investments or IPR. Mainland Chinese regulations, rules and other measures frequently call for technology transfer and, in certain cases, appear to include criteria requiring that certain IPR be developed in the mainland or be owned by or licenced to, in some cases exclusively, a mainland Chinese party. The United States believes that such government intervention, including imposed conditions or incentives, may distort licencing and other private business arrangements, resulting in reduced innovation and a disincentive for relevant firms to participate in the mainland Chinese market.

While Washington welcomed a 2015 decision by Beijing to suspend certain measures that invoked security as a justification for imposing barriers to foreign ICT products and services and for requiring disclosure of critical intellectual property as a condition of access to the mainland China market, the report contends that remedial action has not yet resulted in a rebound in sales of foreign ICT products and services to mainland Chinese banks. Another nagging problem is widespread on-line piracy and counterfeiting in mainland China’s massive electronic commerce markets, which has resulted in “great losses” for U.S. rights holders involved in the distribution of a broad range of trademarked products as well as legitimate music, motion pictures, books and journals, video games and software.

The United States also continues to have concerns about the extent to which mainland China provides effective protection against unfair commercial use of, as well as unauthorised disclosure of and reliance on, undisclosed test or other data generated to obtain marketing approval for pharmaceutical products. Beijing has undertaken commitments to ensure that no subsequent applicant may rely on the undisclosed test or other data submitted in support of an application for marketing approval of new pharmaceutical products for a period of at least six years from the date of marketing approval in the mainland. However, there are reports that generic manufacturers have, in fact, been granted marketing approvals by the China Food and Drug Administration prior to the expiration of this period and in some cases even before the originator’s product has been approved.

Despite these and other concerns, the report welcomes the commitment of mainland China’s leadership to intellectual property and innovation and urges Beijing to seize the opportunity of on-going legal and regulatory reform to translate policy commitments into an intellectual property environment in the mainland that provides for effective IPR protection and enforcement, incentivises innovation, and facilitates trade in IPR-intensive goods and services.

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