There have been many recent important developments in the trade and intellectual property areas, but before getting to the developments, set forth below is the second article in our series on the US Politics of China Trade—the Importance of Coalitions.
If you have any questions about the politics article or the developments listed below, please feel free to contact me.
THE POLITICS OF CHINA TRADE—IMPORTANCE OF COALITIONS
As previously mentioned, the serious political situation regarding China Trade in Washington DC warrants greater attention so I have asked former Congressmen Don Bonker to author a series of articles on the political situation in Washington DC and what can be done to change the discussion. Our next article is on the importance of Coalitions of Chinese companies with interested US companies.
The Chinese emperor had a famous saying, “Use a foreigner to deal with a foreigner” When Americans go to China to do business, they often need a Chinese face, an interface, who can help bridge the gap between Chinese and US language and culture.
Many foreigners believe they do not need the US counterpart because they see the United States as an easy country to understand and do business in, because many foreigners speak English. But this is a mistake because there are vast differences in the US, especially in its political system.
Under the US Constitution, there are three co-equal branches—the Executive Branch/President and the Administration, Legislative Branch/the Congress and the Judicial Branch/the Courts. In contrast to China, therefore, political power is more diffuse and not concentrated in any one group.
In China, Governors of Provinces are appointed by the Central Government. Political power in the United States, however, is even more diffuse because of Federalism. Under the US Constitution, power not specifically given to the Federal Government, is reserved to the States. Because of the multiple power bases in the United States, Coalitions with US companies become essential to making the political argument.
A key reason for the US China Trade problems, I believe, is the failure of Chinese companies and even the Chinese government to understand the importance of working with the US importers and end user companies in Coalitions that have common interest in trade and investment disputes. For many Chinese companies the “go it alone” approach is simply not working. It does not take into account the political realities that exist in many trade cases.
Simply responding to US Antidumping, Countervailing Duty and other Trade cases is often not sufficient to obtain a favorable result. Trade cases are not an application process. This is litigation, fighting with the US industry, and the objective of the US producers in a trade case is to throw the Chinese companies out of the US market.
The same can be said on the investment side of the case. When Chinese companies attempt to acquire sensitive companies in the US, they are competing, fighting, with US companies for that business, and the US companies will use the investment laws under CFIUS and the political process in the US to change the nature of the debate.
In Trade Cases, although the major target of US trade disputes may appear to be Chinese companies, in reality it is the importer, the first US company that purchases the products, that is legally liable for antidumping and countervailing duties. In fact, they can be retroactively liable if the rates go higher in antidumping and countervailing duty review investigations.
This punitive aspect of antidumping and countervailing cases, which are supposed to be remedial statutes, is unfair and needs to be addressed. Many US importers do not realize that when they import a product from China under an antidumping and/or countervailing duty order, they do not post the antidumping or countervailing duty, but the cash deposit. If duties go up in subsequent review investigations, the US importers are retroactively liable for the difference plus interest.
In one case that I am involved in, Ironing Tables from China, the antidumping rates went from 0 to 157% because Commerce determined in a review investigation that the Chinese company had played with its documents and committed fraud. This decision exposed the US importers to $25 to $50 million in retroactive liability. In the Wooden Bedroom Furniture, US importers have been exposed to an estimated $1 billion in retroactive liability. I have met with a good old boy company in High Point, North Carolina, that had its entire $60 million furniture importing company go up in flames because it imported from China under an antidumping order.
When Chinese companies go it alone, because of potential retroactive liability, US importers vote with their feet and go to third countries. Thus the US importers are now importing ironing tables from India, and Vietnam has become the largest exporter of wooden bedroom furniture.
When US importers and Chinese companies work together in antidumping and countervailing duty cases, however, the US importer keeps importing because he knows what is going on behind the scenes at the Chinese company. In my Sebacic Acid case, for example, I had a coalition of Chinese exporters, a US importer and US distributor go on for more than 10 years importing sebacic acid into the United States under an antidumping order because the importer felt it was safe to import.
The point here is that Chinese companies and even the Chinese government need to work with US companies in Coalitions to win trade argument. Part of these cases is the political argument.
THE POLITICS OF CHINA TRADE—IMPORTANCE OF COALITIONS
By Hon. Don Bonker
The U. S. – China economic relationship, particularly its growing dependence on investment and trade, is being tested as never before. Both countries have legal mechanisms for dealing with unfair trade practices, to be sure, but there is no guarantee they will be fairly applied.
On the American side, our laws were crafted to protect American companies from foreign competitors who benefited from government subsidies, engaged in dumping activity or otherwise were doing injury to their U. S. counterparts. No one can take issue with the purpose of such laws.
But they can question the application of the government’s trade laws (whether they are fairly applied) and if the public interest is truly being served.
A Commerce Department and an International Trade Commission (ITC) ruling in an antidumping and countervailing duty case has the appearance of targeting a foreign entity, but its punitive effects are felt by the importing U. S. companies who are liable for the higher tariffs, which can even be applied retroactively plus interest. The costs, often totally unexpected, can run into the tens of millions, even causing bankruptcies of US companies.
In such cases, the public interest is not being properly served. Congress needs to address this problem to insure more fairness and balance in the application of U. S. trade laws. For Chinese companies, they will loose large market shares given that U. S. importers may opt to purchase similar products from Vietnam, India, Brazil and other developing countries.
Meanwhile, Chinese companies and American importers must cooperate to offset the “imbalance” that exists today. To offset the imbalance, Chinese companies and US importers/end users have to collaborate to counter their American competitors’ political activity that is affecting their businesses and harming our trade relationship. For Chinese companies it is difficult to engage in lobbying activity because US laws, such as Foreign Agents Registration Act, strictly regulate such a situation. US companies, however, can and do lobby their Senators and Congressmen recognizing that it is their fundamental right as U. S. citizens.
Despite the ongoing trade cases against Solar Cells and Wind Towers from China, the Obama Administration has made renewable energy a top priority, providing tax credits and other incentives that are contributing to making this a growth industry.
To many American producers they see Chinese imports as a threat given the quality and price of imported products, which they attempt to counter by establishing coalitions. The Coalitions share the cost and boost their effectiveness by retaining lobbying, public relations and law firms so as to give them an advantage before the respective government agencies.
The different firms work together. The law firm gives legal advice on the various trade and investment cases, and the lobbying/public relations firm gives political advice on how to change the debate in Washington DC. This collaborative approach is what’s gaining the other side distinct advantages in cases before government agencies.
Here are a few notable examples:
1. Coalition for American Solar Manufacturing (CASM). A consortium of U. S. domestic producers of conventional solar panels whose central purpose is “to hold China accountable by filing cases before government agencies.” The Coalition consists of seven domestic producers, led by Solar World, a global company based in Bonn, Germany. There is also the Solar Energy Industries Association that spent nearly $400,000 to retain lobbying and law firms in support of higher tariffs on Chinese products.
2. The Wind Tower Trade Coalition (members consist of US Wind Tower Producers). This Coalition’s mission is to obtain prohibitive tariffs on wind turbines and other products, which is widely reported in the news. Also the American Wind Industry Association reportedly spent over $600,000 retaining lobbying and law firms.
This is what goes on in the nation’s capitol. It is about law, economics and politics and how they all come together to influence policy and agency decisions.
As it relates to current trade cases on renewable energy imports, it has been regrettably one-sided. The U. S. producers are politically active and apparently quite effective. The other side, which includes the US importers and end users, is paying a heavy price for remaining passive and conceding the argument.
There is a common refrain on Capitol Hill that says it best: “The only thing that keeps decision-makers upright is equal pressure on all sides.”
China’s exporters and their American importers, distributors and end users must be more politically engaged if they expect to keep the US political leaders, Commerce Department officials and even ITC Commissioners and other U. S. officials “upright” to insure more favorable outcomes on cases they are considering. .
Such coalitions, not uncommon in America’s political system, are often necessary to develop greater public awareness and political support when trade cases and other actions are brought before these agencies. The US importers, distributors and end-users of Chinese-made products with the help of their Chinese suppliers would do well to put together their own coalitions and adopt strategies that will leverage their respective positions, as follows:
• The Coalition will consist of the affected U. S. companies, including US importers and the affected US down user producers, and adopt a strategy and plan that will demonstrate to the Administration, including the interested government agencies, Congress, and the Media, the public support and economic benefits the imports from China bring to the local economy.
• Provide information on the economic benefits (and the loss of those benefits) should the imposition of prohibitive tariffs affect the operations of the US companies involved by shutting the Chinese products out of the US market.
• In the local regions involved, including States and local city and county governments, mobilize public and political support that can be conveyed to Members of Congress and the particular government agencies.
• In Washington, D. C., engage the Congressmen (representing the regions and serving on important committees) to enlist their support of the Coalition member cases when they appear before the agencies.
• Develop a media package for distribution on Capitol/ government agencies, and media outlets (local, national, including trade publications); also be proactive on social media to insure the positive matches the negatives on Google and other internet venues.
The purpose is to insure the Coalition members’ cases by educating the public and the Politicians as to the other side of the argument so as to demonstrate strong public and Congressional support when the Department of Commerce and ITC are considering the trade cases. Taking a collective approach helps to share the cost and be more effective in Washington, D. C.
DEVELOPMENTS TRADE, 337, PATENT/IP, AND CFIUS
TRADE LAW–GPX CASE
On January 7, 2013, Judge Restani of the Court of International Trade issued her new decision in GPX Tires case, which is attached. 2013 CIT DECISION GPX In her decision, Judge Restani found the new law passed by Congress making the US Countervailing Duty law retrospectively applicable to China effective November 20, 2006 is Constitutional and did not violate the Ex Post Facto Clause of the Constitution. Judge Restani stated:
“Article I Section 9 of the Constitution provides that “No Bill of Attainder or ex post facto Law shall be passed.” This clause, however, does not prohibit the imposition of all retrospective laws. Instead, the clause only prohibits the imposition of retrospective penal legislation, which often, though not always, takes the form of criminal law. . . .By contrast, retroactive remedial laws are not prohibited by the clause.”
Judge Restani then determined that since the countervailing duty law is a remedial statute, retrospective laws, such as this provision, are constitutional. Judge Restani then threw out the other Constitutional arguments against the law.
Judge Restani did raise questions with some of the issues in the Commerce Department’s initial determination and remanded the case back for further clarification from Commerce.
CHINESE TRADE CASES—PULP CASE AGAINST THE UNITED STATES, CANADA AND BRAZIL
There are strong rumors in China that the Chinese government will soon initiate an antidumping case against cellulose pulp from the United States, Canada and Brazil. If anyone wants more information about the situation, please feel free to contact me.
With the strong rumors of a pulp case against the United States and an ongoing Chinese case against Paperboard, we are starting to see another trade war in the Wood Products, Pulp and Paper Sector. This war started with the US cases on Coated Paper, Wooden Bedroom Furniture and Wood Flooring and now the Chinese government has reacted with cases on Pulp and Paperboard. The trade war continues.
SECTION 337 PATENT CASES—DOJ AND USPTO OBJECTIONS TO EXCULSION ORDERS ON STANDARD-ESSENTIAL PATENTS
In contrast to the US antidumping and countervailing duty law, section 337, which deals with violations of intellectual property, in particular, patents, does have a public interest provision. If the US International Trade Commission (“ITC”) determines that imported products infringe a US patent, the ITC can issue an exclusion order to exclude the infringing products at the border. In deciding whether to issue an exclusion order, the ITC is to take public interest into account, and based on public interest grounds can refuse to issue the exclusion order.
On January 8, 2013, the Department of Justice Antitrust Division and the US Patent and Trademark Office (“USPTO”), filed a report at the ITC questioning whether the ITC should issue exclusion orders in section 337 cases where the banned imports are found to infringe standard-essential patents (“SEP”). The DOJ and the USPTO argued that where SEP owners have agreed to license their patents on fair, reasonable and nondiscriminatory terms and the respondents have agreed to those terms, the ITC should not allow the threat of an import ban to result in the extraction of unfairly high royalty rates for these patents.
Recently, antitrust authorities have become focused on how companies whose patent have been incorporated into industry standards should be allowed to enforce their IP and Patents. Much of the debate has centered on the so-called “FRAND or RAND licensing commitments.” In the proposal, the DOJ and the USPTO defined these licensing agreements as follows:
“ a patent is RAND- or FRAND-encumbered where a patent holder has voluntarily agreed to license the patent on reasonable and non-discriminatory (RAND) terms or fair, reasonable, and non-discriminatory (FRAND) terms while participating in standards-setting activities at a standards-developing organization (SDO). In the United States, SDO members may commit to license all of their patents that are essential to the SDO standard on RAND terms. In other jurisdictions, SDO members may commit to license such patents on FRAND terms. For the purposes of this letter, F/RAND refers to both types of licensing commitments. Commentators frequently use the terms interchangeably to denote the same substantive type of commitment.”
The report goes on to state:
“Voluntary consensus standards serve the public interest in a variety of ways, from helping protect public health and safety to promoting efficient resource allocation and production by facilitating interoperability among complementary products. Interoperability standards have paved the way for moving many important innovations into the marketplace, including the complex communications networks and sophisticated mobile computing devices that are hallmarks of the modern age. Indeed, voluntary consensus standards, whether mechanical, electrical, computer-related, or communications-related, have incorporated important technical advances that are fundamental to the interoperability of many of the products on which consumers have come to rely.”
The report then goes on to state:
“A patent owner’s voluntary F/RAND commitments may also affect the appropriate choice of remedy for infringement of a valid and enforceable standards-essential patent. In some circumstances, the remedy of an injunction or exclusion order may be inconsistent with the public interest. This concern is particularly acute in cases where an exclusion order based on a F/RAND-encumbered patent appears to be incompatible with the terms of a patent holder’s existing F/RAND licensing commitment to an SDO. A decision maker could conclude that the holder of a F/RAND-encumbered, standards-essential patent had attempted to use an exclusion order to pressure an implementer of a standard to accept more onerous licensing terms than the patent holder would be entitled to receive consistent with the F/RAND commitment—in essence concluding that the patent holder had sought to reclaim some of its enhanced market power over firms that relied on the assurance that F/RAND-encumbered patents included in the standard would be available on reasonable licensing terms under the SDO’s policy. Such an order may harm competition and consumers by degrading one of the tools SDOs employ to mitigate the threat of such opportunistic actions by the holders of F/RAND-encumbered patents that are essential to their standards.”
“This is not to say that consideration of the public interest factors set out in the statute would always counsel against the issuance of an exclusion order to address infringement of a F/RAND-encumbered, standards-essential patent. An exclusion order may still be an appropriate remedy in some circumstances, such as where the putative licensee is unable or refuses to take a F/RAND license and is acting outside the scope of the patent holder’s commitment to license on F/RAND terms.”
337 ROBOTIC TOY TRADE SECRETS CASE
On January 4, 2013, a 337 complaint was filed on robotic toys at the ITC alleging theft of trade secrets by a Chinese company.
According to the complaint filed by Innovation First International Inc., CVS Pharmacy Inc. is importing a robotic toy fish incorporating trade secrets stolen by a former IFI employee and taken to a Chinese company, Zuru Inc. See the notice below.
Docket No: 2930
Document Type: 337 Complaint
Filed By: Lauren A. Degnan
Firm/Org: Fish & Richardson
Behalf Of: Innovation First, International, Inc., Innovation First, Inc., and Innovation First Labs, Inc.
Date Received: January 4, 2012
Commodity: Robotic Toys
Description: Letter to Lisa R. Barton, Acting Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended regarding Certain Robotic Toys and Components Thereof . The proposed respondent is CVS Pharmacy Inc., Woonsocket, Rhode Island.
PATENT CASE AGAINST HANGZHOU COMPANY
On January 4, 2013, TP Orthodontics Inc. sued Hangzhou Shinye Orthodontic Products Co. Ltd. and Global Orthodontics LLC in the Federal Court in Illinois for patent infringement for imports of orthodontic brackets, which allegedly infringe TP’s US patent.
CRIMINAL COPYRIGHT CASE AGAINST CHINESE CITIZEN
On January 7, 2013, it was revealed that a Chinese citizen has pled guilty in Delaware federal court to criminal conspiracy charges for operating websites in China through which he sold more than $100 million worth of pirated computer software to buyers around the world. Attached are copies of the Indictment and the Plea Agreement. INDICTMENT PLEA AGREEMENT
In June of 2011, a Xiang Li of Sichuan was arrested in Saipan for criminal violations of US copyright laws. The pirated programs that Xiang Li was selling were sensitive technology. Mr. Li now faces a possible sentence of 25 years in Federal prison. Li was lured to a US territory, the Pacific island of Saipan, by undercover agents, where he was arrested.
ANNUAL CFIUS REPORT TO CONGRESS
In the attached December 20, 2012 annual report to Congress, CFIUS REPORT TO CONGRESS the Committee on Foreign Investment in the United States (CFIUS) states:
“Based on its assessment of transactions identified by CFIUS for purposes of this report, the U.S. Intelligence Community (“USIC”) judges with moderate confidence that there is likely a coordinated strategy among one or more foreign governments or companies to acquire U.S. companies involved in research, development, or production of critical technologies for which the United States is a leading producer. Information supporting this assessment is provided in the classified version of this report. Indications of other coordinated strategies may go unobserved due to limitations on intelligence collection, or may be hidden or misconstrued because of foreign denial and deception activities.”
This finding could affect future transactions from identified companies or governments, which could include China.
If you have any questions about these developments or wish copy of the 337 complaint or other documents, please feel free to contact me.