Enforcement

Like much about China in the past 10 years, the story of IP protection is marked by a stunning breadth and speed of change. As Judge Jiang Zhipei, Chief Justice of the IP Tribunal of the Supreme People's Court puts it: "We started much later than developed nations, but we are catching up quickly; faster than anyone could ever have expected." With full accession to the WTO and a complete revision of the relevant laws and regulations, China has developed a comprehensive legal framework for IP protection that is now nearly fully compliant with the TRIPs Agreement. Problems remain for sure, but China has come a long way.

The early days

Prior to the opening of the economy in the early 1980s, China did not pose much of a problem as a production centre for counterfeit and pirated products. Most factories were controlled by the state and produced goods according to the central plan. With greater economic liberalization and the establishment of manufacturing centers by foreign investors, the problem of counterfeit production began to grow. Factories could choose for themselves what type of goods to produce and foreign invested manufacturers were under pressure to return a profit.

From those beginnings grew an infringement problem that threatened to spiral out of control in the 1990s. Increasingly fractious trade disputes arose between China and its trading partners in the developed world, and the US in particular. It was in 1993, during these turbulent times when the problems of IP protection seemed almost insurmountable, that Rouse & Co was established in China.

Investigative and enforcement actions undertaken during those early days often involved more than a small degree of danger. In one investigation into the producer and distributor of a counterfeit drug used to treat sexually transmitted diseases, the investigator had been working on the case for a few months, when he believed he was going to be taken to meet with the main distributors. The investigator was met at the pre-arranged spot and forced into a car with a number of other large and unfriendly men. They drove him around for the rest of the night threatening all manner of bodily harm and finally slicing his clothing into tatters by the time they finally released him with the stern warning to drop his investigation and forget whatever information that he had learned to that point. It later turned out that a rogue element of the People's Liberation Army had been responsible for the manufacture of the counterfeit pharmaceutical drug, and that they distributed it through brothels they owned throughout southern China. (These actions took place before Jiang Zemin's order for the PLA to divest its business interests.)

The high tide of administrative enforcement

Throughout most of the 1990s, enforcement of IP rights in China almost exclusively involved the use of administrative agencies.

In general, for actions to be undertaken against a store or warehouse found to be selling or displaying counterfeit or trade mark infringing products, a local branch of the Administration for Industry and Commerce (AIC) was the relevant authority, with exclusive jurisdiction over enforcement of trade mark infringements and unfair competition cases. For actions against a factory or manufacturing site, the relevant agency would be the local office of the Technology Supervision Bureau (TSB). The TSB had jurisdiction to enforce anti-unfair competition and inferior product quality laws. However, actions for copyright infringement had to be coordinated through the National Copyright Authority, which would direct local copyright bureaux to undertake an inspection and enforcement action against the identified infringer. After 2002 (the new Implementing Regulations) this clumsy procedure was revised: authority for initiating action was devolved directly to local and provincial copyright bureaux.

In virtually all of these administrative enforcement cases, the authorities would arrange for the initial inspection and raid at the infringer's premises. Any counterfeit or pirated goods would then be seized and a punishment decision and fine would be issued following the conclusion of the case. The seized goods would then be destroyed or have the infringing trade marks or logos removed, and then auctioned off. In contrast with most western countries, rights holders in China generally did not choose to take action through judicial means. Administrative enforcement was viewed as much less expensive and time consuming than the courts. Despite low fines which did not have much deterrent effect, and the fact that authorities often needed pushing to act, or follow through, the administrative system was in essence the only realistic means of IP rights enforcement.

Recently, an attempt has been made to address the ineffectiveness of administrative penalties. These have been increased to three times the "operation value" of the infringer. In the AIC system, based on the State Administration for Industry and Commerce's interpretation, operational value is determined by the costs of the counterfeit goods. In the event the infringer's "operation value" cannot be calculated, the sanctioning agency can fine the infringer up to Rmb100,000 ($12,100).

Another headache was the virtual inability of foreign trade mark owners to apply for "well-known trade mark" status through the administrative route. New procedures have now been promulgated effective June 1 2003, allowing foreign owners to petition for "well-known" status when their trade mark has been infringed in relation to the production and sale of dissimilar goods or when their unregistered trade mark has been used for similar goods or services. At the time of writing no applications have succeeded.

Civil litigation develops

Over time growing dissatisfaction with the administrative enforcement system was voiced. Accordingly, the Chinese government began increasing the capacity and capability of the judicial system to handle such complaints. The Supreme Court established an IP Trial Division in Beijing as early as 1993. This was followed in other large cities. Specialized training for judges in IP cases was introduced. Since then the Supreme Court has published more than 30 judicial interpretations on enforcement and protection of IP rights. Other issues that have been addressed are:

• For many years a glaring omission in the IP enforcement system in China was the lack of preliminary injunctions. A breakthrough came with the revised Copyright Law and Trade Mark Law (see table). Courts can now issue these pre-trial orders for evidence preservation, asset preservation, and to halt the infringing activity. The device is still (2003) in its early days but expect a lot of development in this area, in years to come.
• Prior to China's accession to the WTO in 2001, decisions made by the Trade Mark Review Appeals Board and the Patent Re-examination Board concerning the registration of trade marks or patents were unreviewable. This was a major headache for applicants. The courts have now been given jurisdiction to review administrative decisions made by these bodies.

Civil damages

The difficulty of recovering adequate damages in IP infringement cases has been a persistent problem in taking IP enforcement action in China. For many years rights holders had to prove the actual damage suffered, due to the production and sale of the counterfeit goods, or the profits made by the counterfeiter.

A helpful reform now allows for statutorily mandated damages of up to Rmb500,000 ($62,000). How this can be used is illustrated in a recent trade mark infringement case we handled, where a foreign health and personal hygiene products maker sued a repeat infringer in the Beijing Intermediate People's Court. As is often the case, the plaintiff was unable to quantify fully its damage from the actions of the counterfeiting factory, so requested the maximum allowable statutory damages of Rmb500,000 for two separate counts of trade mark infringement. The Court accepted the plaintiff's evidence and ruled in their favour on both counts, awarding the maximum allowable damages of Rmb1 million in aggregate (the defendants have appealed).

In the area of copyright protection, courts in both Shanghai and Beijing have issued decisions affirming the rights of foreign entities to protect their copyrights in China. In a series of actions brought in Shanghai by the Motion Picture Association against retailers and distributors of counterfeit and pirated DVDs, the Shanghai court awarded the plaintiffs Rmb250,000 ($30,200).

And the courts have shown that they are prepared to go well beyond the statutory limits where evidence is good. Two US educational bodies recently took action for copyright and trade mark infringement against the Beijing New Oriental School for flagrant copying of examination papers. In a decision issued on September 27 2003, the Beijing No 1 Intermediate People's Court ordered New Oriental to pay compensation of Rmb10 million (US$1.2 million) to the two plaintiffs, publish a public apology in the Chinese newspaper Legal Daily, and either destroy or return all illegal copies.

Greater deterrence: criminal action

These cases illustrate the growing sophistication of the Chinese civil legal system and willingness to compensate rights holders for their losses from infringement of their rights. However, generally a civil judgment does not provide enough of a deterrent to stop the actions of large scale and repeat IP infringers. If that is the ultimate aim, nowadays the best option is to use the criminal system.

Before the Criminal Law was amended in 1997, the provisions concerning criminal liability for IP violations were rather obscure and scattered throughout the criminal code and various Regulations and Laws. The Criminal Law amendment in 1997 changed this situation. It set out a specific chapter for the IP crimes, where definitions of various IP crimes were detailed and their corresponding penalties set out clearly. For violations of the new IP criminal laws, tough prison sentences were laid down - between three and seven years for a serious offence, and up to three years for less serious. In the last five years the number of criminal cases has increased tenfold.

We have found that these provisions can be extremely effective. In two cases for a major international pharmaceutical company, we have managed to coordinate multi-regional investigations and criminal prosecutions of individuals involved in the manufacture and sale of counterfeit drugs. Both cases were given a "Best Case Award" by the Quality Brand Protection Committee in 2001 and 2002, respectively. In the latter case, a foreign national was the first non-Chinese to be charged and imprisoned for violation of China's criminal IP laws.

And the next 10 years?

When one considers the roughing-up of the unfortunate investigator back in the early 1990s the subsequent changes in the Chinese IP regime look fairly spectacular. In the 10 years we have been in mainland China, virtually all of China's major laws concerning IP protection and enforcement have been revised (see table on the top 10 legislative developments).

However it would be quite wrong to suggest that IP enforcement is now always easy. There still exists a great deal of work to be done. In the area of criminal enforcement:

• the monetary thresholds for criminal enforcement remain too high;
• determination of the monetary value of confiscated infringing goods is still too vague to have broad application;
• cooperation between administrative agencies and the criminal authorities is poor in many instances; and
• since the PSB (Police) is not always keen to put IP criminal cases as a priority and even reluctant to accept such cases, intensive lobbying for the PSB acceptance and move is often required.

In other areas, revisions in Customs rules and regulations also require immediate attention (for example, requiring bonds often equal to the market value of the goods seized), as does the ambiguity of the Anti-Unfair Competition Law (the Toyota v Geely case last case month did not provide much help in this regard). And ongoing local protectionism and lack of effective enforcement in certain localities and jurisdictions remain significant concerns.

Despite these problems, China seems determined to continue to build upon the progress of the last 10 years. The attitude at top levels of the Chinese government seems to be encouraging. Vice-Premier Wu Yi has been named the head of the National Leading Group for the fight against counterfeits and IP infringements. In a recent statement Madame Wu said that enforcing IP and economic cooperation was a "win-win" situation for China. In addition, she stated that China "would earnestly implement its WTO commitments on the basis of mutual cooperation and reciprocity." There appears to be an awareness of the problems IP holders still face in China and a commitment to engage in further reforms to strengthen the systems to address these problems. We look forward to reporting back to you on how things have developed in another 10 years!

Timothy Browning

Timothy Browning joined Rouse & Co International in Guangzhou in June 2001, having previously worked in China as in-house counsel responsible for IP for a major European fast-moving consumer goods producer, and as a consultant and manager with the Pinkerton(China) Consulting Company. Before coming to China in 1995, Tim spent more than eight years with the US Department of Labor as a Senior Attorney-Advisor at the Benefits Review Board. While there, Tim was twice honoured with departmental citations for outstanding service. Tim now handles an extensive range of enforcement related IP matters, as well as non-contentious matters including IP licensing and supply chain audit/review. He has a BA from the University of Maryland, and MIBS from the University of South Carolina and a JD from the Univeristy of Baltimore.

Carol Wang

Carol Wang is a lawyer in the Shanghai office of Rouse & Co International. She joined the firm in 2002 and her responsibilities include drafting research reports, editing newsletters, and handling some contentious matters. Carol has a BA from Shanghai University for Science and Technology and an LLB from Fudan University. Her personal interests include movies and music.

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