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The end of the beginning

China has long been criticized for failing to enforce IP rights. Now, after years of thinly veiled threats, the US has taken the matter to the WTO. Peter Ollier considers what may happen next, and how the row will affect IP owners

It finally happened. After years of hints and threats the US has taken its dispute with China over its record of enforcing IP rights to the WTO.

In fact the US has brought two cases; the first over what officials described as deficiencies in China's legal regime for protecting and enforcing copyrights and trade marks, and the second over China's alleged barriers to trade in books, music, videos and films.

Susan Schwab, the US Trade Representative, said in a statement on April 10 that "while the United States and China have been able to work cooperatively and pragmatically on a range of IPR issues...we have not been able to agree on several important changes to China's legal regime that are required by China's WTO commitments".

The case was filed on the same day. China and the US now have 60 days in which to hold consultations. If no progress is made, the US can refer the matter to a WTO dispute settlement panel. The three-person panel usually takes six to nine months to issue a decision, which can then be appealed.

READ MORE: US-China trade deal step in right direction but more work needed

The history of the dispute

April 2001: The American Chamber of Commerce (AmCham) in China criticizes China's IP infringement penalties and enforcement measures.
December 11 2001: China formally accedes to the WTO having overhauled its IP laws to comply with TRIPs.
March 2002: New regulations automatically protecting software copyright come into force.
May 2003: The USTR's Special 301 Report acknowledges improvements in China's IP laws but notes "significant concerns" in the area of enforcement, especially "lack of transparency and coordination among Chinese government agencies, local protectionism and corruption, high thresholds for criminal prosecution, lack of training and weak punishments".
September 2003: INTA opens its first office outside the US in Shanghai.
June 2004: The US-China Economic and Security Review Commission, created by Congress in 2000, concludes that the US-China economic relationship is "heavily imbalanced and undermining [America's] long-term economic health". The Commission says the US government should warn China that its "WTO honeymoon period has ended".
September 2004: The USPTO appoints Mark Cohen to serve as its first IP attaché to the US Embassy in Beijing.
February 2005: The International Intellectual Property Alliance (IIPA), a coalition of six trade associations, tells the US Trade Representative (USTR) that it should put China on its Section 301 Priority Watch List. Eric Smith, IIPA president, says China must take "real, not rhetorical" deterrent enforcement action to reduce rampant piracy in the country.
May 2005: In its Special 301 Report the USTR elevates China to the Priority Watch List. Claiming that Chinese-made fakes make up over two-thirds of the counterfeits confiscated in the US, officials threaten China with WTO action. Observers suggest that the US lacks the hard evidence required to launch – and win – a complaint at the trade body.
September 2005: AmCham and the European Union Chamber of Commerce in China release reports that are highly critical of China's IP record.
October 2005: The US, Japan and Switzerland ask China to provide details of its efforts to enforce IP laws to help them assess whether the country is doing enough to tackle infringement. China queries whether it has any obligation to provide the information.
February 2006: US Trade Representative Robert Portman presents a report, US-China Trade Relations: Entering a New Phase of Greater Accountability and Enforcement, to Congress, which lambasts China over its record of enforcing IP laws. The USTR threatens to use "all options available" to resolve the situation.
April 2006: The Chinese government requires computer makers to pre-install legitimate operating software on computers sold in China. Domestic PC makers Tsinghua Tongfang and TCL Group sign a deal with Microsoft that requires them to load the US software maker's operating system on their computers. Lenovo, China's biggest PC maker, agrees a similar deal.
October 2006: The final meeting of the TRIPs Council in 2006 ends in disagreement after the EU, with support from the US, Japan and Switzerland, raises the issue of TRIPs enforcement. In a statement, China says the issue should be discussed elsewhere: "The WIPO advisory committee should be well equipped to discuss the issue of enforcement. We see no reason to duplicate the work of another institution."
November 2006: Chinese commerce minister Bo Xilai says that US action at the WTO would have a negative impact on the two countries' economic and trade relations. "We think it's senseless. It won't help solve any problems."
December 2006: The USTR's 2006 Report to Congress on China's WTO Compliance focuses on China's "chronic under-utilization" of criminal penalties and describes its enforcement regime as "toothless".
January 2007: Xiong Xuanguo, vice-president of the Supreme People's Court, announces at the Third Global Congress on Combating Counterfeiting and Piracy in Geneva that China will increase the deterrent effect of anti-counterfeiting laws by amending a judicial interpretation issued in December 2004 so as "to give full play to its role of punishing and preventing IPR related crimes".
April 2 2007: Chinese Customs issues new guidelines on the destruction of counterfeit goods.
April 4 2007: The Supreme Court and Supreme People's Procuratorate issue new rules that lower the criminal prosecution threshold in copyright infringement cases and increase the level of penalties that judges can impose.
April 10 2007: The US launches formal proceedings at the WTO.

Looking for allies

Some of China's biggest trading partners have been taking their time in deciding whether to take part in to the WTO action. In the week the case was filed Viviane Reding, the EU Information Society and Media Commissioner, told journalists in Beijing that the EU was pursuing IP issues with the Chinese on a bilateral basis and "will follow the WTO proceedings as observers, but will not formally join them".

But one week later EU trade commissioner Peter Mandelson told a press conference: "I do not rule out initiating or joining action at the WTO if, in our view, China is failing to takes its responsibilities seriously." While some argue the EU is playing an astute game of good cop to the US's bad cop to encourage China to make IP concessions, right now it seems to be more of a confused cop.

Australia has joined the US as a third party in previous WTO disputes (see figure 2) and is still deciding whether to join the latest trade row and in what capacity. While in Beijing for the second high-level economic cooperation dialogue, trade minister Warren Truss said there was "a possibility" that Australia might join the dispute.

Japan and Switzerland both joined an earlier US effort to force China to provide details of its attempts to enforce IP laws (see timeline). Japan announced on April 21 that it would be joining the consultation as an observer. As MIP went to press, Switzerland had yet to decide.

Japan undoubtedly delayed its response because it was hosting a rare visit from the Chinese prime minister in the week the US launched its IP offensive. But an official from the Japanese Ministry of Trade and Industry told MIP that the government also wanted to ask business leaders whether a judicial interpretation issued by the Supreme Court and the Supreme People's Procuratorate on April 4 would satisfy their demands for action.

The judicial interpretation revises the rules for criminal enforcement (see box), which should make it easier for the authorities to charge counterfeiters with criminal offences.

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Repeated complaints

Since China joined the WTO the US has complained that the thresholds necessary for trade mark counterfeiting and copyright piracy to be considered criminal offences are too low.

Article 61 of TRIPs states that criminal procedures and penalties should be applied "in cases of wilful trade mark counterfeiting or copyright piracy on a commercial scale". The US argues that Chinese counterfeiters are careful to keep below the thresholds, where they are only subject to administrative penalties such as fines. This creates a safe harbour for IP infringement, they argue.

The US complaint also suggests that China's rules for disposing of infringing goods seized by Customs breach its obligations under TRIPs. Article 46 of the Agreement states that "the simple removal of the trade mark unlawfully affixed shall not be sufficient, other than in exceptional cases, to permit release of the goods into the channels of commerce".

China hits back

Although China has now addressed this issue (see box below) its action was not enough to win over the USTR. US officials instead went on to request WTO intervention. China's response was predictably hostile. Wang Xinpei, a spokesman for the Ministry of Commerce, said the complaint would "seriously undermine the cooperative relations the two nations have established in the field and will adversely affect bilateral economic and trade ties". Tian Lipu, commissioner of SIPO said: "It is not a sensible nor a rational move for the US government to file such a complaint [with the WTO]."

Chinese officials have since made efforts to demonstrate that the government is successfully fighting fakes. On April 6 officials revealed a national action plan on IPR protection for 2007. In it, the government promises to accelerate the revision of the trade mark law and to "study on the improvement of the copyright law". It also promises "to harness criminalization tools to achieve better punitive and deterrent effects," but gives no detail about how this will be achieved.

State media reported in the week before the complaint that China will now allow foreigners involved in legal challenges to attend IP trials as part of efforts to improve transparency.

And on April 14, China's official news agency Xinhua said that officials had destroyed 30 million pirated digital DVDs, VCDs, CDs and pieces of software as part of a campaign to raise awareness of IP issues in preparation for World Intellectual Property Day.

Mixed response

Reaction among IP practitioners to the US move has been mixed. Luke Minford, head of Rouse & Co's Beijing office, told MIP that it was "a positive step for us and for our clients". He argues that the USTR's decision to take the matter to the WTO shows that the US is looking at a multilateral solution to the problem of IP enforcement in China, rather than relying on the bilateral Special 301 Report.

But Zhengfa Wang, a partner of China Patent Agent (HK) in Beijing, said that "China is trying very hard to strengthen enforcement," and pointed out that counterfeiting is a global problem that does not only affect China. And Horace Lam, a partner of Lovells in Beijing, stressed the improvements he has seen since he began working in China five years ago.

Inevitably, there are many who suggest that domestic political concerns prompted the Republican administration to act. The US trade deficit with China reached a high of $232.5 billion in 2006. The Democrat-dominated Congress believes China is inflating this deficit by not playing fairly by trade rules and wants the government to take a tougher line.

Democrat Senator Charles Schumer, who said of the WTO case "late is better than never" and Republican Senator Lindsey Graham are sponsoring a bill that threatens China with sanctions if it does not revalue its currency. US Treasury Secretary Henry Paulson's next US-China strategic economic dialogue is scheduled for May this year. There will be lots to discuss.

None of the China-watchers with whom MIP spoke believed the dispute would be resolved during the 60-day consultation period. China is taking the US's action seriously and can be expected to mount a spirited defence if and when the case goes to a panel. But it is difficult to believe that US would have initiated a WTO action if it thought it would fail. The parties will now be engaged in a high-stakes game of bluff. If neither country backs down and the case goes to a WTO panel, the trade body's dispute resolution process looks set to be tested as never before.

The Supreme Court Interpretation

(Adopted at the 1422nd Meeting of the Adjudication Commission of the Supreme People's Court and 75th Meeting of the Supreme People's Procuratorate April 4 2007; effective April 5 2007)

Fa Shi [2007] No 6

To maintain order in the socialist market economy and to punish criminal acts of infringement of intellectual property in accordance with the law, several issues regarding the concrete application of the law in the handling of criminal cases of intellectual property infringement are hereby interpreted as follows in accordance with applicable provisions of the Criminal Code and the Criminal Procedure Code.

Article 1 – Where for profit-making purposes and without the permission of the copyright owner there is reproduction and distribution of a literary work, a musical, cinematographic, television, or video recording work, computer software or other works, and the total quantity of reproductions is 500 units or more, this shall constitute "other serious circumstances" pursuant to Article 217 of the Criminal Code; where the total quantity of reproductions is 2500 units or more, this shall constitute "other exceptionally serious circumstances" under Article 217 of the Criminal Code.

Article 2 – For the purposes of Article 217 of the Criminal Code, the term "reproduction and distribution" means reproduction and/or distribution.

Promotion of infringing products by the holder of the infringing products by means of advertisements, solicitation of subscription, etc, shall constitute "distribution" under Article 217 of the Criminal Code.

If anyone illegally publishes, reproduces and/or distributes another person's work and such copyright infringement constitutes a crime, that person shall be convicted and punished for the crime of copyright infringement.

Article 3 – If an intellectual property crime meets the conditions for suspended sentences as provided under the Criminal Code, the punishment shall be suspended in accordance with the law. In any of the following circumstances, suspended sentences shall generally not be applied:

  1. Where, despite the prior application of a criminal or administrative penalty for intellectual property infringement, another infringement of intellectual property which constitutes a crime takes place;
  2. There is no indication of remorse;
  3. There is refusal to give up the illegal income;
  4. Other circumstances where it is not appropriate to suspend sentences.

Article 4 – In determining the fine for intellectual property crimes, the People's Courts shall comprehensively take into account the illegal income, the illegal turnover, the damage caused to the rights owner, the harm to society and other circumstances of the crime. The amount of the fine shall generally range from one time up to five times the illegal income or 50% up to one time the illegal turnover.

Article 5 – If the victim has evidence to prove an intellectual property crime and directly files a complaint with the People's Court, the People's Court shall accept the case in accordance with the law; where intellectual property crimes poses serious harm to social order and the interests of the nation, the People's Procuratorate shall file a public prosecution in accordance with the law.

Article 6 – If a unit engages in activities that constitute a crime under Articles 213 to 219 of the Criminal Code, it shall be convicted and sentenced in accordance with the corresponding criteria for individual offenders set forth in the Interpretation of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues in the Concrete Application of the Law in Handling Criminal Cases of Intellectual Property Infringement and this Interpretation.

Article 7 – In the event of any conflict between prior judicial interpretations and this Interpretation, this Interpretation shall apply.

MIP would like to thank Baker & McKenzie for preparing a translation of the Interpretation.


Customs Notice

Several Issues on the Auction of Confiscated Goods that Infringe Intellectual Property Rights (2007 – No. 16)

(Issued by the General Administration of Customs April 2 2007; effective April 2 2007)

Pursuant to Article 27 of the "Regulations of the People's Republic of China on Customs Protection of Intellectual Property Rights"(the "Regulations"), if confiscated goods that infringe upon intellectual property rights ("infringing goods") cannot be used for public welfare projects and the holder of the intellectual property rights has no interest in purchasing the same, Customs may auction off the goods in accordance with law after removing their infringing features. In order to regulate the auction of infringing goods by Customs, to increase transparency in law enforcement by Customs and protect the right of intellectual property owners to information, relevant issues are addressed as follows:

Article 1. When the Customs auction confiscated infringing goods, the infringing features of such goods and their packages should be removed completely, including removal of trade marks and other infringing features that infringe upon copyright, patents and other intellectual property rights. Where the infringing features of goods cannot be removed completely, such goods should be destroyed and be prohibited from being auctioned.

Article 2. The opinions of the intellectual property owners should be sought by Customs before auctions.

MIP would like to thank Baker & McKenzie for preparing a translation of the Notice.



WTO TRIPs cases

Emma Barraclough, London

This is not the first WTO case to deal with the way in which countries enforce IP rights under the TRIPs Agreement. Figure 1 shows how earlier TRIPs enforcement cases were dealt with, and Figure 2 shows three of the most recent TRIPs disputes at the WTO.

Figure 1: TRIPS enforcement disputes at the WTO
ComplainantRespondentRequest for consultationsTitleAt stakeResult
USDenmarkMay 14 1997Measures affecting the enforcement of IP rightsThe US accused Denmark of failing to make provisional measures available in civil IP cases, in violation of Articles 50, 63 and 65 of TRIPs.On June 7 2001, the parties notified a mutually satisfactory solution after the Danish Parliament backed changes to the law to allow the authorities to launch an investigation at the defendant's premises without providing prior notification.
USSwedenMay 28 1997Measures affecting the enforcement of IP rightsThe US alleged that Sweden failed to make provisional measures available for IP civil cases in breach of Articles 50, 63 and 65 of TRIPs.In November 1998 the Swedish Parliament amended the country's IP laws to allow courts to order a search for infringing materials, documents or other evidence if there is reason to believe that a person has taken or is about to take action to infringe IP rights. The two parties notified a mutually agreed solution on December 2 1998.
USEuropean Communities/GreeceApril 30 1998Enforcement of IP rights for films and TV programmesThe US claimed a number of TV stations in Greece regularly broadcast copyrighted films and TV shows without authorization. The US argued that Greece did not seem to provide or enforce effective remedies against copyright infringement in breach of Articles 41 and 61 of TRIPs.On March 20 2001, the parties notified a mutually satisfactory solution after Greece changed its law to provide for the immediate closure of television stations that infringe IP.

Figure 2: Three recent TRIPS disputes
ComplainantRespondentRequest for consultationsTitleAt stakeResult
Australia and the US (and 11 third parties including Argentina, Brazil and India)ECJune 1 1999 (US) and April 17 2003 (Australia)EC–Trade marks and geographical indicationsThe complaints alleged that the EU's GI system discriminated against non-EU producers and contravened Article 3.1 of TRIPs which provides for equal treatment.
The US also expressed concern about the impact of GIs on prior trade mark rights. This has been an important issue in the dispute over the Budweiser name in Europe.
The WTO panel agreed that the EU's GI Regulation was inconsistent with TRIPs in that it restricted prior trade mark owners from attacking registered GIs, that it only allowed governments rather than individuals to object to registrations and that the reciprocity conditions are not equal. But the panel rejected other accusations about the EU rules.
The EC said that a new regulation on GIs that came into force in March 2006 resolved the issue. The US and Australia disagreed and invited the EC to revise its rules. The issue has not been raised formally at the WTO since March 2006.
BrazilUSJanuary 31 2001US-patent protectionBrazil requested consultations with the US, arguing that there were discriminatory elements in the US Patents Code. These included rules that limit the right to use or sell any federally owned invention in the US to a licensee that agrees that any products embodying the invention or produced through the use of the invention will be manufactured substantially in the US.No panel established nor settlement notified.
USBrazilMay 30 2000Brazil-patent protectionIn a dispute largely concerned with pharmaceutical patents, the US requested consultations about provisions in Brazil's patent law that establish a "local working" requirement for the owner to enjoy exclusive patent rights. The rules also said a patent shall be subject to compulsory licensing if the subject-matter of the patent is not "worked" in Brazil.Brazil offered to discuss the issue with the US if the US withdrew the WTO panel. The US, which noted that Brazil had never actually used the controversial provision to grant a compulsory licence, agreed. The US said it expected Brazil not to proceed with its own case against the US's patent law (see above). The parties notified a mutually agreed solution in July 2001.

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