This is Part Thirteen of a series showing how inflation, deflation, barter, tariffs, taxes, postage, war, counterfeiting, history, economics, ‘free’ trade, famine, dearth, climate, auctions, precious metals, religion, and education are combined into one great whole.

Part Thirteen. Why study the United States Trade Representative (USTR) report on China’s unfair acquisition of American intellectual property and technology?

Previous parts explained how trade taxes, tariffs, levies or countervailing duties, are a national security matter. China’s (III) discriminatory Licensing was reported by the United States Trade Representative (USTR) on March 22, 2018. Abbreviations and Acronyms may be found in Part Twelve.

OFFICE of the UNITED STATES TRADE REPRESENTATIVE EXECUTIVE OFFICE OF THE PRESIDENT  FINDINGS OF THE INVESTIGATION INTO CHINA’S ACTS, POLICIES, AND PRACTICES RELATED TO TECHNOLOGY TRANSFER, INTELLECTUAL PROPERTY, AND INNOVATION UNDER SECTION 301 OF THE TRADE ACT OF 1974 March 22, 2018

https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF

III. China’s Discriminatory Licensing Restrictions A. Introduction

The second category of conduct set forth in the Federal Register Notice issued on August 24, 2017, addresses China’s acts, policies, and practices depriving U.S. companies of the ability to set market-based, mutually-desirable terms in licensing and other technology-related negotiations with Chinese companies. In addition to the difficulties with administrative licensing discussed in Section II, China also intervenes in U.S. firms’ investments and related activities in China through restrictions on their technology licensing. These restrictions result in discriminatory technology transfer-related acts, policies, and practices that burden U.S. commerce.

China’s regime of technology regulations deprives U.S. technology owners of the ability to bargain and set terms for technology transfer that are free from interference by China. U.S. firms seeking to license technologies to Chinese enterprises must do so on non-market-based terms that favor Chinese recipients. Moreover, the bureaucratic hurdles contained in licensing regulations provide China with an additional opportunity to pressure firms to transfer more technology, or transfer it on more favorable terms, in exchange for administrative approvals.

China’s imposition of mandatory adverse licensing terms is reflected in official measures that impose a different set of rules for imported technology transfers originating from outside China, such as from U.S. entities attempting to do business in China, compared to separate rules for technology transfers occurring between two domestic companies. The mandatory requirements for importation of foreign technology are discriminatory and clearly more burdensome than the domestic requirements, as explained in detail below. The result of these mandatory terms imposed only on technology import contracts is that foreign entities (including U.S. entities) doing business in China are at a disadvantage compared to Chinese entities. These restrictions benefit domestic entities at the expense of foreign competitors, including U.S. competitors, because the mandatory terms are only imposed on technology import contracts and do not govern technology contracts between two domestic parties. From the outset, the regime is tipped in favor of Chinese entities before a U.S. company even attempts to enter the market in China through a legal framework adversely influencing all technology negotiations and contracts.

As explained in more detail below, due to mandatory provisions in China’s regime of technology regulations, U.S. entities seeking to license foreign technologies to enterprises in China must do so on non-market-based terms that favor Chinese recipients. One such entity, the Office of Intellectual Property (IP) and Industry Research Alliances (IPIRA) at the University of California, Berkeley, summarized its experiences with these unacceptable terms mandated by the Chinese regime, provided at Appendix E to this report.

1. Foreign Licensing Restrictions and China’s Technology Transfer Regime

China regulates instances in which an entity seeks to transfer technology into China under its

Regulations of the People’s Republic of China on the Administration of the Import and Export of

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Technologies (TIER)270 and situations in which a foreign entity seeks — as part of its investment in its foreign-invested enterprise in China — to transfer technology to that entity by means of the Regulations for the Implementation of the Law of the People’s Republic of China on Chinese- Foreign Equity Joint Ventures (JV Regulations).271 These Chinese regulations provide less favorable treatment of foreign entities than the comparable treatment of domestic Chinese entities under the Contract Law of the People’s Republic of China (PRC Contract Law).272

Specifically, TIER imposes the following restrictions (among others) on the ability of U.S. technology owners to negotiate market-based terms for the transfer of technology into China:273

• ·  Indemnity terms: TIER mandates that all indemnity risks be borne by the foreign technology transferor. Parties cannot negotiate the allocation of this risk, even if the transferee would like to bear the risk for a variety of reasons. Specifically, the licensor (typically a foreign entity for a technology import contract) is liable for any claims of “infringing [a third party’s] lawful rights” made against the licensee resulting from the use of the licensed or transferred technology.274 This requirement is particularly onerous for small U.S. firms seeking to license technology, as they typically would not have the expertise or resources necessary to assess and cover the risk of third party litigation.
• ·  Rights in technology improvements: TIER mandates that all improvements belong to the party making the improvement. TIER further provides that the licensor cannot stop the licensee from making improvements to the technology.275 Parties cannot negotiate shared ownership or that the licensor will own improvements made by the licensee.276 These provisions are particularly harmful to a U.S. licensor if the Chinese licensee makes an improvement severable from the original invention and then patents the severable improvement in China or elsewhere. The TIER’s provision on mandatory ownership of improvements enables the Chinese licensee to enjoy the

270 Regulations of the People’s Republic of China on the Administration of the Import and Export of Technologies [hereinafter “TIER”] (Order of the State Council No. 331, issued Dec. 10, 2001, effective Jan. 1, 2002, amended Jan. 8, 2011, in Order of the State Council No. 588). Art. 2 of TIER defines technology import and export as “the act of transferring technology from outside the territory of … China to inside the territory of … China or from inside the territory of … China to outside the territory of … China.” Several key provisions impose mandatory terms only on technology import contracts. For example, art. 24 provides that “[t]he licensor of a technology import contract shall …” while art. 27 applies “[d]uring the valid term of a technology import contract” and art. 29 provides that “[a] technology import contract may not contain ….” (emphases added).

271 Regulations for the Implementation of the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures [hereinafter “JV Regulations”] (State Council, Guo Fa [1983] No. 148, issued Sep. 20, 1983, effective Sep. 20, 1983, amended Jan. 15, 1986, in Guo Fa [1986] No. 6, further amended Dec. 21, 1987, in Guo Fa [1987] No. 110, Jul. 22, 2001, in Order of the State Council No. 311, Jan. 8, 2011, in Order of the State Council No. 588, and Feb. 19, 2014, in Order of the State Council No. 648).

272 Contract Law of the People’s Republic of China [hereinafter “PRC Contract Law”] (adopted at the Second Session of the Ninth NPC on Mar. 15, 1999, effective Oct. 1, 1999).
273 TIER, art. 2.
274 TIER, art. 24.

275 TIER, art. 29(3). 276 TIER, art. 27.

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severable improvement without the original technology licensed by the U.S. entity to the Chinese entity, and block the U.S. entity from enjoying the benefit of the severable improvement. The provisions prevent the U.S. entity from restricting its Chinese licensee from making improvements to the transferred U.S. technology or from using such improvements in the market place, including using the improvements to the detriment of the U.S. licensor.

The JV Regulations also mandate terms that are non-market-based for technology agreements in joint ventures between Chinese and foreign entities. Among other provisions, the JV Regulations generally limit technology contracts to a duration of ten years and provide that the Chinese joint venture must be granted the right to use the technology in perpetuity after the technology contract expires.277

The JV Regulations further impose requirements on the characteristics of transferred technologies. The technologies must be capable of (i) significantly improving the performance or quality of existing products and increasing productivity or (ii) significantly saving raw materials, fuel, or power; and (iii) being applicable and advanced, such that the joint venture’s products generate significant social and economic benefits in the domestic market or are competitive in the international market.278 These requirements provide opportunities for Chinese officials to pressure foreign firms to transfer the latest and most advanced versions of their technologies, restricting their freedom to deploy the technology as they choose, and notwithstanding any intellectual property infringement concerns the firm may have.

The JV Regulations in particular provide ample opportunities for Chinese officials to review foreign technologies in detail and pressure transfer to Chinese partners. For example, as with wholly foreign-owned enterprises, initial capital contributions from the foreign party may include industrial property rights, know-how, and other intellectual property rights.279 The foreign party may also license the right to use technology to the joint venture. The license must be reviewed and approved by China, typically at the same time as the joint venture application. Although there are no express limits on the amount that the foreign licensor is paid for the license, Chinese regulations provide guidelines to determine if the payments are appropriate and should be approved by China.280

The technology licensing regime in China applies to all importers of foreign technology. The TIER, JV Regulations, and the PRC Contract Law all have provisions applicable to technology transfer agreements involving a foreign party. TIER applies to “acts of transferring technology from outside the territory of the People’s Republic of China into the territory of the People’s Republic of China or vice versa by way of trade, investment, or economic and technical

277 JV Regulations, art. 43.
278 JV Regulations, arts. 25, 41.
279JV Regulations, art. 5. See also Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures art. 8 (adopted at the First Session of the Seventh NPC on Apr. 13, 1988, amended by the 18th Session of the Standing Committee of the NPC on Oct. 31, 2000, further amended Sep. 3, 2016, in Executive Order No. 51, and Nov. 7, 2016, in Executive Order No. 57, and Nov. 4, 2017, in Executive Order No. 81).
280 JAMES ZIMMERMAN, CHINA LAW DESKBOOK: A LEGAL GUIDE FOR FOREIGN-INVESTED ENTERPRISES 102, 109– 110 (Am. Bar Ass’n 4th ed. 2014).

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cooperation.”281 The TIER further defines these acts to “include assignment of the patent right or right to apply for patents, licensing for patent exploitation, assignment of technical know-how, technical services and transfer of technology by other means.”282 The JV Regulations apply to technology “introduction” contracts under Article 40, defined as the “necessary technology obtained by the joint venture by means of technology transfer from a third party or parties to the joint venture.” The PRC Contract Law addresses “Technology Contracts” in its Chapter 18. Within Chapter 18, Article 322 defines a technology contract as a “contract made by the parties to define their mutual rights and obligations for technology development, transfer, consultation or service.”

1. Different Outcomes for U.S. Companies versus Chinese Competitors

Foreign entities cannot fully take advantage of the domestic Chinese contract licensing regime under the PRC Contract Law because conflicting articles of the TIER and JV Regulations control over the PRC Contract Law. Article 123 of the PRC Contract Law provides that the PRC Contract Law will not control under Chinese law “where other laws stipulate otherwise on contracts.” In addition, Chapter 18 of the PRC Contract Law, which covers technology contracts, specifically addresses the “Applicability of Other Laws of Administrative Regulations” in Article 355, which stipulates that “[w]here laws and administrative regulations stipulate otherwise on contracts for technology import and export or on contracts for patents and patent applications, the relevant provisions thereof shall govern.” Thereby, and as explained in detail below, where the provisions of the TIER and the JV Regulations are in conflict with those of the PRC Contract Law, the TIER and the JV Regulations, respectively, control under the licensing regime in China.283

TIER imposes a number of procedural requirements that the PRC Contract Law does not impose. Under TIER, all technology import contracts must be notified to China and copies of such contracts provided.284 If such contracts are not duly notified as required, the foreign technology licensor is denied the ability to remit any royalty payments back to its home country.285 From the outset, foreign imported technology licensors, including U.S. technology licensors, must meet obligations that are not imposed on their Chinese competitors under the PRC Contract Law.

2. Indemnification Against Infringement Claims

The TIER imposes obligatory indemnifications and other special treatment in favor of Chinese licensees of imported technology.286 Under Article 24, in a technology import contract the “liabilities shall be borne by the licensor” for any infringement of the “lawful interests of any other person.” The TIER does not permit parties to freely contract issues of liability. Therefore,

281 TIER, art. 2.
282 TIER, art. 2.
283 See NATIONAL FOREIGN TRADE COUNCIL [hereinafter “NFTC”], Submission, Section 301 Hearing 7 (Sept. 28, 2017).
284 TIER, art. 18.
285 See TIER, art. 20.
286 TIER, art. 24. See also BSA | THE SOFTWARE ALLIANCE [hereinafter “BSA”], Submission, Section 301 Hearing § II(A) (Sept. 28, 2017) (referring to art. 24 of the TIER as part of “insufficient and contradictory laws relating to contracts and liability for infringement” in China).

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all U.S. technology licensors of imported technology are required to indemnify Chinese technology licensees for, among other things, third party infringement claims based on use of the imported technology.287 In addition, the indemnification requirement in the TIER on “lawful interests of any other person” does not appear to be limited to the “other person’s” intellectual property rights. Therefore, the TIER potentially obligates a U.S. technology licensor to indemnify its Chinese licensee for any infringement suit by a third party.288

In contrast, Article 353 of the PRC Contract Law provides parties negotiating for the transfer of domestic technology within China with flexibility to determine the scope of the licensor’s liability for indemnification. Article 353 sets out that “[w]here the exploitation of the patent or utilization of the technical know-how by the transferee as contracted infringes upon the legitimate rights and interests of others, the liability therefor shall be borne by the transferor, unless the parties stipulate otherwise.”289 Unlike for licensors of foreign technology, the PRC Contract Law permits parties to a domestic technology transfer agreement to negotiate issues of liability in Article 353, whereas Article 24 of the TIER does not permit parties to contract around liability for infringement claims and no other article of the TIER permits parties to agree to terms on liability.290

3. Ownership of Improvements to Licensed Technology

Article 29(3) of the TIER prohibits U.S. technology licensors from restricting their Chinese licensees to make or use improvements to the transferred technology. Article 29(3) prohibits technology import contracts from including any clause that “restrict[s] the receiving party from improving the technology supplied by the supplying party, or restricting the receiving party from using the improved technology.” This prohibition means that U.S. licensors cannot restrict their Chinese licensees from using the transferred technologies, which could include valuable information protected not only by patent laws but also by trade secret protections resulting from research and development conducted and paid for by the U.S. licensors, to then improve the transferred technologies. By prohibiting any restriction on the licensee to make or use improved technology, Article 29 permits Chinese licensees to free ride on U.S. technology licensors’ research and development costs in any imported technology transfer agreement.

Article 27 of the TIER requires that the rights to any of these improvements to imported technology will vest in the party making the improvement.291 As with the liability issues in

287 See CHINA CHAMBER OF COMMERCE FOR IMPORT & EXPORT OF MACHINERY AND ELECTRONIC PRODUCTS [hereinafter “CCCME”], Submission, Section 301 Hearing 10 (Sept. 27, 2017) (“the provision only mentions the liability of the licensor”).
288 See INFORMATION TECHNOLOGY & INNOVATION FOUNDATION [hereinafter “ITIF”], Submission, Section 301 Hearing 15–16 (Oct. 25, 2017) (“Article 24 requires that licensor (licensor importing technology into China for that matter) to bear full liability regardless whether or [sic] the licensor is aware that use of the licensed technology may ‘infringe upon the lawful rights and interests of another person.’ In fact, not only does awareness not matter, the liability could result from any third party’s ‘lawful rights and interest.’ That is, the liability could include tort and other liability beyond IP infringements.”).

289 Emphasis added.
290 See NFTC, Submission, Section 301 Hearing 7 (Sept. 28, 2017).
291 See, e.g., CHINA CHAMBER OF INT’L. COMMERCE [hereinafter “CCOIC”], Submission, Section 301 Hearing 62 (Sept. 28, 2017) (stating that “the basic meaning is that an achievement made in improving the technology

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Article 24, the TIER restrictions on the ownership of improvements cannot be contractually avoided by parties to the imported technology contract because “[the right over] any improvement on the technologies shall be vested with the party which has made the improvement.” The “shall be vested” language in Article 27 of the TIER does not permit the parties to a technology import contract to negotiate other terms. The restriction means that a U.S. technology licensor cannot negotiate for ownership rights to any improvements made by its Chinese licensee while that licensee is using the U.S. licensor’s technology, and, with the restriction against prohibiting improvements from Article 29, the U.S. technology licensor has no means to negotiate how its technology will be “improved” or how rights in that improved technology will be vested in the Chinese licensee.

By contrast, under Article 354 of the PRC Contract Law, domestic Chinese companies have flexibility to determine how any benefits, licenses, and ownership rights arising from improvements to technology will be shared between the parties to the technology transfer contract. Article 354 provides that “[t]he parties to a technological transfer contract may, in accordance with the principle of mutual benefit, stipulate the method for sharing any subsequently improved technological result obtained from the patent exploitation or utilization of the technical know-how.” Unlike the restrictions placed on U.S. importing technology licensors, licensors party to domestic technology transfer agreements can negotiate the terms for sharing the benefits of any improvements to a licensed patent or trade secret.292

The PRC Contract Law also provides a default position for parties to domestic technology transfer agreements such that, should the parties fail to agree on how to determine ownership of any improvements, or if the contractual language regarding improvements is vague,293 then the default is that neither party owns any improvement made by the other party to the contract. This default provision only provides a non-mandatory backstop position for technology transfer contracts, as well as a position from which to negotiate such contracts, yet such flexibility is only available to companies transferring technology domestically.

4. Use of Technology after the Technology Contract Expires

concerned belongs to the party making the improvement”); CCCME, Submission, Section 301 Hearing 10 (Oct. 23, 2017).
292 A Chinese commentator has also identified this inconsistency between the terms of art. 27 of TIER and art. 354 of the PRC Contract Law. In a general overview to TIER published shortly after its promulgation, a Chinese patent attorney noted that it was a “very real problem” that a foreign party might see its co-ownership rights to an improvement rescinded by a Chinese court, even if the foreign party and Chinese party had agreed to share ownership of such improvements based on the PRC Contract Law. In that writer’s opinion, the PRC Contract Law permitted “a comparatively flexible and elastic means” by which the parties may, on the principle of mutual benefit, contract for ownership of these improvements which are “seeking truth from facts, in the long term interests of the parties.” Wang Chongfang, Thoughts and Interpretations of TIER, 13 INTELLECTUAL PROPERTY RIGHTS 31 (2003). 293 Art. 61 of the PRC Contract Law applies to “Indeterminate Terms; Supplementary Agreement” and states that if a “[f]or a contract that has become valid, where the parties have not stipulated the contents regarding quality, price or remuneration or the place of performance, or have stipulated them unclearly, the parties may supplement them by agreement; if they are unable to reach a supplementary agreement, the problem shall be determined in accordance with the related clauses of the contract or with trade practices.” Art. 354 of the PRC Contract Law specifies that art. 61 applies when determining whether the method of sharing improvement is “not stipulated or not clearly stipulated, nor can […] be determined pursuant to the provisions of Article 61,” and is therefore vague.

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In the course of the Section 301 investigation, USTR identified additional licensing restrictions in the JV Regulations. In addition to the TIER, the JV Regulations, too, include licensing restrictions on technology exporting parties involved in joint ventures within China’s territory (e.g., U.S. parties exporting technology to their Chinese joint venture). The licensing restrictions result in securing benefits for technology importing parties (the Chinese joint ventures importing technology into China from the United States). Article 43(3) of the JV Regulations states that the term of the technology transfer agreement to the JV shall “generally not exceed ten years.” The provision may result in U.S. companies only having control over their transferred technology for ten years, even though some forms of technology, such as patents and trade secrets, may be protectable for much longer than ten years. After the conclusion of the JV- related technology transfer agreement, Article 43(4) stipulates that the “technology importing party shall have the right to continue using the technology.” The result of Article 43(4) is that Chinese joint ventures to technology contracts have the right under the JV Regulations to continue to use transferred technology after the expiration of the related technology contract, even if the transferred technology would otherwise be protected from use by that Chinese party. This means that under the JV Regulations, the Chinese joint venture licensee has the right to use the U.S. licensor’s technology in perpetuity after the technology contract expires, without paying compensation or subject to other terms.

1. Concerns Raised by Other Trading Partners

Other governments have identified China’s technology transfer licensing regime as a problem.
In connection with the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Council transitional reviews of China at the World Trade Organization in 2009 and 2011, Japan, the EU, and the United States requested information from China to explain its technology transfer regime and address other areas of concern as well. In the last review of China in 2011, Japan specifically noted its concern that the TIER contains discriminatory provisions as to the treatment of foreign licensors when compared to their domestic counterparts.294

Japan continues to raise concerns about the system in China for regulating importation of technology.295 In its 2016 Annual Compliance Report, Japan’s Ministry of Economy, Trade and Industry (METI) devoted a section of its report on China specifically to the discriminatory articles of the TIER, including Articles 24, 27, and 29. METI notes that “[i]n many cases of technology import and export subject to the [TIER], foreign companies are assumed to be the parties providing the technology” and that therefore the “mandatory provisions [of the TIER] are applied only to foreign companies providing the technology and therefore can be a measure that discriminates between Chinese and foreign technology transfer.”296

Foreign stakeholders also have raised concerns. The European Union Chamber of Commerce in China concluded in its “Intellectual Property Rights Working Group Position Paper 2016/2017”

294 China’s only response to these criticisms was that there are no discriminatory regulations in the TIER. For a summary of the 2011 TRIPS Council meeting, see the 2016 report of the Ministry of Economy, Trade and Industry (METI) of Japan, THE 2016 REPORT ON COMPLIANCE BY MAJOR TRADING PARTNERS WITH TRADE AGREEMENTS – WTO, EPA/FTA AND IIA [hereinafter “2016 Report on Compliance”] 67 (2016), available at http://www.meti.go.jp/english/report/data/2016WTO/pdf/01_01.pdf.

295 See 2016 REPORT ON COMPLIANCE at 64–67. 296 2016 REPORT ON COMPLIANCE at 65.

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that due to TIER, “parties to a cross-border technology transfer contract are not allowed to freely negotiate clauses concerning the ownership of subsequent developments or the liability for infringement of third parties rights….[A]s a consequence, [TIER] interfere[s] with the needs of Chinese and foreign companies for effective technology trade mechanisms.”297 In its position paper for 2017/2018, the Chamber recommended that Article 27 of the TIER be deleted.298

1. China’s Acts, Policies, and Practices are Discriminatory

The above articles of the TIER and the JV Regulations constitute discriminatory acts, policies, and practices of China.299 The TIER and JV Regulations put foreign technology importers, including U.S. entities, at a disadvantage relative to their domestic Chinese counterparts because the TIER and JV Regulations impose additional restrictions on importers of foreign technology and their use and enjoyment of their rights in technology, including but not limited to rights in intellectual property.300 Through these restrictions, U.S. technology importers into China often are forced to grant ownership or usage rights to valuable intellectual property to domestic Chinese entities. At the same time, the licensing restrictions result in benefits for the Chinese counterparty to those forced arrangements.301

1. Justifications for Discrimination

In this Section 301 investigation, USTR received submissions and testimony stating that the licensing restrictions in China are necessary to protect Chinese companies, which are in a “weak position” in technology transfer negotiations and contracts.302 Other submissions stated that

297 EUROPEAN CHAMBER IN CHINA, INTELLECTUAL PROPERTY RIGHTS WORKING GROUP POSITION PAPER 2016/2017 87, available at http://www.europeanchamber.com.cn/documents/download/start/en/pdf/429.
298 See EUROPEAN CHAMBER IN CHINA, INTELLECTUAL PROPERTY RIGHTS WORKING GROUP POSITION PAPER 2017/2018 89, available at http://www.europeanchamber.com.cn/documents/download/start/en/pdf/545.

299 See NFTC, Submission, Section 301 Hearing 7 (Sept. 28, 2017) (“This lack of freedom of contract [under art. 24 of the TIER] discriminates against overseas licensors….”); US–CHINA BUSINESS COUNCIL [hereinafter “USCBC”], Submission, Section 301 Hearing 10 (Sept. 28, 2017).
300 NFTC, Submission, Section 301 Hearing 6 (Sept. 28, 2017) (“The Regulations on the Administration of the Import and Export of Technology impose greater risks and liabilities on foreign technology licensors than China’s Contract Law imposes on domestic licensors.”).

301 ITIF, Submission, Section 301 Hearing 16 (Oct. 25, 2017) (“In summary, China imposes onerous restrictions on foreign parties involved in technology licensing activities in China which disadvantages foreign parties to the benefit of the Chinese counterparty.”).
302 See Yang Guohua, Submission, Section 301 Hearing (Sept. 28, 2017) (“The relevant provisions of China’s Regulation on Technology Import and Export Administration are well-founded. The provisions are intended to safeguard the legitimate rights and interests of the licensees who have a weak position in international technology transfer negotiations, as similar laws and policies of other countries do in such circumstances.”); CCOIC, Submission, Section 301 Hearing 63–4 (Sept. 28, 2017) (“In the context of cross-border technology transfer, the status of the licensor from developed countries and licensee from developing countries in a negotiation is usually unequal, often greatly…the Regulations are based on the same principle, which is to redress the imbalance of powers leading to imbalance of interests and to protect the rights of the licensee having a weak negotiation position.”).

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licensing negotiations and contracts are based on market conditions without interference from China303 and that the TIER does not favor Chinese companies.304

Other submissions stated that licensing restrictions like the TIER could not constitute a problem for U.S. industry because there were no legal cases brought in China based on the TIER.305 These submissions do not account for the continuing existence of the TIER (as well as the JV Regulations) in China and the effects of such restrictions on contract negotiations for U.S. technology owners.306 These concerns increase when a company has valuable intellectual property and other proprietary information that may be affected by China’s licensing restriction regime.307 Moreover, none of the submissions justifying the discriminatory policies addressed how such a licensing regime meets a national treatment standard. National treatment means that a country (like China) accords to the nationals of other countries (like the United States) treatment that is no less favorable than that it accords to its own nationals with regard to the policies at issue. Instead, the submissions appear to implicitly acknowledge that China has discriminatory acts, polices, and practices concerning technology import contracts by justifying their existence.

Section 301 defines acts, policies, and practices that are discriminatory to “include, when appropriate, any act, policy, and practice which denies national or most-favored nation treatment to United States goods, services, or investment.”308 Technology transfer agreements as defined by the TIER and the JV Regulations in China cover U.S. goods, service, or investment as related to the licensing and importing of U.S.-owned technology into China when compared to the treatment of domestic licensing of Chinese goods, services, or investment.
The TIER and JV Regulations place U.S. technology owners at a disadvantage relative to their Chinese counterparts when licensing technology into the Chinese market. The disparate treatment is effectively based on nationality, resulting in discrimination under Section 301.

303 See CCCME, Submission, Section 301 Hearing 9 (Oct. 23, 2017) (alleging that “contracts are concluded according to companies’ independent willingness. Chinese governments at all levels neither participate nor intervene in any of those business decisions or activities…The intellectual property licensing or technology negotiations are carried out based on market conditions by Chinese companies and U.S. companies.”); CCOIC, Submission, Section 301 Hearing 64 (Sept. 28, 2017).

304 CCCME, Submission, Section 301 Hearing 10 (Oct. 23, 2017).
305 E.g. CCCME, Submission, Section 301 Hearing 5 (Oct. 23, 2017) (“Over the past five years, however, CCCME received neither dispute nor complaints related to intellectual property and technology transfer.”).
306 USCBC, Submission, Section 301 Hearing 10 (Sept. 28, 2017) (“China’s JV requirements and foreign equity limitations create an unequal negotiation for companies…Elimination of these policies would create a meaningful change in companies’ ability to negotiate market-based terms for their IP and technology in China.”).
307 Id. at 3 (“In USCBC’s recent survey, most companies report that they are concerned about transferring their technology to China, regardless of the circumstances, because of concerns about the protection of intellectual property rights and proprietary information, as well as concerns about enforcing technology licensing agreements.”). 308 19 U.S.C. § 2411(d)(5).

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2. Acts, Polices, and Practices of Other Countries

In addition, USTR received submissions regarding the acts, policies, and practices of other trading partners relating to licensing and technology transfer, including submissions regarding the technology licensing regime in the United States. None of the cited acts, policies, or practices in comments submitted to USTR was the same as or similar to those of China. Instead, these very different examples highlight that the acts, policies, and practices of China in technology licensing discriminate against importers of foreign technology, including U.S. entities.

USTR received comments and testimony asserting, without support or discussion, that the PRC Contract Law provisions regarding technology transfer “equally apply to domestic and foreign invested companies without favoring either group.”309 As discussed above in Section III.B.1, the PRC Contract Law does not equally apply to domestic and foreign companies.310 A Chinese company seeking to transfer technology within China can take full advantage of the provisions of the PRC Contract Law, while a U.S. technology owner seeking to transfer technology into China must adhere to the adverse terms imposed by TIER or the JV Regulations.311

Some submissions characterized other indemnity clauses in international codes and national laws as similar to those in the TIER. For example, two submissions highlighted language from the Draft International Code of Conduct on the Transfer of Technology (Draft Code), a United Nations text.312 Article 24 of TIER states in relevant part that “[w]here any of the lawful interests of any other person is infringed upon, the liabilities shall be borne by the licensor. Chapter 5, Paragraph.4, Romanette vi (Rights to the technology transferred) of the Draft Code states that “[t]he technology supplier’s representation that on the date of the signing of the agreement, it is, to the best of its knowledge, not aware of third parties’ valid patent rights or similar protection for inventions which would be infringed by the use of the technology when used as specified in the agreement….” The Draft Code, drafted over thirty years ago, does not address indemnification for future liability, which is what is required by Article 24 of TIER. Instead, the Draft Code addresses a warranty issue regarding known past infringement at the time the contract is signed.313 The TIER addresses all indemnification issues, not just past warranties as the Draft Code addresses.

309 CHINA GENERAL CHAMBER OF COMMERCE – USA [hereinafter “CGCC”], Submission, Section 301 Hearing (Sept. 28, 2017). The CGCC submission adds that “[i]n addition to the Contract Law, the Regulations on Technology Import and Export Administration of the People’s Republic of China (passed in 2001) have additionally bolstered the protection of technology transfer, licensing, ownership and indemnity in cross border transactions,” but does not include information as to how the TIER bolsters such protections nor how the TIER’s separate regime for foreign technology transfers works alongside the PRC Contract Law. Id. 14-5.

310 ITIF, Submission, Section 301 Hearing 15 (Oct. 25, 2017) (“CCCME…holds that TIER’s relevant Articles 24 and 27 are ‘neutral in nature.’ Yet they are not, for CCCME omits that the articles only apply in a ‘technology import contract.’”).
311 See id. (“CCCME contends that these provisions are ‘neutral in nature’….But this fails to rebut or address the real issue at hand, for it omits the fact that both articles [24 and 27 of TIER] only apply ‘in a technology import contract’ but do not hold with regard to a technology license contract.”).

312 CCCME, Submission, Section 301 Hearing 10 (Oct. 23, 2017); CCOIC, Submission, Section 301 Hearing 61–2 (Sept. 28, 2017).
313 ITIF, Submission, Section 301 Hearing 15 (Oct. 25, 2017) (“The unaware-of-dominant-patent fundamentally differs from TIER Article 24’s ‘licensor shall bear liability.’”).

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Instead of adopting the Draft Code, certain Members like China and the United States have adopted the Convention on Contracts for the International Sale of Goods, which includes a provision expressly providing for the freedom of contract around such terms. The Convention does include a related warranty provision that a seller of goods “must deliver goods which are free from any right or claim of a third party based on industrial property or other intellectual property” in Article 42, but the Convention also provides in Article 6 that parties “may…derogate from or vary the effect of any of [the Convention] provisions.” A similar freedom of contract provision is incorporated into the “Successful Technology Licensing” publication of the UN’s World Intellectual Property Organization (WIPO). WIPO, of which China and the United States are also members, provides guidance through its Successful Technology Licensing document, which recognizes the “legal complexity” of terms regarding issues like indemnity and the importance of parties being able to freely negotiate such terms. In its Successful Technology Licensing, WIPO makes clear that “there is no set answer” and “nothing is ‘standard’ or ‘customary.’” These freedom to contract provisions in the UN Convention and the WIPO document are reflected in Article 353 of the PRC Contract Law, but the TIER conflicts for U.S. technology importers into China.

Some submitters asserted that additional relevant laws of trading partners, including the United States, address indemnification, but the submitters failed to provide supporting legal analysis for such allegations.314 USTR was unable to analyze unsupported allegations such as these, particularly when the submitters were provided an opportunity during the hearing to respond to these questions and chose not to do so in the hearing or afterwards in written submissions during the rebuttal comment period.315

For example, a submission identified the Philippines as having similar indemnification and improvement ownership clauses to China in the Voluntary Licensing chapter of the Intellectual Property Code of the Philippines (Republic Act No. 8293).316 However, the cited provisions of the Philippine law are not similar to the Chinese regime under the TIER.

As discussed above, the TIER in China requires a technology importing licensor to be responsible for all liabilities resulting from use of the technology provided “[w]here any of the

314 For example, the China Intellectual Property Law Society submitted that German case law and the U.S. Uniform Commercial Code both included similar rules to the TIER, but did not cite to any provision in either that required foreign licensors to indemnify domestic licensees for all infringement liability. China Intellectual Property Law Society [hereinafter “CIPL”], Submission, Section 301 Hearing 80–1 (Sept. 27, 2017). Instead, CIPL only cited German case law and the U.S. Uniform Commercial Code with regard to express and implied warranty language for goods in Germany and the United States regarding known defects of products. Jin Haijun, CIPL, Testimony, Section 301 Hearing 140–1 (Oct. 10, 2017).

315 E.g. Jin Haijun, CIPL, Testimony, Section 301 Hearing 140–1 (Oct. 10, 2017) (“We provided the explanation of your question in our written comments….We give some examples like the judgment in Germany and the UCC in the United States and the draft code in the United Nations.”); John Tang, DHH WASHINGTON DC LAW OFFICE P.C. [hereinafter “DHH”], Testimony, Section 301 Hearing 164 (Oct. 10, 2017) (responding that “I believe in our supplemental comments, we will address your answer in a more complete way” regarding questions about TIER) compare with DHH, Submission, Section 301 Hearing 4 (Oct. 23, 2017) (“In particular, China does not have any laws, rules or regulations that force foreign investors to transfer their technology. Should such situations arise, it would be an agreement among corporations subject to market conditions, instead of by government interference.”). 316 CCOIC, Submission, Section 301 Hearing 62 (Sept. 28, 2017).

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lawful interests of any other person is infringed upon.”317 The cited Philippine law states that there is a prima facie presumption that an adverse effect on competition and trade arises for technology transfer arrangements that “exempt the licensor for liability for non-fulfilment of his responsibilities under the technology transfer arrangement and/or liability arising from third party suits brought about by the use of the licensed product or the licensed technology.” Given that it is a presumption, the Philippine measure significantly differs from the TIER’s broad indemnification requirement. Additionally, there is an exception to the presumption under Philippine law for situations listed under Section 91 of the law, which include technology transfer arrangements that are “exceptional or meritorious cases where substantial benefits will accrue to the economy, such as high technology content, increase in foreign exchange earnings, employment generation….” The submission fails to account for the exception cited in the section, that the presumption applies “[e]xcept in cases under Section 91 [of the Intellectual Property Code].” Section 91 of the Intellectual Property Code of the Philippines specifically permits entities to seek exemptions from the cited Sections 87.14 and 87.16, including in cases “where substantial benefits will accrue to the economy, such as high technology content.” Most importantly, the Philippine law appears to apply to all technology transfer arrangements under Philippine law, whereas the Chinese TIER provision only applies to importers of foreign technology, such as U.S. industry.

For the ownership clause, Article 27 of the TIER requires that improvements to imported technology belong to the party making the improvement. As discussed above in Section III.B.3, the obligation in Article 27 means that Chinese parties to technology importing contracts have the automatic right to any improvements made by those same parties without negotiating terms with their U.S. partners. The cited Philippine law318 in Section 87.6 states that there is a prima facie presumption that technology transfer arrangements that “obligate the licensee to transfer for free to the licensor the inventions or improvements that may be obtained through the use of the licensed technology” have an adverse effect on competition and trade. The TIER requires that all improvements made by a licensee vest with that licensee, not that there is a prima facie presumption of adverse effect on competition and trade where a licensee must transfer any improvements for free, as set out in the Philippine intellectual property law. Also, and as with Section 87.14, there is an exception to the presumption under Philippine law for situations listed under Section 91 of the same law, which include technology transfer arrangements that are “exceptional or meritorious cases where substantial benefits will accrue to the economy, such as high technology content, increase in foreign exchange earnings, employment generation….” Similarly, the Philippine law appears to apply to all technology transfer arrangements under Philippine law, whereas the Chinese TIER provision only applies to importers of foreign technology, such as U.S. industry.

USTR also received statements that the intellectual property regime in Vietnam is similar to the TIER.319 However, just as for the Philippine system, Vietnam does not have a provision like Article 27 of the TIER in China. The regime in Vietnam addresses contracts that require licensees to transfer improvement made by the licensee free of charge to licensors. Article 144.2(a) of Vietnam’s Law on Intellectual Property Law states that “an industrial property object

317 TIER, art. 24.
318 CCOIC, Submission, Section 301 Hearing 63 (Sept. 28, 2017). 319 CCOIC, Submission, Section 301 Hearing 63 (Sept. 28, 2017).

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license contract must not have provisions which unreasonably restrict the right of the licensee.” Specific examples include “[p]rohibiting the licensee to improve the industrial property object other than marks” and “compelling the licensee to transfer free of charge to the licensor improvements of the industrial property object made by the licensee or the right of industrial property registration or industrial property rights to such improvements.” However, the TIER in China forbids the parties from freely contracting as to how improvements are allocated between the parties, taking into consideration that the technology at issue was provided by the licensor in the first place.320

Similar submissions failed to address whether any of these cited provisions only apply to foreign technology owners and provide different treatment for domestic technology transfers, as is the regime in China. All of the so-called “similar” legal and guidance provisions in other countries and international fora do not solely apply to imported technology transfers, as the TIER does in China, but instead apply equally to all technology transfers in licensing contracts.

USTR received comments stating that U.S. companies are not treated differently under the TIER as compared to Chinese domestic companies.321 As explained above in Section I.B.2 et seq. and Section I.D.1, this is not the case. One submission states that “as long as the patent on the technology is still valid or the technology remains subject to confidentiality, the use of the technology by the licensee still requires licensing by the licensor” under the TIER.322 Such comments do not account for the other requirements of the licensing regime in China, including the JV Regulations that, among other things, authorize the licensee to use the technology without compensation after the conclusion of the agreement. Other comments stated without citations that the Chinese contract law system “originated from those in major European countries (such as Germany) and the law has evolved into a very similar one to its U.S. counterpart.”323 Assertions of such a general nature are not responsive to the concern articulated above regarding the differential and discriminatory treatment of U.S. and other foreign technology owners relative to Chinese counterparts. The submitters’ failure to provide citations to the asserted relevant U.S. counterpart contract provisions precludes USTR from concluding such statements are sound and supported by law. Moreover, no submission addressed the fact that the contract laws of the United States do not provide different treatment for domestic transfers of technology versus foreign imported transfers of technology.

USTR did not receive any submissions establishing that the United States or any third country has enacted any act, policy, or practice similar to the JV Regulations.

1. China’s Acts, Policies, and Practices Burden U.S. Commerce

As discussed earlier under Section II.E., China’s acts, policies, and practices regarding restrictions on technology transfer — including licensing and other technology-related

320 See TIER, art. 27.
321 See CCCME, Submission, Section 301 Hearing 10 (Oct. 23, 2017) (alleging that “these two provisions [arts. 24 and 27 of the TIER] are neutral in nature….Either Chinese companies or U.S. companies can be the licensor and the party who has made the improvement.”); CCCME, Submission, Section 301 Hearing 7 (Oct. 23, 2017) (asserting without citations that “enterprises usually agree on the ownership of improved technology”).
322 CCOIC, Submission, Section 301 Hearing 62 (Sept. 28, 2017).
323 CGCC, Submission, Section 301 Hearing §2(C) (Sept. 28, 2017).

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negotiations for U.S. entities — clearly burden U.S. commerce. Acts, policies, and practices that burden U.S. commerce include licensing requirements that result in discrimination against U.S. technologies,324 as well as acts, policies, and practices that do not adequately protect U.S. intellectual property rights.325 The licensing restrictions described in Section III.B on U.S. entities clearly meet these standards because they deprive U.S. entities from benefiting from their innovative technology that has been transferred into China under a discriminatory licensing regime.326

324 See Initiation of Section 302 Investigation and Request for Public Comment: Japan Market Access Barriers to Agricultural Products, 62 Fed. Reg. 53,853 (Oct. 16, 1997); Petition of National Canners Association, 40 Fed. Reg. 44,635 (Sept. 29, 1975).
325 See Termination of Action: Protection of Intellectual Property Rights by the Government of Honduras, 63 Fed. Reg. 37,943 (June 30, 1998).

326 WILEY REIN LLP, Submission, Section 301 Hearing 11 (Sept. 28, 2017) (“Chinese companies would be able to employ ‘winner-take-all’ strategies to keep U.S. companies from regaining market share. Therefore, it is clear that the Chinese government’s action burden and restrict U.S. commerce.”).

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