Deep Dive Episode 142 – The United States-China Relationship and Intellectual Property

Recent disputes between the United States and China have focused on trade, but perhaps the most potent trade-related issue is not tangible products but intangible property. China’s policies and practices involving intellectual property reveal a plan for luring investment and innovation to China for economic advantage.

On this live podcast, world-renowned experts in intellectual property and China’s policies discuss whether this constitutes a violation of international norms, and what, if anything, the United States should be doing about it.

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TRANSCRIPT

Jack Derwin:   Good afternoon 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 the speakers on today’s call. 

 

Today, we are excited to bring you a great discussion titled, “The United States-China Relationship and Intellectual Property.” For our Moderator today, we are pleased to have Brian O’Shaughnessy, who is a Partner and Head of the IP Acquisitions Group at Dinsmore & Shohl, is a past president of the licensing Executive Society for U.S.A. and Canada.

 

Brian will introduce the rest of our speakers for today’s call. If you would like to learn more about any of our speakers and their important work, you can visit RegProject.org where we have listed all of their bios.

 

In a moment, I will turn it over to Brian to get us started and moderate the conversation. After opening remarks and discussion, we will then go to audience Q&A. Please be thinking of questions you’d like to ask any of our speakers. 

 

Thank you all for joining us. Brian, the floor is yours. 

 

Brian O’Shaughnessy:   Thank you, Jack. And it’s a pleasure to be here. I’m going to give brief introductions so that we can get right into the substance of things, but I certainly will encourage any interested parties to look up our panelists and get more detail on their background and their experience and their current professional affiliations. 

 

But let me first start with Chief Judge Paul Michel, formerly Chief Judge of the U.S. Court of Appeals for the Federal Circuit. We also have Former Chief Judge of the U.S. Court of Appeals for the Federal Circuit Randy Rader, who is now Honorary Professor at Tsinghua University. And finally, we have Professor Mark Cohen. Mark formerly lead the USPTO’s China Team and is now Director and Senior Fellow at the Berkeley Center for Law and Technology at the University of California at Berkeley. So, gentlemen, welcome and thank you for joining us today.

 

Let me start first with you, Judge Michel. We certainly have seen a lot of discussion in the media lately and suggestions from China that there has been progress in updating and enhancing its intellectual property protections, particularly relating to patent. Meanwhile, some say that the U.S. IP system has declined and fallen into a state of disarray and even uncertainty. What are the principal areas in which decline in the U.S. IP system has been most consequential? And what, in your view, has caused it? 

 

Hon. Paul R. Michel:   In my view, Brian, the biggest problem has to do with eligibility law which was stable and acceptable up until 2010. Then we saw the first of the four Supreme Court interventions on eligibility in the cases of Bilski, Mayo, Myriad, and Alice. And the result of those cases and the way they’ve been implemented below is to sharply narrow the scope of eligibility despite the odd wording of Section 101 of the Patent Act. And in addition to narrowing, there’s been an enormous increase uncertainty that chills investment and crimps the innovation machine. 

 

Second area that concerns me greatly is the difficulty in getting injunctions. Of course, the eBay decision goes back to 2006, but its teeth really got much longer and sharper in the current decade because of the way it was implemented by the federal circuit and district courts, particularly relying on the dicta in Justice Kennedy’s minority concurrence rather than the majority opinion. 

 

Injunctions are now more difficult to get in the U.S. than they were when I was on the federal circuit and particularly for non-manufacturing communities, extremely difficult to get. Universities once in a while can get an injunction. But any other non-manufacturing successful patent owner who have prevailed at trial in getting an injunction is slim to none.

 

The third area is the operation of the Patent Trial and Appeal Board. In my opinion, the design in the AIA itself passed in 2011 was faulty, for example, by having a lower standard of proof compared to courts of law. But the implementation by the Patent Office made poor design even worse so now we have a forum that I would consider out of control, unpredictable, and invalidating patents that courts would uphold or in some cases actually did uphold. 

 

So those are the three biggest areas and things have just gotten, in my view, steadily worse throughout the past eight or nine years.

 

Brian O’Shaughnessy:   Well, you mentioned Supreme Court intervention and you also mentioned the AIA and post grant proceedings and things of that nature. So there are obviously a myriad or a variety of authorities at work here. What do you think is our best approach for solving this problem? Is there something we can expect the Supreme Court to fix, or is this going to require legislation? Is the director’s rulemaking authority sufficient? What are your thoughts here? 

 

Hon. Paul R. Michel:   Well, I think legislation ultimately will be needed. As I mentioned, AIA built in — baked in design in the three reviews it authorized, particularly inter-parties review. And as to the Supreme Court, particularly with regard to eligibility, they have turned down in the last eight years about 50 requests to revisit and revise their eligibility law. Seems to me they’re sending a very clear message they of no intent to do so anytime in the near future.

 

And as to injunctions and patent trial and appeal boards, they’ve basically not been involved in recent years either. So [if] I have any faith in the Supreme Court cleaning up the weakness of U.S. patent law, Congress can help a lot by revising the AIA and by passing legislation that would restore the reasonable chance of a successful patent owner to get an injunction after proving infringement of a valid patent. And the Patent Office has made some progress in reforming the procedures at the Patent Trial and Appeal Board. 

 

In my opinion, the current management has solved about half the problems but only half. They have authority in my view to solve further problems, not only by rulemaking but otherwise. Time will tell, and the leadership orientation will be a big factor. But basically, you’ve got to count on the Patent Office in the shorter run and the legislature in the longer run. And I’ve totally given up on the Supreme Court myself.

 

Hon. Randall R. Rader:   This is Judge Rader. 

 

Brian O’Shaughnessy:   Sure. Please.

 

Hon. Randall R. Rader:   Judge Michel, how does a Justice Barrett influence your judgement on potential judicial reform? 

 

Hon. Paul R. Michel:   Well, I can’t make a prediction because I have no basis any more than I did when Justice Gorsuch was added to the Court or Justice Kavanaugh, all three very recent appointments. But the Supreme Court’s actual decisions don’t seem to be any different since they arrived compared to before in material respects so time will tell. I can’t make a prediction. 

 

I’m hopeful that Justice Barrett and some of the other recent additions may be more respectful of the notion embedded in the Constitution that a patent is a private property right. But only time will tell whether other justices are adequately influenced by them in order to get to the magic number five, so we’ll see.

 

Brian O’Shaughnessy:   Well, I think that’s a good point. And it’s a very good question. Justice Gorsuch, of course, has put in place a very interesting dissent in Oil States, I guess it was, and seemed to be focused very much on the private property right. So as a fellow originalist, perhaps we can be hopeful that a Justice Barrett would align with that theory. But any thoughts that you have in that regard, Judge Rader? 

 

Hon. Randall R. Rader:   Well, I have some degree of optimism that a changing majority can cause significant changes in the way the Supreme Court looks at things. That had some influence when we went from fluke to deer and Chakrabarty. There was a change of a vote in the Supreme Court, and it went from a 5-4 one way to a 5-4 the other way. 

 

So I haven’t abandoned hope that the originalist origins will take the Supreme Court back to the language of the statute. And as Judge Michel has noted, if they do that, they will very quickly abandon their current jurisprudence in favor of a more sound foundation for intellectual property rights.  

 

Hon. Paul R. Michel:   Yeah. It’ll take time, I imagine. It’ll take several more vacancies to get to the magic five unless people like Justice Thomas are suddenly converted to a more pro-patent or respectful of patent stance. But in the short term, I don’t see it happening. In the long term, I think it probably will happen.

 

In fact, I can easily imagine the Supreme Court saying in four or five years that hey, lower court judges, we told you, don’t overdo this. These judicial exceptions are supposed to be very sparingly applied, and you all overdid it by not heeding our warning so it’s all your fault. Don’t blame us. I see that happening in five years from now, not now.

 

Brian O’Shaughnessy:   Well, Judge Michel, you mentioned that legislation is ultimately going to be required to fix all of these solutions. And so what are your thoughts on the prospects? We’ve seen a couple of runs at various fixes in terms of 101 reform that had trouble getting off the ground, just by extensive round table discussions with this stakeholder community. And then, of course, we have the STRONGER Patents Act and a few other efforts to remedy the unintended consequences of the AIA. Do you think that legislative action has a realistic prospect for success going forward? 

 

Hon. Paul R. Michel:   It’s a question of timing. I think there is a realistic success of progress going forward. And if the STRONGER Patents Act, for example, were to move forward briskly in the legislative process, that might even influence what the federal circuit or perhaps even the Supreme Court might rule in the future. And obviously, if the STRONGER Patents Act were enacted into law, it would make a very major change and solve the problems fully, in my opinion, at the PTAB and with regard to injunctions.

 

And it’s worth noting that the STRONGER Patents Act is distinctly bipartisan and bicameral. There are a dozen or two supporters in each body, about evenly divided between the Senate between Republicans and Democrats. So it’s a slow process. Judge Rader and I both worked at the Senate in a prior life. And very often, I was told there that the normal gestation period for any significant legislation on the average is five years.

 

We have a ways to go if that’s the metric. But I think it will happen eventually because there’s growing evidence that the U.S. innovation ecosystem is flagging and faltering because of these anti-patent aggressive interventions. There’s a sharp decrease, for example, in venture capital investment in computer chips and a corresponding increase in the flow of VC money into entertainment and other areas that don’t depend on patents. And to some extents, outflows out of the U.S. of U.S. VC money going to jurisdictions that have better patent systems: faster, cheaper, clearer, and more supportive. 

 

So as that becomes better known, I think that Congress will become quite alarmed. And I expect that China’s advances, which are enviable in many respects I would say, would be a further spur to the Congress to wake up and act to revive the U.S. patent. 

 

Brian O’Shaughnessy:   Well, you’ve thoroughly articulated some of the economic problems that are associated with this weakening and increased uncertainty in the U.S. IP system. Are we unwittingly — Judge Rader, maybe you can address this, are we unwittingly seating the high ground to other jurisdictions and particularly China? 

 

Hon. Randall R. Rader:   Yes. I think that that’s implicit in what Chief Judge Michel was articulating. And I have certainly seen a revived interest in the Chinese IP system. I have seen them in corporate board meetings where decisions were made to take litigation to Asian tribunals rather than risk work in a U.S. court or even in arbitration or mediation. So there does seem to be a shift in emphasis. And I think, as Mark will tell you, China is very decidedly trying to make that happen.

 

Hon. Paul R. Michel:   Brian, all you have to do is comparison on things like injunctions. They’re apparently easier to get on the whole in China than in the U.S. They’re also easier to get in Germany. They’re practically automatic there. If you look at the time to trial in Germany and in China, it’s somewhere in the nature of, as I understand it, of a year or a little less. 

 

If you look at successful litigation in the U.S., it costs about ten times as much and often takes five to ten years before a real enforcement occurs. So it’s not hard to see why business leaders will be shifting litigation and investment and the locations of factories and labs to jurisdictions in Europe and Asia, particularly China, including China prominently. 

 

It’s a rational business decision. And business leaders are unsentimental. It’s not a matter of patriotism for them. It’s a matter of relative advantage and comparing the features of our system with the features in China and Germany, we look pitiful. 

 

Brian O’Shaughnessy:   Well, Professor Cohen, let’s bring you into the conversation here. So Judge Rader tipped you off there. What are your thoughts about the evolution of the China patent system? Is it improving, or are there things we should be concerned about? 

 

Mark Cohen:  Sure. So if you can first double back a little bit on what Judge Michel just said and what Judge Rader also chimed in on. The folks who are observing the Chinese patent system like me and also looking at the evolution of Supreme Court precedent regarding patent eligible subject matter, it almost seems potentially Machiavellian the extent to which China was enhancing patent protection at the same time the Supreme Court was weakening that protection, and in precisely the same areas, in-tech, software patents, diagnostics. I don’t think it was Machiavelli, and I don’t think it was, say — they were saying gee, we could give this opportunity to take a competitive jump forward. It was really in response to the demand of their own companies. 

 

But it does create the dynamic that the U.S. has been self-weakening as China has been self-strengthening. And some of the reasons for that are unrelated to legal process. I think Judge Michel rightly pointed out that injunctions in China and IP cases of all types are more or less automatic. The rate is somewhere around 98 percent, 99 percent. And that other one or two percent are because the plaintiffs didn’t request an injunction. They only wanted monetary damages.

 

But the real value of the injunction in China isn’t simply that it’s automatic and also the damages are low. That’s really the relief that you’re going to get. But when you have a country that’s the manufacturing top of the world, that injunction is extremely valuable. China becomes a chokehold over your production, and if you can get an injunction against the manufacturing, well, you’re going to get a settlement pretty quickly rather than risk a collapse in global sales by [inaudible 00:19:13] the infringement. 

 

So this is part of a double whammy as well that you have injunctions being automatic in the U.S. post eBay; they hardly are. And second of all, those injunctions are becoming much more valuable. China, for as much as I’m a big fan of markets and protecting IP as a private right, in this respect, China has a market difference from the U.S. in understanding the role of patents, one of many market differences. 

 

But in this case, it’s that China has clear plans about its goals to become a strong IP economy and the role of IP in its economic development. And the [inaudible 00:19:53] wants to nurture, including biotech, including medical diagnostics, including software, etc.

 

The other thing, though, I think it’s really important to tamper your enthusiasm a bit is that there are serious structural issues in China’s effort to achieve the kind of techno dominance or IP dominance. And the predominant one, really, in the legal area is that we’re dealing with an imperfect market, if you will, for IP enforcement in China. It’s about that China has done a remarkable job going from zero to sixty in a short period of time in terms of publishing cases. The Chinese legal database is the largest public case law database in the world, I think, right now. 

 

But generally, most people think that only about 70 percent of the cases are published. And so you have a problem of ascertaining how consistent decisions are being made and whether important decisions are being left out. But that being said, when you have a candle in the dark which before there was none and people can make strategic decisions, and we do see some very important decisions that are being made in areas, often to the benefit of foreigners. 

 

Judge Michel pointed out correctly that foreigners win cases and in less time and less expense. Judge Rader also noted that in China. So the average amount of time for a patent litigation in China is seven months — seven months. The average amount of time to get a design patent granted in China is another point to comparison that praises the efficiency of the office with which admittedly design patents have not examined for substance, but that’s a two-month period from time of application to grant. And if that’s moving areas like design, like traction, or like technology, that ability to get the patent grant and to report it quickly is a significant advantage. And it’s another area where China may be outdoing the U.S.

 

But you do have, and I always have to remind people, there are lots of folks, particularly the patent community, will look at China as offering some guidance about where the U.S. should go or at least where the U.S. is hurting itself. It’s not a system of world law in the same sense that we are not only due to lack of transparency but also political interference in the legal system. 

 

Some of the most damaging cases involving foreigners have not been published whereas on balance, though, we do see a positive trend. A trend, by the way, that is largely omitted in the discussion around the IP grant and the trade war. There’s no reference to the judicial database in the USVR Report on China’s forced technology transfer and the like. Nor is there any inclusion of cases.

 

A great example, by the way, that came to me recently, just on the trade secret issue, this is the foreigner bomber, is Eli Lilly some years back got a preliminary injunction in China for trade secret misappropriation by an employee. Now, since preliminary injunction cases are usually not published, I only found out recently that this employee was an employee of Eli Lilly in the United States who went to China with the confidential information, unauthorized by Lilly. And Lilly got an injunction stopping the employee from working for a competitor and requiring it to return all the information. 

 

This is a very different narrative from what you hear about China stealing our stuff. In this case, the Chinese court issued the kind of injunction that would really help the U.S. in addressing our claims about theft of trade secrets, Chinese employees running off to China. So some of the rules that we have in our perception of China’s IP department are due in increase inflicted by China. If they were a bit more transparent, more complete, we could trust them more. There’s actually some concern from recent months that the courts may actually now be getting a little bit weaponized on issues like anti-stealing injunctions. And the like, a little bit more nationalistic is perhaps the better word. 

 

With unbalance, I think, it’s kind of a run of the mill patent issue. The data shows that you’ll win. You’ll win at a greater frequency than a Chinese litigator in a Chinese court. And not only that, you’ll win at a greater frequency than you would if you were sued in the United States. So it’s about an 84 percent win rate for patent litigation in China based on available data. It’s about 80 percent for Chinese, 84 percent for foreigners. And that compares to a range of about 50 to 70 percent in the United States. 

 

That is too bad. And that shows the reason that Judge Rader and others are hearing why don’t I in China? Get an injunction against local infringement. If that’s the end game and it’s not damages, and that’s a pretty compelling end game, that can be extremely valuable. If you can get that in seven months at lower expense, why not try it? 

 

This was the case with Qualcomm in the Apple litigation. The first court to issue a preliminary injunction globally was the Chinese court. 

 

Hon. Randall R. Rader:  Let me add a few thoughts to what Mark said. And I agree with everything he said. I hate to admit that, Mark. 

 

Mark Cohen:  Yeah. That’s unusual, Randy.

 

Hon. Randall R. Rader:  On the slightly contrary side, I think Professor Cohen would be the first one to tell you that if you’re a pharmaceutical research company applying for a patent at the CNIPA, the Chinese patent office, you’ve got to decidedly difficult task ahead of you. And it’s got the lowest rate, probably in the world, of granting patents to pharmaceutical compositions. And that is disturbing.

 

Back on the positive side, though, a few things Mark didn’t mention. In 2013, they created three new IP courts. And since then, they’ve created 27 IP tribunals and a federal circuit type IP division at the Supreme People’s Court, meaning that they really have developed, in my opinion, maybe the world’s most expert judiciary in handling intellectual property disputes, at least a judiciary that is comparable to the U.K. and the U.S. 

 

And so once again, all of this bespeaks a country that is committed to making IP work with those areas that still present real difficulties like the pharmaceutical area.

 

Mark Cohen:  I agree, Randy. Thank you for that interjection. I’ll just add that one of the other things that I found interesting to observe over the years is how Chinese officials involved in IP have often gotten promoted in the bureaucracy, often to positions that are well beyond IP. Luo Dongchuan, who was a chief IP judge, is now one of the senior justices of the Supreme Court. Vice Senior Wu Yi, who was a vice minister of commerce, became Minister. She had the IP portfolio throughout and became vice-premier, keeping that IP portfolio and managing the national IP efforts. 

 

We haven’t seen this in the U.S. in my view since Edwin Stanton became secretary of war under Lincoln. He was a patent lawyer before that. But the very conscious elevation — unfortunately, Judges Rader and Michel didn’t make it to the Supreme Court. 

 

Hon. Randall R. Rader:  Yet. 

 

Mark Cohen:  We have seen Chinese — yet, I’ll say — I apologize.

 

Hon. Randall R. Rader:  Yet, Mark. I’m advocating for Chief Judge Michel in the next vacancy.

 

Mark Cohen:  Okay. They’re —

 

Brian O’Shaughnessy:   I think we’re all in agreement in that regard. 

 

Mark Cohen:  Okay. I’ve got —

 

Hon. Randall R. Rader:  I think that Mark — Professor Cohen would agree that one distinguishing feature of the Chinese judiciary is that they tend to give more independence and a priority to their intellectual property courts. And they’re willing to experiment with more liberalized procedures. They’re willing to look into how to use experts. They’re willing to do a lot of things in their IP courts that they probably wouldn’t do elsewhere which is, again, a sign that they really are putting a priority on intellectual property advancement in their economy. 

 

Mark Cohen:  I think that’s also a very important point, Randy. And I’m sorry we’re agreeing so much, but let me just say that —

 

Brian O’Shaughnessy:  We don’t want to make this boring after all. 

 

Mark Cohen:  I know. Many of the most important civil law reforms in China began with intellectual property. It’s interesting. IP has been the whipping boy by the west, by the United States, on China’s legal regime. But in fact, from the Chinese perspective, it’s been quite the reverse. 

 

Preliminary injunctions are civil matters. It began with the Turks Agreement. It began with IP. Specialized courts, there are many that are now beyond intellectual property. It began with IP. Highly trained judges, expert witnesses, and evidence expanded evidence preservation measures, all beginning with IP. 

 

So there’s been a demonstrable effect, and I think many of the Chinese legislators and bureaucrats that have worked on IP reforms over the years are very proud of the contributions they make in the legal system. In fact, many people have observed that the whole concept of precedent — obviously, China’s a civil law system, but there was a nation system of precedent that began with an experiment in the Beijing IP Court. And it’s been documented about how often they have used precedent, cited the precedent, and even had dissenting opinions and amicus briefs in IP cases well before these concepts bleeded out to the rest of the legal system.

So then this about —

 

Hon. Randall R. Rader:  I’ve got — I’ve got — Brian, I’ve got the question that’s going to help Mark give balance to this, though. 

 

Brian O’Shaughnessy:  Mark, the trade agreement and its intellectual property procedures, which looked a lot like our Hatch-Waxman Act, are going to work to improve protection of pharmaceuticals in China.

 

Mark Cohen:  I think that is probably a stretch. I would love it if it were going to be the case, but unfortunately, it’s a problem with the overall trade agreement that it relies far too much on direct government administrative intervention in China, including by agencies that may be vested in polices that may be antagonistic to what we want but to accomplish its goal. 

 

So rather than, for example, insisting on greater transparency to courts or a greater role of the courts in, for example, Hatch-Waxman litigation, the agreement to false to using either judicial or administrative remedies, that is using the Food and Drug Administration to self-police itself. 

 

In addition to that, the draft rules that have come out were on a very low level — this is an old scene from the trade play book—it’s regrettable it’s playing out again—at a very old low-level of legislative hierarchy where they really cannot be used for judicial decision making for Hatch-Waxman type implementation.  

 

It’s a whole complicated topic. Let’s just say that this is — we had patent linkage back in the early 2000s on a very similar flimsy legal basis in China, and it didn’t work. And here we are again going through that same process. The agency for much of the reform in China in part, not because they’re necessarily politically independent, but at least they have to balance competing legal interest. 

 

If you’re deciding a patent case, you also need to know about the tort law. You need to know about the civil procedure law. You need to know about technology transfer law, etc., etc. is the course. They’re the ones that integrate the best, and they’re separately physically from the administrative agency. That’s not what we have in the linkage regime. And considering the low grant rates and the extensive roll market precedents of generics, often that are approved in advance of the innovators marketing approval applications, we still have a big problem on our hands. 

 

Hon. Randall R. Rader:  To me, the great irony is that CNIPA, the patent office in China, insists upon becoming an administrative enforcer of all IP rights. And, as we’ve discussed earlier, they have a history of being very antagonistic to pharmaceutical patent applications and very antagonistic to any form of enforcement of pharmaceutical IP rights.

 

So, here, the fox really is trying to assert predominance over the henhouse and, at least in the most recent actions of the People’s congress, CNIPA seems to be given a right to make the regulations that will govern the linkage regime and protect IP rights in China. That is worrisome, I think.

 

Brian O’Shaughnessy:  Well, Judge Rader, you’ve advised the Chinese fairly extensively in the evolution of their IP system. What, in your view, have they done right? In other words, followed your suggestions? Where have they gone off the rails?

 

Hon. Randall R. Rader:  Well, I think this gives us a chance just to state the themes again. Their court system is really excellent and has made, in a short period of time, in less than a decade they’ve become the leader in numbers and outcomes of IP cases, and they have developed an expertise that will rival any place in the world.

 

So the court systems are a high compliment to China. The disappointing features are what we’ve been focusing on: the inability to extend that protection into the pharmaceutical area and the willingness to let CNIPA, the Chinese patent office, kind of step forward and assume a role that, in some cases, takes the judiciary out of the leadership when they would be by far the best entity to handle these disputes.

 

Brian O’Shaughnessy:  Well, Mark, what areas do you see evolution occurring in China? And what, if anything, do you think we should be doing to promote those changes?

 

Mark Cohen:  Those questions are actually very much interrelated, and it’s a good question for that reason.

 

We have seen over the past ten years, in a variety of areas—and Randy pointed out probably one of the most important ones are the courts—the real integration of IP into China’s legal system, its economic, and social system. Everything from the college entrance exams to the elementary school textbooks to leadership getting promoted to a huge patent and trademark office, a huge litigation docket, specialized IP courts, but also specialized IP law faculty, specialized IP newspaper, etc., etc. And even TV programs devoted to IP.

 

So this is really a uniquely evolving system, something I think no one, myself included, could’ve anticipated 30 or so years ago that China would not only — when people would say China was rejecting IP, China decided to embrace IP. I think for people like Randy, me, Judge Michel, anybody who really believes in intellectual property, frankly, it’s refreshing, even today, to go to China and to be speaking to audiences of people who really want to learn and do it better — are not skeptical. They want to learn about it and they want to do it better. That’s refreshing to me.

 

On the other hand — 

 

Hon. Paul R. Michel:  Brian, another thing that is worth mentioning is that the Chinese have poured enormous resources into their innovations in their court system and into their patent office. Again, the contrast is not good. U.S. court system is too slow, too expensive, too unpredictable, too disruptive, and badly understaffed.

 

I would say our patent office is also badly under resourced and understaffed. The IT systems are inadequate. The amount of time examiners have, particularly in difficult cases, is inadequate. And it’s really, in the end, a question of resources.

 

I have to salute the Chinese for putting the resources in place to do it right, and we have consistently not done that here.

 

Mark Cohen:  And this is also pervasive. The resources are good, but when the state gets too involved, you have the problem of a finger being on the scale. Randy already pointed that out in terms of pharmaceutical patents. This other data that suggested in certain areas—maybe standard-essential patent litigation, or SEIs, what they call the strategic emerging industries, a precursive plan to the Made in China 2025—foreign litigants may not do quite as well as Chinese litigants. And, frankly, we’re not at really the bottom of some of these concerns.

 

I could say to you that there is data that suggests bias. There are certainly issues involving transparency, and you have, in a certain sense, I think, the prospect of too much intervention, the possibility of an IP system that’s emerging that is much less friendly to private rights and much more friendly to state intervention and management.

 

The fact that you have IP in our five-year plan. I was never familiar, before, with the concept of how many patents per 10,000 people, or how many trademarks per 10,000 companies. Yet you see these kinds of details spelled forth in Chinese five-year plans. Frankly, one of the easiest discussions to have with a Chinese patent office official on a local level is “How are you doing with your metrics?” because everybody knows them.

 

If you were to be promoted as a mayor: “How many patents did he have last year for 10,000 people? Are you becoming an innovative economy?” And so on.

 

If you want to get out of jail, you can get your time commuted if you file patents. That’s how extensive it goes, including getting much-desired residency to cities like Beijing and Shanghai.

 

So all of these things can be very distorted. You have a problem, for example, in the Chinese patent office between quality and quantity, and I think that’s because many people dismiss the Chinese patent office, which is a mistake. But nor should we say that it’s necessarily producing quality patents at a level, whatever, six, seven, eight times the United States.

 

That kind of distortion could be problematic if China becomes a norm setter in the global system because it suggests that the markets will play a diminished role if China is the model.

 

But on the other hand, just a final point, it isn’t all bad even for the small players. China, unlike the U.S., has had a conscious drive to get small and medium-enterprises, small inventors, to use the IP system. We hear a lot about China imitating the United States, about [inaudible 00:42:05].

 

The cohort of individual inventors in China is about six times, as a percentage, of the U.S. cohort. In fact, if you lined up all the individual inventors in China that have filed for patents, they would be about equal to the total number of patent applications at the USPTO last year.

 

The same is true of using the trademark system. The cheapest trademark agency in the world right now is probably Alibaba. They filed 180,000 applications for third parties in the first quarter of this year, and they didn’t charge a penny for those applications.

 

So getting the average person invested into the system is another tremendous accomplishment of China. We have a highly-corporatized IP regime. I think we have to get back to the Thomas Edison/Edwin Land view and get everybody involved in the system to really make it flourish, and China’s done a great job in that way.

 

Brian O’Shaughnessy:  Those are great, great points. Thank you. Judge Rader, in your consultations with the Chinese, it does seem to me that the AIA changes and other developments have really tilted the patent system toward the incumbents as opposed to the innovators.

 

Is there a sense, in your view, that the Chinese patent system has sort of taken advantage of the weaknesses that have evolved in our system in modifying their system?

 

Hon. Randall R. Rader:  Well, I have been in meetings where that has been mentioned, that this is a time of opportunity for China to take leadership, but I do think Mark’s correct that the real driving force for change in China is really Chinese industry and Chinese small business too. They are beginning to build a small business environment, and that is perhaps the most important part of the impetus to improve IP in China.

 

Brian O’Shaughnessy:  Now, Mark, you’ve mentioned that there have been some varying approaches to how we negotiate with China and talk about potential changes to bring them in line with international norms.

 

What do you think we ought to be doing? What are the tools in the toolbox, if you will, and are we using them appropriately?

 

Mark Cohen:  I think that, as is our discussion on the Chinese system, it’s largely a matter of U.S. resources, coordination, alignment, corporate, and government. One of the important things we all have to recognize that has happened over the last ten years, and particularly the last three to five, is that the Chinese IP environment has become increasingly complex, increasingly data driven, and that it is really beyond the resources of a small group of people while they’re sitting at USDR, or PTO, or the state department, or an industry to really be up to date on everything.

 

I teach a Chinese IP class at Berkeley, and I was remarking to a colleague of mine from a Chinese law faculty I have to change the curriculum every year because of a new law, a couple of new laws—this year, several new laws—that were enacted. There’s so many new developments and policies. Really hard to keep up. I think it’s especially hard for government and companies to keep up.

 

So what you have, though, are the structures in the United States that were oriented towards a much smaller Chinese economy, that are not data driven, and that are not encouraged to share and have some sense of where things are headed. They are kind of condemned to a rather shallow perspective of what is happening in the Chinese economy.

 

A perfect example is the Section 301 Report. No reference to this comprehensive judicial database. No reference to a single — no citations to a single trade secret case that was so critical to the launch of the trade war, and no reference to the kinds of big data that can be used to analyze the system.

 

We had [inaudible 00:46:43] economist look at 1.8 million Chinese patents and look at evidence of bias in certain technology areas. We don’t have to rely on companies to come forward to say, “These are biased.” We can get that from the data, and we should. Actually, often, when do that, we get good responses from the Chinese.

 

The other thing that I think is really important here is that I feel like, in our frustration with China, we’ve reached out too many times for things like asking the Chinese government to have a special campaign to seize all the infringing products, for customs to detain counterfeit or a part of these goods, to bring criminal cases, to wrap up on antitrust. All these things that, to me, depend on intervention of the States.

 

What we really need to be doing is finding ways to enhance the market, to enhance the role of IP [inaudible 00:47:40] rights, and to accomplish greater transparency in the system so individuals can protect their rights on their own.

 

A great example of this is Microsoft. According to recent data, Microsoft won 100 percent of, I think, around 60 of its software copyright infringement cases in the past five or seven years. I know Microsoft thought the government intervened, but we should encourage more of the self-help exercises to really drive a better IP environment for all.

 

Hon. Randall R. Rader:  I think this administration made an excellent step with putting an emphasis on intellectual property and the trade negotiations. And they did achieve apparent improvements. Much of it, I think, Mark and I would confess were already features of China’s law and where it was going, so we couldn’t really give them credit for changing much when they’d already done most of it.

 

But still, if we would follow up on our trade negotiations and perhaps even use our trade might and power to ensure that linkage, for example, is actually implemented and achieved within the Chinese system, as is promised in the trade agreement. That that would be something that could have a legitimate impact on Chinese intellectual property and to the benefit of our U.S. users of that system.

 

Mark Cohen:  I just wanted to add to Randy’s point, which is that if you have a binary form of trading engagement which is confrontation or negotiation, which is largely the U.S. approach, particularly out of USDR, you’re going to lose a lot of potential for other forms of reform.

 

I think the glaring case study I would offer on that is China’s specialized IP courts. Judge Rader and I did a program on this—I think it was around 2002—and many other follow-up events, including a huge conference with several hundred Chinese IP judges around 2012. There’s a lot that can be done softly. There’s a lot that can be done through aggressive monitoring and follow up of the kind Judge Rader just mentioned for patent linkage.

 

Sometimes, yeah, you do have to use more confrontational techniques. Let’s just use them surgically so we get the kinds of results we really need.

 

Brian O’Shaughnessy:  Mark, I’m particularly interested and intrigued by your remarks about the Chinese data-driven approach, so Judge Michel, as you say, you’ve spent time in the Senate as well as the judiciary. What are your thoughts about U.S. policymakers being open to that kind of a data-driven approach?

 

Hon. Paul R. Michel:  Well, it’s not encouraging if you look at recent signs. Some of the data that seems to me to be particularly important has to do with the cost of enforcement. In China, they’re apparently putting huge emphasis on having the system work well for individual inventors, small operations, emerging middle-size companies, and the smaller players.

 

Here, the smaller players have been put at a terrible disadvantage because if they file a lawsuit, they face an immediate IPR in the patent office and very likely several IPRs. So they’ll spend a couple years and a million or two fighting that off. Then, they revive the district court case, and they may have to spend, if they can, $4, $6, $8 million over many years.

 

So, basically, the small and middle-sized players have been priced out of the U.S. IP enforcement system, so now some of them refer to it cynically as the sport of kings and it leaves them out. They’re the very people who are most dependent on patents, and if the system is to be tilted in favor of the small versus the giant incumbents, it ought to be in favor of the small. But in reality, we’ve done exactly the opposite, and you can see it just in the cost effects.

 

Brian O’Shaughnessy:  Judge Rader, what are your thoughts? If we can get Congress to listen to data, what kind of data should we be generating and presenting?

 

Hon. Randall R. Rader:  I really appreciated Chief Judge Michel’s comments. They were right on point that there’s not enough attention to the harm that’s being done to the true innovation community, often the universities and the small inventors not just the big engineer shops in corporate America.

 

I think there needs to be attention to that. There used to be a very viable small inventor coalition that affected U.S. legislation, and I haven’t seen that operating very effectively recently.

 

Brian O’Shaughnessy:  It does seem to be that people, policymakers in particular, have kind of lost sight of the ability of the patent system to promote diversity in the marketplace and to enable the disruptive entrepreneur from getting into the marketplace. Without the patent system, there’s very little that they can do to battle these behemoth incumbents.

 

Hon. Paul R. Michel:  And, Brian, time also works against them; not only expense and disruption and PTAB proceedings before they can move forward in the district court. In a typical patent case, it can take four to eight years to get a final result. A small or middle-sized company can’t survive over that timeframe if they can’t monetize their patent sooner than four to eight years. Many of them will just go out of business or have to give up on the enforcement litigation.

 

So we’ve made it too slow as well as too expensive and too hard for the small and middle-sized players even though we talk incessantly in our culture about how much we love small business.

 

Brian O’Shaughnessy:  Yeah. Good point. Excellent point. Well, we’ve only got a few minutes left, and then I’d like to open the lines to a couple of questions for the audience. We have agreed to stay on for a few minutes beyond the 1:00 timeframe, so we will probably go a little bit over our time.

 

But let me sort of wrap things up, if you will, with a quick 30-second piece by each of you as to what would be on your wish list of things that U.S. policymakers or legislators should be doing with regard to our Chinese relationship and particularly with respect to IP?

 

Professor Cohen, let me start with you. What would be your wish list of things that we should be doing to engage China?

 

Mark Cohen:  I would go for a bit of reorganization in U.S. government structure to have a much more nuanced and diverse approach to engaging China. I would like to see more leverage of big data and not have anecdotally driven trade wars.

 

And I think we need to more deeply incorporate some of the things we just spoke about into our trade discussions. Recognizing where we’ve been self-weakening and creating a self-imposed disadvantage and also where there may actually be things we can learn from China to strengthen.

 

The binary approach, for me, does not work. We have to have spine in addressing the things that are unfair in China but also recognize where China has made dramatic improvements.

 

Brian O’Shaughnessy:  That’s great. Good. Thank you. Judge Rader, your thoughts.

 

Hon. Randall R. Rader:  I’m going to go on the short term here and say let’s enforce our current U.S. trade deal with China in the IP sector by making sure there is real linkage that is not turned over to CNIPA, which is the fox guarding the henhouse problem, and instead we really insist that there is a true incentive given to research drug productions.

 

Brian O’Shaughnessy:  Yeah. Good point. Thank you. Judge Michel, what’s on your wish list of things that we should be doing with respect to our IP system and particularly our relationship with China in that regard?

 

Hon. Paul R. Michel:  Well, I would like to see some serious effort to induce, or pressure, or some combination, the Chinese government into calling off the apparently very systematic theft through cyber hacking of U.S. technology with law firms and corporations and labs and government agencies being hacked on an unbelievably massive scale. I’m sure that’s not an easy topic to address, but it has to be addressed as part of the overall picture, in my view.

 

Brian O’Shaughnessy:  Thank you. Well, I want to thank the panelists. Jack, do we have any questions waiting or can we open the lines for questions?

 

Jack Derwin:  Yeah, I will now open up the floor to do so. Hopefully we can fit in one or two questions here.

 

Chris Garvey:  Yeah. Chris Garvey. I’m a retired patent attorney. One of the problems, I think, as Judge Rader [inaudible 00:58:24], is that our own Supreme Court has found more and more things [inaudible 00:58:28] it’s getting harder and harder to get patents in the United States, and that’s one of the reasons I retired.

 

Brian O’Shaughnessy:  Do you have a question for the panelists?

 

Chris Garvey:  Oh, a question. Do you agree?

 

Hon. Randall R. Rader:  That sounds like a Judge Michel question.

 

Hon. Paul R. Michel:  Well, obviously, the ball keeps being moved, or the goal lines keep being moved by the shifting obviousness rulings of the federal circuit in recent years, so it’s more difficult to get a patent, more difficult to sustain it after you get it than it was before, and it’s a constantly changing, unstable, unpredictable area of law.

 

It’s almost as bad as the uncertainty and irrationality in the eligibility law, and it traces back to the same source of Justice Kennedy’s concurring minority opinion in eBay is treated as if it were the opinion of the Court, which it distinctly was not, and it was dicta, which has now become the doctrine being enforced in most district courts.

 

So, on obviousness, we have almost exactly the same problem as on eligibility, and if the Supreme Court can’t fix it, won’t fix it, doesn’t fix it, my suggestion is Congress better because otherwise we’re going to crimp our job creation, our global competitiveness, our technological leadership, and maybe even compromise our national security.

 

Brian O’Shaughnessy:  Well, and it seems to me that precedent is a poor pathway for policy. Mark, you’ve mentioned in particular the notion that the Chinese system is strengthened by the fact that there is some central decision making. What are your thoughts on that?

 

Mark Cohen:  I just want to add one other very quick thing to that as well on this [inaudible 01:00:32] which is that Chinese law and legislation requires that if property rights are being narrowed they cannot be applied retroactively. The result is that if they change their examination guidelines—we had the same problem with 101 and novelty—but it cannot be applied retroactively.

 

The reason they, clearly—and this has been true in many other areas—they want to provide stability for investment and economic development. So that’s actually been one thing that would really thwart the kind of circuits we’ve seen in the United States where previously granted rights have now been jeopardized.

 

Brian O’Shaughnessy:  Fascinating. Yeah. All right, Jack, another question perhaps?

 

Jack Derwin:  Absolutely. Let’s do one more.

 

Howard Klein:  Hello. This is Howard Cline from Klein O’Neill & Singh out in California. I have a question. I’ve heard that technical information submitted under seal in patent courts in China is accessible to government authorities. To what extent, if any, is that true?

 

Mark Cohen:  I don’t quite understand the question. The question is whether you submitted — [inaudible 01:01:49] patent office if you submitted information under seal? I don’t know what the — 

 

Howard Klein:  In a court proceeding.

 

Mark Cohen:  In a court proceeding, if you want to submit official U.S. government or other documentation, normally the process is to get it notarized and consularized. Normally, you should try to have that in advance of the litigation.

 

One of the reason that China has such an inexpensive litigation process is they don’t have cumbersome discovery, but that also makes it incumbent upon the parties to try to get their evidence together and in such a form as to be acceptable to the Chinese. China has accepted, for example, copyright registrations, U.S. copyright registrations in court cases for proof of ownership of copyright and other foreign legal documents.

 

So, yeah, you could submit it. If it’s under seal, the additional problem is that assurances of confidentiality of court documents. There have been a lot of horror stories over the years, and I think there have been some improvements, about the scope of protected orders, which is not only linked to the availability of the orders but the sanctions for their violation.

 

Chinese courts have fairly weak contempt powers or sanctioning powers nor have courts had a lot of experience in how to control confidential information by only making it available to counsel, or outside counsel, not in-house counsel to parties. There is no attorney-client privilege under Chinese law as with many civil law countries.

 

That also means that, theoretically, your attorney could be compelled to disclose confidential information. I don’t know where that has occurred, but that is a theoretical risk, and it also attaches to foreign lawyers practicing in China. They are subject to the same ethics rules of the Chinese bar. So you’re in a different environment regarding protection of confidential information, including the possibility of leakage in court proceedings.

 

Frankly, this also goes back to the transparency issue. One of the reasons we have such a problem understanding China’s trade secret environment is that court cases that contain confidential information are not to be published, and China really has limited experience in sanitizing court documents, removing the confidential information, to make them publically available. This really hampers publication of certain kinds of court cases including, especially, trade secret cases.

 

It takes a lot of steps to protect confidential information and be aware that the remedies if the information is misappropriated can be highly limited, but also be aware that due to the Phase 1 agreement, this is a much greater concern. There’s laws in place now restricting Chinese government agencies from revealing confidential information. The courts, I think, are much more attuned to this, and they are getting much more expert at protecting confidential information.

 

Brian O’Shaughnessy:  Judge Rader, anything you’d like to add?

 

Hon. Randall R. Rader:  I was just going to add that I think this is one of those areas where both Mark and I have been doing a lot of consultation with their courts on protective orders, and they’re making progress in those areas. I’m not aware of any instance of trade secret or other information shared with the court winding up in government hands.

 

But I agree with Mark that it’s a different system and, up to now, their protective order and confidentiality systems have not been as developed as ours. You have to be kind of careful with how you proceed there.

 

Brian O’Shaughnessy:  Well, with that, we’re eight minutes past the hour, and I know some our panelists have a hard stop, so I want to thank you for staying a little bit longer on the phone. I want to thank, once again, Chief Judge Paul Michel and Chief Judge Randall Rader and Professor Mark Cohen for participating in this teleforum today. And I want to thank The Federalist Society and the Regulatory Transparency Project for hosting this teleforum.

 

Thank you all, and thanks to the audience for listening in.

 

Mark Cohen:  Thank you. It was a great discussion.

 

Hon. Randall R. Rader:  Thanks for having us.

 

Hon. Paul R. Michel:  Thanks, Brian.

 

Jack Derwin:  Thanks so much, Brian, and thank you to all our panelists. We welcome listener feedback by email at rtp@regproject.org. Thank you all for joining us. We are adjourned.

Mark Cohen

Director and Senior Fellow

Berkeley Center for Law and Technology, University of California at Berkeley


Paul Michel

Chief Judge (ret.)

U.S. Court of Appeals for the Federal Circuit


Randall Rader

Chief Judge (ret.), U.S. Court of Appeals for the Federal Circuit and

Honorary Professor, Tsinghua University


Brian O’Shaughnessy

Partner, Dinsmore & Shohl LLP and

Past President, Licensing Executives Society, USA & Canada


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