Worldwide Challenges Assist China and the EU Discover Settlement on Expertise Switch

International Challenges Help China and the EU Find Agreement on Technology Transfer

On December 30, 2020, after seven long years of negotiation, China and the EU concluded the negotiations on a Comprehensive Investment Agreement (CAI) in principle. The frayed political and trade relations with the US as well as Brexit convinced the EU members to put aside objections related to human rights abuses and to conclude the agreement with China, today’s most important trading partner. The Chinese who struggled to offset the diplomatic setbacks of 2020, including the abuse of the initial Covid-19 crisis, the issue of the Xingjian labor camps and the Hong Kong crisis, and the need for alternatives to their strained relations with the US , were willing to make concessions – including some key provisions regarding China’s forced technology transfer.

If these provisions are really and properly implemented by China, they could benefit EU companies over their US competitors. We are reviewing the provisions, comparing them to similar commitments China recently made with the US, and assessing their potential impact on EU and US intellectual property owners in China.

Forced technology transfer

In recent years, China has been accused by the US and the EU of following and enacting a number of policies and practices that enable, if not directly support, forced technology transfer, intellectual property disclosure, and innovation theft.

In a WTO dispute, for example, the US accused China of (i) enacting regulations that oblige or pressure foreign companies to transfer technology by forcing them into joint ventures with local competitors, (ii) the terms and conditions for licensing Restrict technologies and (iii) allow unprotected and unchecked disclosure and transfer of technologies in regulatory approval and licensing procedures and (iv) indirect coverage and support for acts of industrial and cyber espionage. Due in part to these alleged illegal practices, the U.S. launched a Section 301 investigation and trade sanctions against China in 2018, starting the trade wars.

The above allegations are very grave and present the biggest challenge facing US and EU rights holders doing business in China right now. This is particularly the case because of China’s new innovation policy launched by the Xi Jinping government, including the ambitious goal of making China technologically independent, particularly from the US, by 2025.

The CAI Regulations on Forced Technology Transfer

The CAI sets very clear rules against the forced technology transfer. The provisions consist of: (a) Prohibiting various types of investment requirements that enforce technology transfer, such as B. Requirements for technology transfer to a joint venture partner; (b) prohibitions against encroaching upon the freedom of contract in technology licensing; (c) Protecting confidential business information collected by administrative authorities (e.g. during the certification of a good or service) from unauthorized disclosure.

If these obligations were effectively translated into laws and regulations, they would provide a much safer environment for companies to conduct their business, especially in the key sectors listed in the CAI. These include general manufacturing, automotive, finance and banking, hospitals and healthcare companies, research and development in biological resources, telecommunications, cloud and computer services, air and maritime transport, business and environmental services, and construction.

In practice, the implementation of these obligations would meet the requirements of the EU and the US – but only if they apply equally to EU and US companies. This advantage would benefit EU companies if China implemented these obligations only for the benefit of EU rights holders.

Warning example

As promising as China’s commitment to the CAI appears on paper, it is not the first time that China has made such commitments. China made a very similar commitment in the US-China trade deal of January 15, 2020 that ended the trade wars. China has stipulated: “[t]o Further strengthen the protection of trade secrets and better encourage different companies to innovate. . . ”

  1. China prohibits the unauthorized disclosure of undisclosed information, trade secrets or confidential business information by government personnel or third party experts or advisers in criminal, civil, administrative or regulatory proceedings conducted at either the central or sub-central government level that such information is communicated.
  2. China requires administrative and other authorities at all levels to:

(a) Limiting requests for information to no more than necessary for the lawful exercise of investigative or regulatory authorities;

(b) limit access to submitted information to only government personnel who are necessary to perform legitimate investigative or regulatory functions;

(c) ensuring the security and protection of the information transmitted;

(d) ensure that no third party experts or advisors who compete with the conveyer of the information or who have an actual or probable financial interest in the outcome of the investigation or regulatory process have access to this information;

(e) Establish a process for those who request an exemption from disclosure and a mechanism for challenging the disclosure to third parties; and

(f) Criminal, civil and administrative penalties, including fines, suspension or termination of employment, and, as part of the final action to amend relevant law, provide for imprisonment for the unauthorized disclosure of a trade secret or confidential business information intended to prevent such unauthorized disclosure.

In the past 12 months, China has passed several regulations that implement many of the commitments made in the January 2020 trade agreement. Some very critical intellectual property issues have been implemented in the new patent law of 2020 or in important interpretations of the Supreme People’s Court. However, there is no provision or any apparent attempt to meet the above specific obligations in Forced IP Handover. China’s failure to address this particular problem while taking very active care of everyone else suggests that China is unwilling to address trade secret issues.

This is not a good sign for the implementation of CAI’s forced transfer of intellectual property regulations. Apart from the fact that the agreement may never come into existence if it is not ratified by the EU Parliament, the concrete implementation of the obligations mentioned can take a long time and possibly never meet all the requirements of the EU and the USA.

Bring away

Addressing the forced technology transfer problem doesn’t just require changing a law or two. China needs to implement complex regulations that address the overlapping and confusing jurisdiction of different administrations jealous of their privileges, and redefine and further reform state-owned companies to ensure their competitiveness in a more open and fairly regulated market and the overall innovation system ( education, talent acquisition and government-subsidized research). As so often in the past, normative reform at the top will not necessarily be followed by consistent implementation.

For all of these reasons, the steps China is taking with the CAI should be viewed with caution and expectations must be realistic. A real change in terms of forced technology transfer and acquisition has not yet occurred. A more coordinated approach between the EU and the US on this matter, as proposed by the upcoming Biden administration, could speed up the process.