IP, Digital Trade and the New "NAFTA"

The United States Trade Representative has released a summary of some of the highlights concerning IP and the new “NAFTA” between the United States, Canada and Mexico.  The USMC agreement (United States Marine Corps or What We Say -- I'm making a joke.) summary states, in part:

UNITED STATES–MEXICO–CANADA TRADE FACT SHEET Modernizing NAFTA into a 21st Century Trade Agreement

The United States, Mexico, and Canada have reached an agreement to modernize the 24-year-old NAFTA into a 21st century, high-standard agreement. The new United States-Mexico-Canada Agreement (USMCA) will support mutually beneficial trade leading to freer markets, fairer trade, and robust economic growth in North America.

INTELLECTUAL PROPERTY

The United States, Mexico, and Canada have reached an agreement on a modernized, high-standard Intellectual Property (IP) chapter that provides strong and effective protection and enforcement of IP rights critical to driving innovation, creating economic growth, and supporting American jobs.

Key Highlights: Protections for United States Innovators and Creators

The new IP Chapter will:

• Include 10 years of data protection for biologic drugs and a robust scope of products eligible for protection.
• Require full national treatment for copyright and related rights so United States creators are not deprived of the same protections that domestic creators receive in a foreign market.
• Continue to provide strong patent protection for innovators by enshrining patentability standards and patent office best practices to ensure that United States innovators, including small- and medium-sized businesses, are able to protect their inventions with patents.
• Include strong protection for pharmaceutical and agricultural innovators.
• Require a minimum copyright term of life of the author plus 70 years, and for those works with a copyright term that is not based on the life of a person, a minimum of 75 years after first authorized publication.
• Require strong standards against the circumvention of technological protection measures that often protect works such as digital music, movies, and books.
• Establish appropriate copyright safe harbors to provide protection for IP and predictability for legitimate enterprises that do not directly benefit from the infringement, consistent with United States law.
• Provide important procedural safeguards for recognition of new geographical indications (GIs), including strong standards for protection against issuances of GIs that would prevent United States producers from using common names, as well as establish a mechanism for consultation between the Parties on future GIs pursuant to international agreements.
• Enhance provisions for protecting trademarks, including well-known marks, to help companies that have invested effort and resources into establishing goodwill for their brands.

Key Achievement: Most Comprehensive Enforcement Provisions of Any Trade Agreement

For the first time, a trade agreement will require all of the following:

• Ex officio authority for law enforcement officials to stop suspected counterfeit or pirated goods at every phase of entering, exiting, and transiting through the territory of any Party.
• Express recognition that IP enforcement procedures must be available for the digital environment for trademark and copyright or related rights infringement.
• Meaningful criminal procedures and penalties for unauthorized camcording of movies, which is a significant source of pirated movies online.
• Civil and criminal penalties for satellite and cable signal theft.
• Broad protection against trade secret theft, including against state-owned enterprises.

Key Achievement: Strongest Standards of Protection for Trade Secrets of Any Prior FTA

In particular, the Chapter has the most robust protection for trade secrets of any prior United States trade agreement.  It includes all of the following protections against misappropriation of trade secrets, including by state-owned enterprises: civil procedures and remedies, criminal procedures and penalties, prohibitions against impeding licensing of trade secrets, judicial procedures to prevent disclosure of trade secrets during the litigation process, and penalties for government officials for the unauthorized disclosure of trade secrets. 

DIGITAL TRADE

The new Digital Trade chapter contains the strongest disciplines on digital trade of any international agreement, providing a firm foundation for the expansion of trade and investment in the innovative products and services where the United States has a competitive advantage. 

Key Highlights of the Digital Trade Chapter

The new Digital Trade chapter will:

• Prohibit customs duties and other discriminatory measures from being applied to digital products distributed electronically (e-books, videos, music, software, games, etc.).
• Ensure that data can be transferred cross-border, and that limits on where data can be stored and processed are minimized, thereby enhancing and protecting the global digital ecosystem.
• Ensure that suppliers are not restricted in their use of electronic authentication or electronic signatures, thereby facilitating digital transactions.
• Guarantee that enforceable consumer protections, including for privacy and unsolicited communications, apply to the digital marketplace.
• Limit governments’ ability to require disclosure of proprietary computer source code and algorithms, to better protect the competitiveness of digital suppliers.
• Promote collaboration in tackling cybersecurity challenges while seeking to promote industry best practices to keep networks and services secure.
• Promote open access to government-generated public data, to enhance innovative use in commercial applications and services.
• Limit the civil liability of Internet platforms for third-party content that such platforms host or process, outside of the realm of intellectual property enforcement, thereby enhancing the economic viability of these engines of growth that depend on user interaction and user content.

White House Releases Memorandum on Actions against China

President Trump has released his directions to the United States Trade Representative concerning China.  In the Presidential Memorandum on the Actions by the United States related to the 301 Investigation, the President states:

First, China uses foreign ownership restrictions, including joint venture requirements, equity limitations, and other investment restrictions, to require or pressure technology transfer from U.S. companies to Chinese entities.  China also uses administrative review and licensing procedures to require or pressure technology transfer, which, inter alia, undermines the value of U.S. investments and technology and weakens the global competitiveness of U.S. firms.

Second, China imposes substantial restrictions on, and intervenes in, U.S. firms’ investments and activities, including through restrictions on technology licensing terms.  These restrictions deprive U.S. technology owners of the ability to bargain and set market-based terms for technology transfer.  As a result, U.S. companies seeking to license technologies must do so on terms that unfairly favor Chinese recipients.

Third, China directs and facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and to generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.

Fourth, China conducts and supports unauthorized intrusions into, and theft from, the computer networks of U.S. companies.  These actions provide the Chinese government with unauthorized access to intellectual property, trade secrets, or confidential business information, including technical data, negotiating positions, and sensitive and proprietary internal business communications, and they also support China’s strategic development goals, including its science and technology advancement, military modernization, and economic development.

It is hereby directed as follows:

Section 1.  Tariffs.  (a)  The Trade Representative should take all appropriate action under section 301 of the Act (19 U.S.C. 2411) to address the acts, policies, and practices of China that are unreasonable or discriminatory and that burden or restrict U.S. commerce.  The Trade Representative shall consider whether such action should include increased tariffs on goods from China.

(b)  To advance the purposes of subsection (a) of this section, the Trade Representative shall publish a proposed list of products and any intended tariff increases within 15 days of the date of this memorandum.  After a period of notice and comment in accordance with section 304(b) of the Act (19 U.S.C. 2414(b)), and after consultation with appropriate agencies and committees, the Trade Representative shall, as appropriate and consistent with law, publish a final list of products and tariff increases, if any, and implement any such tariffs.

Sec. 2.  WTO Dispute Settlement.  (a)  The Trade Representative shall, as appropriate and consistent with law, pursue dispute settlement in the World Trade Organization (WTO) to address China’s discriminatory licensing practices.  Where appropriate and consistent with law, the Trade Representative should pursue this action in cooperation with other WTO members to address China’s unfair trade practices.

(b)  Within 60 days of the date of this memorandum, the Trade Representative shall report to me his progress under subsection (a) of this section.

Sec. 3.  Investment Restrictions.  (a)  The Secretary of the Treasury (Secretary), in consultation with other senior executive branch officials the Secretary deems appropriate, shall propose executive branch action, as appropriate and consistent with law, and using any available statutory authority, to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States.

(b)  Within 60 days of the date of this memorandum, the Secretary shall report to me his progress under subsection (a) of this section.

News agencies are reporting that tariffs will be assessed on around $50 billion of Chinese imports, here and here.  CNN reports that the U.S. companies that stand to lose in a U.S./China trade war include Intel, 3M, Boeing, Apple and others.  However, there is the question of how much those companies are losing because of intellectual property theft that may be supporting competitors based on stolen intellectual property in markets outside of China. 

Acquiring and sublicensing film rights not a "trade"

Still on the subject of UK tax and its impact on the creative industries, the Court of Appeal (Sir Terence Etherton (Chancellor) and Lords Justices Christopher Clarke and Vos) gave a ruling yesterday in Eclipse Film Partners No 35 LLP v HM Revenue and Customs [2015] EWCA Civ 95. In July 2012 the First-Tier Tribunal held, on the facts before it, that a partnership's activities in acquiring film rights and then sublicensing them to a distributor did not amount to carrying on a trade [see earlier IP Finance blogpost here]. This being so, the partnership's members were unable to obtain tax relief on interest paid on the borrowings which they had made in order to finance the partnership's activities under the Income and Corporation Taxes Act 1988 sections 353 and 362.

Film finance not "trade", rules FTT

Decisions of the UK's First-Tier Tax Tribunal don't often get a mention on this blog, but Eclipse Film Partners No 35 LLP v Revenue & Customs [2012] UKFTT 270 (TC)  looked quite interesting, this being a lengthy decision of Judges Edward Sadler and John Walters QC of 20 April.


Eclipse, an investment partnership, was incorporated in October 2006 and comprised 289 members. According to its partnership deed, its business was the production, distribution, financing and exploitation of films. Eclipse struck a complex licensing agreement with Disney under which each member made substantial contributions of capital to pay the licence fee, stumping up some £50 million of their own cash and borrowing another £790 million under a 20-year facility. At the same time, the film rights were sub-licensed to a distributor, which agreed to pay annual specified sums over a 20-year period. Eclipse then entered into a marketing services agreement as a means of supervising the implementation of the distributor's release plans for the films, as well as a consultancy agreement relating to the future selection, acquisition and exploitation of films and film rights. 


In its first partnership return, Eclipse said it was carrying on a commercial trade of acquiring and exploiting film rights, although no profits had yet accrued. In reliance on the Income and Corporation Taxes Act 1988 sections 353 and 362, its members claimed tax relief in respect of the interest paid on their borrowings. 


The Commissioners for Customs and Revenue considered that there was no entitlement to tax relief because Eclipse was basically just a vehicle for speculative investment rather than a trade. Were they right?.

Dismissing Eclipse's appeal, the FTT explained that the burden was on Eclipse to establish that it was carrying on a trade, not for the Commissioners to disprove it.  The transactions and arrangements entered into by Eclipse were not a sham; indeed, they had legal effect according to their terms, and the fact that they were set up as a tax avoidance scheme did not automatically mean that they could not be trade.  The killer punch here, though, was that the way Eclipse's members financed their capital contributions and the extent to which they did so was extraneous to Eclipse's actual activities.


On these facts, said the FTT, the interdependent and coterminous licensing and distribution transactions entered into by Eclipse did not have the speculative aspect that could be expected of trading transactions. True, the sub-licence produced profit -- but the bulk of that profit was predetermined and could not be regarded as the speculative profit of a trading venture. Any additional profits which might materialise were clearly viewed as a bonus rather than a profit reasonably to be expected. In commercial terms, Eclipse did not have a "customer" but had merely been given the opportunity by Disney of participating in its licensing arrangements.