President Trump has signed Phase I of a much anticipated multi-part trade agreement between the United States and China with provisions that will aid the branded pharmaceutical industry. One of the main goals of the agreement is to bring Chinese laws on the enforcement of intellectual property matters closer to those seen in the US legal system. On the patent side, the deal requires China to develop proceedings similar to Hatch-Waxman patent litigation, patent term extensions that account for often lengthy patent examination and drug approval periods, and use of supplemental data to satisfy patentability requirements. The trade agreement also expands trade secret protections and provides additional protections against counterfeit goods.

I.     Patents

      a.  Patent Disputes

The trade agreement requires China to create an “effective mechanism for early resolution of patent disputes.” But, it remains up to China to develop and implement the system.

The first glimpse of the system is not far off, as China must present an “action” plan within 60 days. The text of the agreement indicates that any such plan should include the availability of injunctions to prevent the entry of generic drugs that would infringe patents covering branded drugs.  It remains to be seen whether these proceedings will occur under administrative review or in the Chinese courts.

The timeline for China’s implementation of a plan is less certain because the trade agreement lacks additional implementation deadlines. Many are optimistic that China will not drag its feet, however, because a system that fairly balances intellectual property owner’s rights and affordable drug prices is also in China’s best interest. A workable solution would incentivize pharmaceutical investment in China and encourage the introduction of new treatments developed in the US to the Chinese market.

      b.  Patent Term

Chinese implementation of a patent term extension framework is likely to occur much sooner than a patent dispute resolution framework—due in large part to China’s one-party system. 

The agreement generally contemplates patent term extensions for “unreasonable delays,” defined, at minimum, as “a delay in the issuance of the patent of more than four years from the date of filing of the application in China, or three years after a request for examination of the application, whichever is later.” Further, the agreement gives special consideration to pharmaceutical patents where delays in the marketing approval process impact the effective term. These adjustments are limited to no more than five years, with the resulting patent term limited to 14 years from the date of marketing approval in China.

      c.  Supplemental Data

The deal’s provisions on the use of supplemental data are brief and straightforward. China will permit pharmaceutical patent applicants to rely on supplemental data developed after the filing date to satisfy relevant requirements for patentability—including the sufficiency of disclosure and inventive step—during patent examination proceedings, patent review proceedings, and judicial proceedings.

II.     Trade Secrets

The new trade secret protections China accepted in the agreement address the scope of liability, the evidentiary burdens on defendants, the availability of preliminary injunctions, the standards for initiating criminal enforcement, and the disclosure of trade secret information companies must submit to the Chinese government.

      a.  Scope of Liability

The scope of civil liability has been expanded so that trade secret owners can bring suit against any natural or legal persons. Previously, liability extended only to entities directly involved in the manufacture or sale of goods and services.

      b.  Evidentiary Burdens and Injunctive Relief

When a trade secret owner can show a reasonable indication of theft, the burden of proof will shift to the defendant to produce evidence that the theft did not occur. A reasonable indication of theft includes instances where the accused party had access to the trade secret, and the information the accused party used is materially the same, and evidence that the accused party has used or disclosed the trade secret. 

Trade secret owners will also soon be able to obtain preliminary injunctions to prevent the use or disclosure of their trade secrets. This remedy is reserved for “urgent situations” and helps to prevent the loss of significant value to trade secrets, which often cannot be recouped after the trade secret has been used or disclosed by another.

      c.  Criminal Enforcement

Previously, a trade secret owner was required to establish actual losses as a prerequisite to the initiation of a criminal investigation for trade secret misappropriation. The agreement clarifies that the current “great loss” standard can be shown via evidence of remedial costs like—mitigating damage to business operations and re-securing computer systems. In the future, China will permanently eliminate the actual loss requirement before initiating criminal investigations.

The agreement also broadened the scope of what criminal investigations will consider as falling under the umbrella of a trade secret theft claim, specifically addressing that criminal procedures and penalties will contemplate misappropriation through theft, fraud, physical or electronic intrusion for an unlawful purpose, and the unauthorized use of a computer system used to carry out acts of misappropriation.

      d.  Government Disclosure

Companies had routinely complained that they were required to hand over trade secret information to Chinese authorities in order to do business there, only to have government officials provide Chinese businesses with the information, who would unfairly compete with the new market entrants. The preliminary trade agreement prohibits the unauthorized disclosure of trade secrets and confidential business information, and places limits on the individuals within the government who are authorized to access any such information. 

Any requests within the Chinese government for this information must be related to the exercise of investigative or regulatory authority and limited to persons necessary to carry out these activities. There are also restrictions in place to protect the information from those who may have conflicts of interest.  Violations will result in yet-to-be finalized criminal, civil, and administrative penalties—including monetary fines, suspension or termination of employment, and imprisonment.

III.     Counterfeit Medicines

China has agreed to “effective and expeditious” enforcement actions related to counterfeit pharmaceuticals and to publish the information on the measurable results of its enforcement actions each quarter. The enforcement data will include seizures, revocation of licenses, and fines. China will also share with the United States the registration information for pharmaceutical raw material sites Chinese authorities have inspected. The agreement includes a separate provision for “significantly increasing the number of enforcement actions” for counterfeit goods with health and safety risks.

IV.     Conclusion

While many of the details regarding China’s implementation of these measures is yet to be determined, Phase I of the trade agreement represents a recognition by China that it must have sufficient enforcement of intellectual property rights to become a world player in the development of pharmaceutical products. Otherwise, companies will not invest in China because they do not feel the necessary mechanisms are in place to protect their intellectual property. As a clearer picture emerges, companies should investigate whether their internal calculus on conducting business in China should change, and prepare themselves accordingly.

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