Poor IP protection in China causes ‘irreparable harm’ to EU companies

14 Jan 2020 | News

A new report by the European Commission says forcing foreign businesses to share their technologies in exchange for market access is a “systemic problem” in China

António Campinos, president of the European Patent Office and Shen Changyu, commissioner of the China National Intellectual Property Administration, signing the minutes of the 2019 bilateral meeting of their offices. Photo: EPO

Poor protection and enforcement of intellectual property rights (IPR) in China continues to be a major concern for EU companies, according to a new report by the European commission citing the “scale and persistence” of unsolved problems in the Chinese system for IP protection and enforcement.

Despite visible progress and attempts to reform, China’s low level of protection for trade secrets and IP theft is still causing “irreparable harm to European businesses,” the report says.

The report warns that forced technology transfer – by which European companies are obliged to share their technologies to do business in China – is a “systemic problem”.

Chinese government and state-owned companies pressure foreign firms to transfer technology to China in exchange for market access, investment access or regulatory approvals.  China also forces foreign companies to license technology below market rates, as a pre-condition to access and to operate in certain markets.

“These practices discourage investment and put foreign operators – particularly in high-tech sectors – at risk of losing their competitive edge,” the report says.

The report also highlights how poor protection of intellectual property protection results in the EU importing vast quantities of counterfeit goods. That not only robs legitimate manufacturers of sales, it also poses safety concerns.

The starkest example is pharmaceuticals, where according to the European Intellectual Property Office (EUIPO), companies lost an average of 3.6 per cent of sales, equivalent to €9.6 billion per annum from 2012 – 2016, due to counterfeit drugs. EUIPO does not comment on the possible harm to patients this may have caused.

China is at the origin of a dominant share of counterfeit and pirated goods arriving in the EU, in terms of both value and volume. More than 80 per cent of the seizures of counterfeit and pirated goods by EU customs authorities originate from China and Hong Kong, according to the report.

In addition, the report points to lower standards in the granting of intellectual property rights in China as having an impact on European companies. The number of Chinese patent applications is growing exponentially as a result of quantity-based top down incentives set by the Chinese government. This is leading to serious concerns about the quality of granted patents.

Another problem highlighted is the frequent use of invalidation proceedings against patents of European companies that have sought legal protection against Chinese infringers. For example, EU companies hold a number of important standard essential patents for technologies that are essential for the functioning of certain standards, such as the 4G telecommunication standard. EU companies report that Chinese companies widely use these technologies without paying adequate royalties.

The commission identifies the countries with the most unfavourable IP protection systems and groups them in three categories, to show where deficiencies in IP protection could cause the greatest economic harm to the EU companies.

China is the only country in “priority 1”, which means it raises “the greatest level of concern” for EU companies.

While not exhaustive, the commission’s list includes a number of other countries it says need to upgrade their IP protection, including India, Indonesia, Russia, Turkey and Ukraine in “priority 2” and Argentina, Brazil, Ecuador, Malaysia, Nigeria, Saudi Arabia and Thailand in “priority 3”.

According to a joint study by EUIPO and the European Patent Office (EPO), IPR-intensive industries generated around 84 million or 38.9 per cent of all jobs in the EU between 2014 and 2016. Over the same period, IPR-intensive industries accounted for around 45 per cent of the EU GDP, worth about €6.6 trillion annually.

EU trade commissioner Phil Hogan said the EU should become “even more efficient in protecting EU firms and workers against intellectual property infringements.”

While it has opened its doors to scientific cooperation with several third countries, the EU is set to exclude China from full membership in its upcoming research and innovation programme, Horizon Europe because of the country’s failure to protect intellectual property rights. Partner countries in Horizon Europe will also be required to uphold basic democratic values and promote open and transparent institutions. 

The report is published as China makes a number of moves to expand research collaboration with the EU. A recent announcement by the Shanghai-based Fudan University saying it intends to open a campus in Hungary is the latest signal of China’s growing interest in science cooperation with central and eastern Europe. This has prompted critics of unchecked international cooperation to say the EU should not open up its research and innovation projects without reciprocity and better protection of IP.

Slow reforms

The commission acknowledges progress made in the past years by countries like China, but says, “concerns persist and a number of areas for improvement and action remain to be addressed.”

Deficiencies in IP enforcement are usually the caused by the lack of political will, but also by lack of resources. Some countries do not have the capacity to bring together the technical infrastructure and judicial expertise needed, while sanctions and penalties for IP infringements are too low to deter abuse.

Between 2017 and 2020, the commission and EUIPO have agreed to spend €7 million in China and southeast Asia respectively, and another €6 million in Latin America, on technical assistance programmes for IPR enforcement.

China recently reformed the office in charge IPR and has set up three specialised IP courts in Beijing, Shanghai and Guangzhou. It has also established “internet courts” in Hangzhou, Beijing and Shanghai to deal with IPR infringements. In early 2019, China created a specialised IP court as within its Supreme Court to focus mainly on patent cases.

The commission says China’s reforms are promising and could increase coherence of court decisions on IPR cases.

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