March 2019, Vol. 246, No. 3


Exploring Tariffs to Curb Alleged Chinese Intellectual Property Thefts

The United States recently implemented significant trade tariffs against Chinese products, totaling over $250 billion. As a result, its trade negotiations with China have waxed and waned over the past several months.  

One of the significant reasons for the United States implementing trade tariffs is China’s alleged “unfair trade practices” under Section 301. The United States Trade Representative (USTR) released its findings of its investigation into potential violations toward the end of the first quarter of 2018.  Specifically, the Section 301 investigation revealed several major concerns.  These included:

(1) China using joint venture requirements, foreign investment restrictions, and administrative review and licensing processes to require or pressure technology transfer from U.S. companies; (2) China depriving U.S. companies of the ability to set market-based terms in licensing and other technology-related negotiations; (3) China directing and unfairly facilitating the systematic investment in, and acquisition of, U.S. companies and assets to generate large-scale technology transfer; and (4) China conducting and supporting cyber-intrusions into U.S. commercial computer networks to gain unauthorized access to commercially valuable business information.

An initial levying of about $50 billion dollars in tariffs against China imports occurred in August 2018, without much change in China’s actions and policies, and was followed by another $200 billion of tariffs in September 2018.  There is a 10% tariff on goods after Sept. 24, 2018, and this level increased to 25% on Jan 1. 

Though it may be popular to label the Trump administration’s latest tariffs on China as part of an ongoing “trade war,” the response may miss a significant point: that imposing tariffs may be one of the only strong ways to force China to stop what the U.S. president alleges are “unfair trade practices” through improperly taking valuable U.S. intellectual property (IP). Many of these actions are an effort to force fairer intellectual property-related laws and procedures for U.S. entities operating within China’s borders.  

  On the positive side, China is a member of what is known as the Patent Cooperation Treaty (PCT), and it has been a member for some time.  China has also made some progress toward implementing more effective patent examination procedures and has made efforts to implement court systems and procedures, include a recently announced specialized court for appeals, which recognize and address intellectual property disputes.   

But this administration believes that its movements or changes in these and other intellectual property areas are not fast or effective enough. These specific actions, for example, do not address the specific Section 301 unfair trade concerns expressed in by the USTR in its investigative findings.

The U.S. administration position is that despite these advances by China, the “unfair trade practices” by China with respect to its continued intellectual property theft are estimated to cost the U.S. between $22.5 billion and $60 billion a year – whether it is a Beijing-based wind turbine company stealing trade secrets from a Massachusetts company, a China company misappropriated trade secrets on steel manufacturing, or a string of large U.S. chemical companies investing in China with the risk of losing their IP rights as part of current Chinese law.

Lately, China has given exceptions to certain industries in areas in which it believes it lags behind – electric vehicles or downstream petrochemical companies, for instance – but energy companies investing in China need to be up to date on these exceptions and plan strategies and structures to mitigate against risk of losing significant IP rights where these exceptions may not apply. Additionally, there are ways in which organizations can structure investments to reduce the risk of losing significant IP rights to China. 

For one, when negotiating joint ventures (JV), a company may consider terminating the JV when it wants to withdraw, thereby terminating any associated IP license associated with the venture.  Otherwise, Chinese law dictates the JV may continue to use the IP brought in during the JV formation. 

A second way to reduce risk would be to license the IP into your own company in China to the extent China allows the formation of an entity there. This avoids licensing into a problematic Chinese JV. Lastly, U.S. companies may try to keep the applicable law and arbitration of these issues outside of China altogether – arbitrating disputes in Hong Kong, Singapore or London, for example. 

Meanwhile, in the United States, organizations need to conduct audits, manage technology, provide important employee guidelines and policies, enhance cybersecurity features and plans, and implement other strong internal trade secret and IP protections. 

Tariffs will undoubtedly cause short-term pain, including higher prices for minerals (barite), materials (steel), parts and overseas assemblies within the energy sector – pipelines specifically – as well as potentially changing trade and supply patterns. It is uncertain how long this pain may last, and this may cause some U.S. energy industry products to be less competitive on a global level, especially where reliance on China goods or investment into China are an issue. 

In the long term, it remains to be seen whether the U.S. administration’s approach to using tariffs will be an effective strategy. But until now, the U.S. Department of Commerce has not been able to move the needle on Chinese IP issues, and implementation of tariffs, despite its drawbacks, is a chance for success that this U.S. administration wants to pursue in an effort to make up for what it believes is lost time. P&GJ

Author: Jeffrey S. Whittle is a partner in the Houston office of Hogan Lovells US LLP. He advises on strategic and complex technology transactions, licensing, patent protection, portfolio analysis, and other contentious and transactional intellectual property matters.

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