In this episode…
As the United States transitions between administrations and trade tensions between the U.S. and Asia are high, many are looking for guidance in this rapidly changing landscape. Our experts, Thomas Cheng and Steve Adkins, discussed competition, antitrust, and patent law, with an emphasis on the current state of trade litigation between the United States and Asia.
Note: Transcript has been lightly edited for clarity.
Introduction: Welcome to the third Discussion at the Round Table, International Competition & Asia/U.S. Trade Law: A Changing Landscape. Our guests will share their knowledge and expertise on competition, patent and trade litigation in Asia and the United States.
Dan Rubin: Good morning to our guests in the United States and good evening to those of you joining us from Asia, including our esteemed panelist, Thomas Cheng. We will start with you focusing on your part of the world. What are the latest trends in antitrust enforcement in both Hong Kong and China?
Thomas Cheng: Well, thank you, Dan. I will start with China, the largest jurisdiction and the jurisdiction of greater interest to those of you here. 2020 was a very busy year in terms of antitrust enforcement. There used to be three enforcement authorities in the mainland, the NDRC, SAIC, and the Ministry of Commerce. That was merged in 2018 into the State Administration of Market Regulations (SAMR). 2020 was the second full year of enforcement by SAMR. It has in terms of actual enforcement activities continued to trend from previous years. The bulk of the work was in merger review and I think it is fair to say that the Chinese authority, previously the Ministry of Commerce and now SAMR, likes to take its time approving reviews. A review takes a long time even though the statute provides for a strict timeframe, [because] the Chinese authority likes to ask companies to withdraw and refile and hence artificially extends the review timeframe. Another trend is the Chinese authority rarely blocks a merger outright. They have only done two and they did not block any mergers last year. In terms of the merger, for the first time the Chinese authority recognizes a structure called the Variable Interest Entity structure (VIE), which is what Chinese companies use to evade the domestic regulation that only domestic firms can operate internet businesses and e-commerce.
The way the Variable Interest Entity structure works is the internet businesses that want to get listed abroad or incorporate abroad must have a domestic business. That business, in theory, owns the Internet operation license, but it enters into a management contract with an overseas entity. The management contract ties the overseas entity with the domestic structure. It was very controversial. No one knew whether if the Variable Interest Entity structures were legal. The Chinese government never said a word about it until this past year when it finally imposed sanctions on some mergers involving this structure and implicitly acknowledged the existence of this structure. Previously the Chinese authority had been very careful about not acknowledging the existence of this VIE structure. That was probably the big development for those of you who are familiar with Chinese E-Commerce business and merger review guidelines. For those of you familiar with antitrust enforcement, you may know that antitrust authorities around the world like to issue guidelines to the Chinese.
SAMR finally issued the intellectual property competition guidelines. The Chinese government has been working on this set of guidelines for close to a decade. Every year there were false alarms when there is a suggestion that the guidelines are finally coming out. But they never did. They finally came out and I do not think there were a lot of surprises there. SAMR put forward a draft amendment to the anti-monopoly law. The most noticeable feature is that fines and sanctions were raised quite significantly, and for the first time the anti-money laundering (AML) mentions criminal liability. Although what exactly it is remains to be seen, because the reference to criminal liability is quite cryptic. The anti-monopoly law itself does not impose criminal liability, it [notes that] if the conduct at issue otherwise violates the criminal code, there will be criminal consequences, but the criminal code currently has no provisions that cover conduct that is covered by antitrust law. In terms of Hong Kong, I will just mention briefly, [that] I think enforcement trends remain focused on the cartel, although last year we finally had an abusive dominance monopolization case, which was quite groundbreaking. I will stop here and then, if there are further questions, I will elaborate.
Dan Rubin: What is the extent of the focus on big tech in antitrust enforcement in Hong Kong and China?
Thomas Cheng: My answer on Hong Kong is very simple. There is not any focus and I think rightly so because big tech cases are so complex, and it is resource intensive. It is quite unrealistic to expect an authority that has only been in existence for eight years to bring a case against the likes of Google, Apple, or Facebook. But in China, in the last year, we saw a very distinct shift in focus to big tech, and in particular Alibaba. The good news for GAFA is that because they are almost completely blocked out of China, they have not been implicated at all in the antitrust enforcement in the mainland. I am sure most of you are familiar with Alibaba and it probably was a tale of hubris. I think some of you probably have heard the story. Jack Ma gave a speech in October criticizing the Chinese authorities for being old-fashioned and not keeping up with the times. I presume he has criticized Chinese officials before, but for some reason this time it grated on the Chinese officials. Unfortunately, Mr. Ma forgot that Ant Financial, which of course runs Alipay, one of the two largest electronic payment systems in the world, was about to go public. The Chinese authority quite shockingly, blocked the financial IPO and after that launched several investigations into Alibaba. They [Alibaba] made contrite noises saying we will cooperate fully with the authority and we will reform our business to make sure that we do not violate the antitrust laws. The Chinese e-commerce websites, the two main ones, Alibaba and jd.com, both have a habit of requiring the merchants to choose one out of the two main websites, which means if you want to sell on Alibaba, you must sell exclusively on Alibaba. It is an exclusive dealings situation and if the entity involved has sufficient market power, would raise antitrust concerns. The Chinese authorities are finally looking into that and so the short answer is there has been a distinct shift to focus on the big tech, but we are talking about Chinese companies and not foreign companies, because [GAFA does not operate in China.
Dan Rubin: Switching to foreign companies, what are the enforcement risks for foreign companies in Hong Kong and China?
Thomas Cheng: In both jurisdictions, foreign companies have featured in enforcement action. There are two sides of the story concerning merger enforcement and conduct enforcement with mergers. The Chinese authority has only imposed remedies in mergers involving foreign entities. In the merger review, the focus has been on foreign entities. The Chinese authority SAMR, previously the Ministry of Commerce, is more likely to impose remedies in mergers involving foreign entities in contract enforcement. For example, cartel or resale price maintenance (RPM) cases. There have been some. Enforcement actions against domestic Chinese companies account for the vast majority, but the problem for foreign companies is because they have much larger revenues, the cases involving the largest fines have almost always featured foreign companies. The domestic companies that have been subject to sanctions were generally small ones, and so the fines were miniscule. I do not think you would say that the Chinese SAMR targets foreign entities. I do not think it is true in contract enforcement. Occasionally, there are cases involving foreign entities and the fines tend to be large, but I think that is a consequence of the foreign companies that are being sanctioned tend to be much larger.
Dan Rubin: Interesting. Shifting focus to the trade war between China and the United States, what are the risks that antitrust enforcement will be used as a weapon in that trade war?
Thomas Cheng: That is the elephant in the room when one talks about Chinese anti-monopoly enforcement. I do not think one can say that the Chinese authority has targeted foreign companies in conduct enforcement at all. I think the vast majority of enforcement actions involving anti-competitive conduct have been focused on domestic companies. In mergers we have seen two instances where the Chinese authority can be suspicious that political considerations were involved. In the first one, Qualcomm and NXP, it was clear that politics ultimately drove the outcome. Qualcomm tried to acquire NXP in 2018, and the notification and review dragged on and on and on. Qualcomm withdrew its application and refiled at least twice. The merger was uncontroversial in other jurisdictions, but China’s Ministry of Commerce (MOFCOM) just would not act and approve or reject the merger. This was at a time when the Trump administration was targeting Chinese tech companies, and eventually, Qualcomm just threw in the towel and said, “Forget it. Let’s just move on.” In that instance, a lot of people agreed that it was politics that drove MOFCOM’s decision.
More recently Cisco’s acquisition of Acacia Communications eventually got the approval with remedies, but the review took 450 days, which is a lot longer than what is statutorily allowed. Again, the merger did not raise any concerns in other jurisdictions, but the Chinese authority dragged the review out for a long time. They have done it before. This is not the only time, but, given the political climate, one may suspect politics was one of the considerations, but nothing has been proven. I think that could be a valid suspicion, that the massive delay was partly caused by political considerations. In short, I think entities and American companies contemplating mergers, especially in the tech space, probably have more to worry about than the other companies. Both mergers involved tech and if the past helps us predict the future, one can say American tech companies contemplating mergers would have more to worry about.
Dan Rubin: Thank you so much, Thomas. At this point, I am going to open it up for questions from our audience.
Audience Member (Question One): Thank you for putting this together. I am in the United States and we are dealing with a lot of litigation over information sharing and trade association membership, so I wanted to see what the enforcement trends are in China related to information exchanges, trade association membership, and those types of issues.
Thomas Cheng: If I remember correctly, I do not think there has been a single case involving that, or, at least, a single case in which information exchange is the main theory of harm. Trade associations are complicated in the mainland because a lot of them descended from former ministries that managed a particular industry during the central planning days. Trade associations in the mainland often have semi-governmental status. What the AML does have, is a separate penalty provision for trade associations that are involved in organized anticompetitive conduct. There have been some small cases involving local trade associations organizing cartels, but I do not recall any of them being on a national scale or of national importance. In those cases, involving trade associations organizing local cartels, they were fairly blatant. I do not think there is any dispute what they did was wrong. I would say that with information exchange, there has not been much. There have been some scattered local trade associations organizing local cartels.
Audience Member: Thank you, that was helpful.
Dan Rubin: Thank you for the question. We are going to switch gears over to you in the United States, Steve Adkins. Steve the focus of your practice is litigation under International Trade Commission (ITC) Section 337. I know the ITC handles various types of trade issues, but can you briefly explain the scope for our listeners of what Section 337 covers?
Steve Atkins: Sure, I am happy to. Thanks for having me today Dan. Section 337 is a way to deal with unfair competition. It is not politically dependent, at least not at the front end. Perhaps it is at the back end. If you have a competitor who is importing a product to the United States and that product may be infringing your intellectual property, typically these are about 97% patent cases, you can go to the Commission and they will do a bench trial before a judge. Extensive discovery is very much like being in district court, but it is a lot more work and a lot less time. You are in a trial in a few months, whereas in district court you might be in trial in two to three years, and lately, with COVID, it is even longer to trial. The Commission has this draconian power to block imports and they direct United States Customs, if they find infringement, to seize products as they come into the border. The unique thing with the ITC concerning 337 is not trade sanctions. I have had people say to me in the last few years with the trade wars with China and others, “You must be really busy.” None of that affects this. This is really competitor to competitor.
Dan Rubin: Does the plaintiff or complainant in a case before the ITC, does it have to be an American company?
Steve Atkins: No, it just has to have an American presence, some R & D perhaps, or a facility, for example. At one point you had Apple suing Samsung. They were in a courtroom in the ITC, and you had Samsung suing Apple back. Samsung, a Korean company, is suing on its United States patents. You just must have U.S. IP (intellectual property). You do not have to be an American company to sue.
Dan Rubin: Can you speak a little bit more about the Customs orders that you mentioned?
Steve Atkins: Sure, there are two types of orders. There is a limited order which says to Customs these companies were named in the complaint, seize their products when they come into the country. And then there is the more fun, if you are on one side, perhaps less fun if you are not, [order which] is a general exclusion order where you can sue people and not tell them. I once told a guy who became a friend after he threw me out of his office in Hong Kong, (in Professor Cheng’s neck of the woods), I let him know, “Your company has been sued.” He built up his company and spent a lot of money because all his competitors had been named in an ITC complaint. All those competitor’s customers had been coming to him to buy the product, so he had spent about $2,000,000 building up his business, not realizing that the company suing (plaintiff/complainant) was seeking a general exclusion order. He said to me, “There is no way you can sue someone and not tell them. That would violate the American dream.” It may well, but that is the case if you go to the Commission and make a certain showing. If there are so many infringers, I cannot identify them all. You get an order, go to Customs, and say to Customs, even though this company was not named, or this company may not have been in existence three years ago when I got my order, seize their products. It is a remarkable remedy you can get through Customs.
Dan Rubin: So, these defendants can be sued without even knowing they have been sued.
Steve Atkins: Well, technically that is right, but the law [believes] that everyone, after they read their newspaper and drink their tea or coffee, reads the Federal Register… In the Federal Register, there is a plain notice that these people have been sued. In reality, nobody is that bored. Very few people read the Federal Register. They are usually getting paid to read it, but that is the due process. That is the way the law gets around the due process issue.
Dan Rubin: You said with the general exclusion order even companies that are not named and do not participate in ITC cases can have their product seized by Customs.
Steve Atkins: That is right. Of course, you can participate and intervene. You file a paper with the Commission and say my products are going to be seized. I want to intervene.
Dan Rubin: Okay, got you. What about the inventory of imported infringed products? Can the ITC deal with those situations?
Steve Atkins: Yes, those are dealt with by something called a cease-and-desist order. Of course, those products necessarily are beyond Customs. They have cleared Customs. They are in warehouses in the United States. Cease-and-desist orders are unlike exclusion orders in that Customs administers where there is no monetary penalty. With cease-and-desist orders there is quite a penalty. I remember several years ago we were called by a company that had just lost in the ITC and they wanted new counsel. I went over and I said to this person who was the boss’s assistant, “You have this limited exclusion order, which is going to ban your products, but you also have a cease-and-desist order, which means you have got all these products in your warehouses. I do not understand why you shipped all these products over to the U.S. It seems that you are stockpiling.” She said, “That is exactly what we did because we understood these orders only affected customs. We rented warehouses, we leased space and we shipped this product in.” I said, “Well, you want to ship that back out or do whatever you can to get it out of the United States and stop advertising, etc.” She said, “You, foreign devil lawyers are not very good businesspeople. Do you know what we spent to ship this product over there and rent these warehouses? We are going to keep selling.” I said, “Then, I will not be able to help you. It is not something I would be engaged in. There are several reasons you probably do not want to do that, but I will give you one that I think will get your attention. For each day that you have the product in the United States and each day you have it advertised on your website [or whatever] the penalty is the greater of two times the value of the goods, or $100,000 a day.” She went down the hall and came back and said, “The boss wants to know 100,000 Taiwan dollars or U.S. dollars and I explained to her that it was U.S. dollars. So, they began an exportation program quickly to get the product out. Those cease-and-desist orders are powerful remedies and there are lots of strategic reasons you want to get one of those if you are suing at the ITC.
Dan Rubin: You answered my question as to whether there was a monetary penalty. How long do the orders last?
Steve Atkins: For the life of the IP. So, with a patent it is 20 years or however many years are left on the patent when you get your order.
Dan Rubin: Can you describe for us some of the difference or differences between bringing a case before the ITC versus bringing it in federal district court?
Steve Atkins: Sure, as I mentioned earlier, there is more to do. One of the more to do’s is you must show you have a domestic industry. When Samsung sues a company in the United States, as they often do at the ITC, they must show, for example, I have a billion-dollar semiconductor fabrication facility in Texas. I have “x” employees, I pay taxes, I pay rent, etc. They have a domestic industry. That is one thing you do not have to prove in district court. In district court I must have a patent that someone is infringing, and I want to sue them. With the ITC you have about 10 days to respond to discovery. In district court you have 30 days. There are almost no limits on discovery, whereas you would have a limit on the number of questions you can ask the other side in writing called interrogatories. I think in district court, it is 21 or so. At the ITC, the minimum most register put 175 as the limit. The Commission rules don’t put any limit. One judge now does a limit of about 31 I think, but most of the judges limit them only to 175. Discovery is much more wide-reaching and unlimited than in a district court, and you have a lot less time to respond to it.
In a district court case, if you are sued on a patent, you often want to go to the Patent Trial and Appeal Board (PTAB) and file a paper saying here is prior art, someone invented this before, [and] the Patent Office should never have granted this patent, so please consider this as well. Federal district judges are doing gun and drug and all sorts of cases, and, frankly, they find patents and many patent lawyers very resistible. When someone comes in and says, “Why don’t you stay this guy? Stop this and let it go to the patent office?” The district court is often happy to do that. They do not have to deal with the patents. They do not have to deal with these strange patent lawyers. They can let the case go off to the PTAB. The ITC does not grant those stays, so you are almost certainly not going to get a stay at the ITC, and you are going to have an exclusion order from the ITC before you can win at the PTAB. You can rarely outrun the ITC.
Dan Rubin: With all of that, I am assuming there has been an uptick in ITC cases versus seeing them before the federal district courts in the patent [realm].
Steve Atkins: I think there has been, Dan, because of the IPR’s at the PTAB proceedings I was talking about. Also, because of COVID, many people are not doing in-person jury trials. Judge Albright is doing one now involving Intel in Texas, but generally, people are still not doing in-person trials. They are doing video trials. These judge’s criminal dockets have statutory deadlines that the civil court docket does not, and this would be civil. You get punted to the back. We had a trade secrets case, for example, that was supposed to go to trial last year. The earliest we are going to get to trial is after Thanksgiving this year. Many people want quicker relief, so they go to the ITC and sue to get to trial in a few months instead of a few years.
Dan Rubin: You mentioned, Steve, that Intel case. I saw that it was the first in-person patent jury trial since November with all the huge backlogs. To make a shameless plug for Round Table Group, we did refer experts that were retained by Intel in that case.
Steve Atkins: I hope you gave them a mask or two, Dan.
Dan Rubin: Right. What is the best way for a respondent company to deal with an ITC case? Is there a silver bullet in terms of getting out of those cases before trial?
Steve Atkins: I would like to say it is the lawyer they pick, but that is not quite so. Getting a great expert who can talk to normal people and teach the technology and why your product or your new product does not meet the patent. Likely the real silver bullet is this new product I just mentioned. You know about the patent now. You may not have known about it before, but you know about it now. You know how the patentee is likely reading its claims to stretch and cover your patent. You come up with a redesign and want to get that redesign into the ITC proceeding before the judge to get it cleared. Another oddity about the ITC is until the orders issued by the Commission (before the first trial before the administrative law judge), the patentee, the IP Holder, have to map its IP rights onto the accused product. Once the Commissioners review them and do their work, there is an order out from the Commission, the patentee, the IP Holder, no longer has to prove the other side is infringing. Anyone who wants to import then has the burden of proving that they do not infringe. The silver bullet, in my opinion, is a redesign, and a redesign you get done very quickly. Now, we have done 80 or 90 of these cases. My team has probably done over 100. Almost every respondent when I say we needed a different product or we need to consider a different product says, “No, we do not. We do not infringe.” The other side would not be spending the money they are spending if they did not think there was a good chance you do infringe. The trick is to focus on a redesign while you are focusing on all the other things simultaneously. Get a redesign before the ITC judge and get that redesign cleared. That is the silver bullet in my opinion.
Dan Rubin: You were selling yourself short. The advice you just gave shows you that devil attorneys like yourself are indispensable.
Steve Atkins: Foreign devil, not just devil.
Dan Rubin: Thank you, Steve. At this point, I am going to open it up to questions for Steve.
Audience Member (Question 2): Thank you so much for doing this. It has been quite informative. As you were talking about the ITC, I remember the recent case of the Fiat Chrysler Group where the trade dress of Mahindra’s ROXOR. It had to be changed and the ITC finally decided on that and gave an order that Fiat did change the car design and now they are able to sell the car over in North America. So, my question is specifically, after changing the trade dress, does the order still have a penal provision or a monetary penalty, which is being put on the patentee infringer or is it limited to just changing the trade dress, and that is enough?
Steve Atkins: That is enough if you change it sufficiently. Again, there is no monetary penalty for violating the customs orders. That monetary penalty is only for violating what I call the inventory or cease- and-desist orders. But if you change it sufficiently, there is no monetary penalty. One of the benefits of getting a cease-and -desist order, however, is if you do not change it sufficiently and the Commission finds that you are still infringing, and you have been bringing this product in, then you face those substantial penalties. A good lawyer and a smart plaintiff will always try to get a cease-and-desist order if they can.
Audience Member: Okay, and is this limited to the jurisdiction? If you bring in a product to the United States then this will come into the picture, or they can also work for a different jurisdiction? For example, if you are producing a product in Japan and import it to the United States. Then you stop importing it to the United States after a cease-and-desist order is issued, can you still keep on making the product in Japan?
Steve Atkins: Yes, you can. We would like to think we have worldwide jurisdiction, but we do not. It is only for the United States. Now, some people have made a product such as train wheels in China and all of the infringing activity took place in China. In this one instance, those products were brought here and there was no infringement here because it is a patent on trade secrets and how these were made. The products were imported to the United States and they were blocked in the United States, but not North America, [not] Canada or Mexico, just the United States.
Audience Member: Thank you so much.
Dan Rubin: Thank you. We have another question in the chat for you Steve. How involved does the ITC judge get into discovery disputes?
Steve Atkins: It depends on the judge. A lot of these judges do not like babysitting unruly lawyers who are disputing every dot and title. Some of the judges will make you go through certain discovery conferences to try to put a buffer between them and you. Some judges, before you can ever file a motion, will say you have to get on a phone call with me, sort of like the Southern New York Courts and the federal courts in New York do. They try to stay out of those if they can. They are not the most enjoyable thing in the world, but if they have to get involved, they will get involved very quickly. If you need something and you do not get it quickly enough, the judge will come after you. These proceedings move quickly so you have to get your discovery as soon as possible.
Dan Rubin: Thank you, Steve. Here’s another question for Steve. Could you tell us a bit about how to extend an ITC case to inducing infringement or contributory infringement claims?
Steve Atkins: ITC orders can be based on both contributory and inducement, so it would not require an extension. There is some law in the Suprema case that came out recently and some Comcast decisions where the infringing activities take place after the product is imported and the argument was there is no infringement until after it is imported. The Commission found that their orders could bar that, even though the infringement was not happening at the exact moment of importation. If it is shown that the products come in only to be used in an infringing way, for example, the Commission orders would certainly block that.
Dan Rubin: Thanks Steve. We have a question for Thomas. Do you see a big change in trade relations between the United States and China with the new administration?
Thomas Cheng: I think the Biden administration is probably going to be less erratic than the Trump administration in terms of what it does. I read recently that whatever China pledged to buy from America under the deal reached with the Trump administration, apparently China has fallen massively behind on those targets. I think that there is going to be less erratic action from the Biden administration, but I think the general tone of the trade relationship is not going to improve. There is enough consensus in Washington that China is a strategic rival, and I think the focus is going to continue to be on the tech industry to try to make sure that the U.S. does not fall behind China in tech. Especially things like semiconductors and 5G technology, so I do not see room for dramatic improvements, although we probably do not see unexpected things from the Biden administration like we did with the last one.
Dan Rubin: Interesting. Thank you, Thomas. Well, with that I do not see any other questions. This concludes our Discussion at the Round Table. I want to say a special thank you to Thomas and Steve for sharing your knowledge and expertise with us. Thank you to all of our attendees for taking time out of your busy schedules in your morning or evening, depending on where you are in the world. Of course, if you have a matter you would like to discuss with either Thomas or Steve, please contact me and we will get you in touch. Thank you again, everyone.
After a quarter century helping litigators find the right expert witnesses, Round Table Group’s network contains some of the world’s greatest experts. On the Discussions at the Round Table podcast, we talk to some of them about what’s new in their field of study and their experience as expert witnesses.
Thomas Cheng, Associate Professor at the Faculty of Law of the University of Hong Kong, is currently a member of the Hong Kong Business Facilitation Advisory Committee and was an inaugural member of the Hong Kong Competition Commission. He assisted the Hong Kong government in drafting the city’s first comprehensive antitrust law. In addition, Thomas holds a number of international advisory positions, including as a member of the Advisory Board of the American Antitrust Institute, and as a member of the Executive Board for the Academic Society for Competition Law. His research has focused on competition law and policy, particularly as they relate to developing countries. Professor Cheng previously practiced law at Simpson, Thatcher & Bartlett in New York prior to transitioning into academia.
Steve Adkins, Partner at McGuireWoods in Washington, D.C., focuses his practice on Intellectual Property and Trade Litigation involving Section 337 of the U.S. International Trade Commission. He is currently a member of the U.S. International Trade Commission Committee, Intellectual Property Owners Association. Steve has worked on behalf of clients based in the United States, Asia, Europe, and South America in a variety of industries, including automotive, computer software, telecommunications, chemicals, mechanical patents, and semiconductors. He has represented companies in roughly 75 ITC investigations and U.S. Customs and Border proceedings.