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Phase One Sino–U.S. trade agreement and the pharmaceutical industry

19 February 2020

On 16 January 2020, China and the United States signed the Economic and Trade Agreement between the Government of the People’s Republic of China and the Government of the United States of America (the Phase One Trade Agreement).

The Phase One Trade Agreement includes a chapter on intellectual property aimed at resolving a wide range of key issues relating to intellectual property protection and enforcement, including, among other things, patents, pharmaceutical-related intellectual property and trade secrets. This summary highlights the following major takeaways that appear most relevant to multinational pharmaceutical companies doing business in China. If properly performed and implemented through domestic legislation, the Phase One Trade Agreement would likely transform and modernise China’s patent system for the benefit of both the innovative pharmaceutical industry and the population it serves in China.

Patent Linkage System

The Phase One Trade Agreement requires a patent linkage system in China to provide innovators and generic companies with an effective mechanism for early resolution of patent disputes, which is to include notice to the innovator, adequate time and opportunity for the innovator to claim patent infringement and procedures for judicial or administrative proceedings and expeditious remedies. The current PRC Drug Registration Administrative Measures only requires the generic applicant to make a non-infringement statement, without providing any recourse for the innovator. In May 2017, the CFDA circulated the Policies Regarding the Promotion and Protection of Innovators’ Rights in Drugs and Medical Devices (Consultation Draft), which for the first time outlines a patent linkage system to strengthen patent protection for innovators. Thereafter, China continued to flesh out the proposed patent 2 linkage system by issuing several policy documents, including, among others, the Opinion on Deepening the Reform of Evaluation and Approval System to Encourage Innovation in Drugs and Medical Devices dated 8 October 2017 and the Opinions Regarding Strengthening the Protection of Intellectual Properties dated 24 November 2019. According to those proposals, patent litigation would be incentivised shortly after marketing approval for the innovator drug, and generic approval would depend on the outcome of such litigation. The Phase One Trade Agreement is the latest step in that same general direction towards a Hatch-Waxman style linkage system, which is hoped to promote both pharmaceutical innovation and generic access in China.

Patent term extension

Pursuant to the Phase One Trade Agreement, China must allow for a patent term adjustment for unreasonable delays in patent prosecution (analogous to PTA under 35 U.S.C. §154(b)), as well as for a patent term extension to compensate for erosion to the term of pharmaceutical patents caused by the drug approval process (analogous to PTE under 35 U.S.C. §156). As in the U.S., the proposed Chinese equivalent to PTA would not be capped. The proposed Chinese equivalent to PTE would not exceed five years, and the aggregate patent term would not be extended by the proposed Chinese equivalent to PTE beyond 14 years from the date of market approval in China. While a patent term extension does not exist in China’s current patent regime, the Phase One Trade Agreement echoes earlier legislative developments in China, such as the latest Draft Amendments to the PRC Patent Law (circulated in January 2019), which includes a term extension for pharmaceutical patents.

Supplemental data

The Phase One Trade Agreement pushes for greater post-filing admissibility of supplemental data for patentability purposes in patent prosecution and in invalidation proceedings. In current practices in China, supplemental data is admissible post-filing only under limited circumstances. For instance, supplemental data produced post-filing to demonstrate technical results in sufficiency of disclosure or inventiveness analysis have been routinely ruled inadmissible, unless the technical results shown in such data are already disclosed in the original specification of the patent applicant. As with many other matters addressed in the Phase One Trade Agreement, supplemental data has long been a thorny issue for foreign patentees in China. In 2017, the Patent Examination Guidelines were amended to allow postfiling supplemental data, but the actual administrative and judicial practices in this aspect are yet to catch up. The Phase One Trade Agreement may prove instrumental in finally swaying SIPO and the Chinese courts.

Trade secrets

The Phase One Trade Agreement sets forth a comprehensive framework for the protection of trade secrets and proposes material changes to elements of misappropriation and related major issues, such as the scope of tortfeasors, the tortious acts, the standard of proof the allocation and shifting of the burden of proof, and interim relief. To a large extent, most of those changes have already been codified in the amended PRC Anti-Unfair Competition Law (effective from 23 April 2019). Additionally, the Phase One Trade Agreement requires China to 3 abolish prima facie evidence of actual damages as a prerequisite for criminal investigation and, as an interim step, to substantially lower all thresholds for criminal enforcement (e.g., China undertakes to allow the victim’s remedial costs to count towards the “great loss” threshold for criminal enforcement).

API

China agrees to take effective and expeditious enforcement actions against counterfeit medicines and biologics, including active pharmaceutical ingredients (the APIs). Under current PRC law, APIs are not subject to export control unless listed on the Categories of Controlled Narcotics and Psychotropic Drugs for Non-medical Use (the Category), which the U.S. found inadequate. The export of fentanyl as an API to the U.S., for example, was a key subject in the negotiations for the Phase One Trade Agreement. At the request of the U.S., to further regulate fentanyl export, China has added six new types of Fentanyl to the Category in March 2017 and September 2018.

Execution of civil judgments

Civil judgments, and intellectual property judgments in particular, are difficult to enforce in China. Pursuant to the Phrase One Trade Agreement, China undertakes to ensure expeditious enforcement of judgments on intellectual property infringement. Additionally, in terms of civil procedure for intellectual property cases, China agrees to (i) permit experts to testify in civil judicial proceedings and (ii) cancel or simplify the formality requirements for authentication, such as legalisation by consular official.