Geopolitics: USA Inc et al v Made in China 2025
Intellectual property in general, and trade secrets in particular, is at the centre of a global battle for strategic political and economic supremacy, as Peter Scott reports.
THE TRUMP PRESIDENTIAL ADMINISTRATION in the United States was, perhaps, known more for its bark than its bite, as countless promises and rhetorical flourishes failed to translate into political reality, whether that be border walls or immigration, infrastructure or healthcare reform. One exception was in its attitude to China. While many people recall the ugly, noisy rhetoric from President Trump himself around China and COVID-19, it is worth noting that under the Trump administration, there were at least two significant developments in relation to intellectual property and China.
Both shine a light on the fraught geopolitics surrounding IP in general, and trade secrets in particular. Arguably IP is the outrider for a larger geopolitical struggle in which two superpowers jostle for position and influence.
THE CHINA INITIATIVE
In 2018, the US Department of Justice (DoJ) under then-Attorney General Jeff Sessions announced the ‘China Initiative’, suggesting that “Chinese economic espionage against the United States has been increasing—and it has been increasing rapidly,” and that “This Initiative will identify priority Chinese trade theft cases, ensure that we have enough resources dedicated to them, and make sure that we bring them to an appropriate conclusion quickly and effectively.”
The threat, Sessions explained, was “not just taking place against traditional targets like our defence and intelligence agencies, but against targets like research labs and universities, and we see Chinese propaganda disseminated on our campuses”.
The DoJ lists 58 cases on its website as examples of those prosecuted under the China Initiative, which was dropped in February 2022 in the face of criticism that it unfairly targeted Chinese academics in US universities and those of Chinese heritage more generally. Of those, many are trade secrets cases, and several resulted in guilty pleas or convictions for executives or companies related to trade secrets theft.
The MIT Technology Review has put together a rather more comprehensive database of cases that might be deemed to fall under the China Initiative, finding that, as of December 2021:
- Only about a quarter of people and institutions charged under the China Initiative have been convicted.
- Many cases have little or no obvious connection to national security or the theft of trade secrets.
- Nearly 90% of the defendants charged under the initiative are of Chinese heritage.”
“THE BIAS AND MISTRUST THAT EXISTS TOWARDS CHINA NOWADAYS IS PALPABLE, AND DOES NOT HELP TO CONVEY THE MESSAGE THAT YOU CAN NOW LITIGATE TRADE SECRETS IN CHINA.”
PAOLO BECONCINI, SQUIRE PATTON BOGGS
That is not to say that the China Initiative was a failure, or even that it was poorly motivated. As James Pooley of the Law Office of James Pooley and the first entrant into our Global Trade Secrets Hall of Fame notes, “the basic idea is a good idea in the sense that we have a geopolitical adversary who has targeted our industrial secrets.
“Now, doesn’t it make sense to focus on an adversary who is dealing with us that way? Yes, it does. Was it wise to make this as much of a political grandstand? I’m not so sure. It was basically telegraphed to the FBI, and to the Department of Justice, that we should be going all out. And my fear? I don’t know. I mean, people make mistakes. And cases that you look at that appear to be really strong, end up sometimes surprising you because you don’t know everything at the beginning. But I worry that some of these cases that caused the downfall of the China Initiative, were perhaps rushed to indictment a little more quickly than they should have been, and perhaps viewed with less scepticism than they should have been.”
While Pooley doesn’t suggest that there was racial profiling motivating some of the weaker cases that were eventually dismissed under the initiative, he cautions that “there certainly was a risk that played out that it would look like that”.
And ultimately, the effect on future prosecutions may be the same whether or not racial profiling was happening in reality or not. “Whatever the truth, as opposed to the appearance of racial profiling, and we’ll never know that, because there were people that argued that it was race-based decision making, you now have a whole group of prosecutors who are understandably worried that if they bring a legitimate case against a Chinese entity, that they may face the same kind of criticism. And that’s unfortunate.”
For its part, the DoJ remains bullish even in the face of winding down the specific China Initiative. Announcing that decision, Assistant Attorney General Matthew Olsen also championed the launch of a new ‘Strategy for Countering Nation State Threats’, focused on wider geopolitical threats beyond China, while also underlining that “we will be relentless in defending our country from China”.
“THE PROBLEM IS IN ENFORCEMENT. WHAT WE’RE HOPING FOR OVER TIME IS SOME INCREASE IN TRANSPARENCY—SO WE CAN SEE WHAT ACTUALLY HAPPENS WITH TRADE SECRETS.”
JAMES POOLEY, LAW OFFICE OF JAMES POOLEY
“THE PROBLEM IS IN ENFORCEMENT. WHAT WE’RE HOPING FOR OVER TIME IS SOME INCREASE IN TRANSPARENCY—SO WE CAN SEE WHAT ACTUALLY HAPPENS WITH TRADE SECRETS.”
JAMES POOLEY, LAW OFFICE OF JAMES POOLEY
TRADE AND DEVELOPMENT
The second pillar of the Trump administration’s China policy was the Phase I Trade Agreement between the two nations, agreed in January 2020, which dealt explicitly with trade secrets, requiring China to develop its laws and procedures to afford a similar level of trade secret protection to that in the US. These include shifting the burden of proof to the accused in civil trade secrets matters, requiring government agencies in China to take actions against unauthorised disclosure of trade secrets, and reducing the threshold for initiating criminal enforcement in trade secrets matters.
Paolo Beconcini leads Squire Patton Boggs’ China Intellectual Property team, and wrote the 2021 report, “Trade Secret Protection in China Before, and After, the 2020 US-China Trade Agreement”.
This study underscores how hacking, cyber-espionage, forced technology transfer and state sanctioned industrial espionage have become the frontline in the power struggle between China and the US. The study points to progress since the trade agreement in the “2020 Draft Interpretation of the Supreme People’s Court”, which while it “has not fully addressed all of the US government’s grievances in the Phase I Agreement … does contain a number of positive improvements to the interpretation and application of the provisions of article 9 of the Unfair Competition Law on the protection of trade secrets”.
In another promising move, there is also now a landmark precedent for trade secrets cases litigated under this law. In 2021, China’s Supreme People’s Court awarded CNY 159 million ($20 million) in a trade secrets dispute, known as the Vanillin case, which marks the highest damages for trade secret infringement that has ever been awarded in China.
Despite this progress, there remain relatively few trade secrets cases in China involving foreign companies.
“China coverage in the past years in the West at all levels has been focused on negative issues but has not always acknowledged improvements or they have gone under the radar,” explains Beconcini.
“Overall, there’s a cultural reluctance of foreign firms to litigate in China. But this is compounded when trade secrets are involved, because this will involve a difficult litigation, wherever you do it and, of course, it is expensive. But it is possible to do,” he explains.
“The bias and mistrust that exists towards China nowadays is palpable, and does not help to convey the message that you can now litigate trade secrets in China.”
George Chan, partner at Simmons & Simmons, echoes this sentiment, arguing that a fatalistic “What can be done?” approach should no longer suffice when addressing cross border violations in China.
“Counsel should try to explore options or investigate whether there are opportunities to take action against these people who are allegedly ‘sitting pretty’ in China. I think that’s not necessarily the case. And there are now more options than before.”
“NOW THE REAL CHINESE INDUSTRY IS LEADING IN TERMS OF INNOVATION, AND PATENT FILINGS. IT HAS CHANGED FROM A COPYCAT TO REALLY A CREATIVE INDUSTRY IN CHINA”
STEFAN DITTMER, DENTONS
WHAT DOES CHINA WANT?
Much of the discussion around China, especially in elements of the Western political class, paints it as a malign influence motivated by greed and aiming for the destruction of the Western economic order. But while the concern is not wholly misplaced given the apparent volume and seriousness of China’s trade secrets activities, and indeed the country may be sometimes opaque in its motivations, it is also often open about what it’s trying to achieve.
Take its ‘Made in China 2025’ industrial policy for example, released in 2015 as “a programme of action for the first ten years of China’s implementation of the manufacturing powerhouse strategy”. (trans Etcetera Language Group). That policy is very open about China’s aim to become the preeminent manufacturing giant in the world, and to do so by developing an industry that is “innovation-led with obvious competitive advantages”.
The plan has a specific section on IP which reads: “Strengthen the application of IPR. Strengthen the intellectual property (IP) reserves of key and core technologies in important manufacturing fields and build an industrialisation-oriented patent portfolio and strategic layout. Encourage and support enterprises that use IPR to participate in market competition, incubate a group of well-positioned enterprises with comprehensive IPR, support the establishment of IP alliances, and promote the coordinated use of IPR by market players. Steadily promote the decryption and market application of national defence IPR. Establish and improve IP review mechanisms, encourage and support industry backbone enterprises and specialised institutions that cooperate in patent evaluation, acquisition, operations, and risk early warning and response in key areas. Build a public service platform for the comprehensive use of IPR. Encourage cross-border IP licensing. Research and formulate policies and measures to reduce the cost of IP application, protection, and for rights protection for small and medium-size enterprises.”
Of course, saying it is one thing and doing it is another, and as Pooley notes, when it comes to trade secrets, “we certainly are not there yet”.
But there are signs of progress in the 2019 amendments to the Unfair Competition Law and the implementation of the Phase I agreement, he adds. “The problem is in enforcement. What we’re hoping for over time is some increase in transparency—so we can see what actually happens with trade secrets. I’m a cheerleader for China for the movement that China has made. And I think ultimately, for no other reason than the good health of its own domestic innovation economy, it will come to the conclusion that we need more law-based as opposed to contract-based rules for information sharing. So that it becomes more robust because strong trade secret laws actually enable dissemination, because you can rely on it and so on. And I think ultimately they’ll get that.”
Perhaps the best hope for Western companies doing business in China is that China achieves its strategic aims around further developing an innovative economy. As Stefan Dittmer, co-head of Dentons’ intellectual property and technology group in Germany explains, “the industry in China has totally changed. And this goes hand in hand, because now the real Chinese industry is leading in terms of innovation, and patent filings. It has changed from a copycat to really a creative industry in China, and we have trouble holding pace with them. And while we may or may not be where we would like to be in terms of reliability and rule of law, and while the Chinese landscape is also very fragmented by local authorities acting this way in one place and another way in another place, I think the situation has much improved.”
Image: Shutterstock.com / PalSand