[Joint House and Senate Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
INTELLECTUAL PROPERTY PROTECTION AS ECONOMIC POLICY: WILL CHINA EVER
ENFORCE ITS IP LAWS?
=======================================================================
ROUNDTABLE
before the
CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MAY 16, 2005
__________
Printed for the use of the Congressional-Executive Commission on China
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CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA
LEGISLATIVE BRANCH COMMISSIONERS
Senate House
CHUCK HAGEL, Nebraska, Chairman JAMES A. LEACH, Iowa, C-Chairman
SAM BROWNBACK, Kansas DAVID DREIER, California
GORDON SMITH, Oregon FRANK R. WOLF, Virginia
JIM DeMINT, South Carolina JOSEPH R. PITTS, Pennsylvania
MEL MARTINEZ, Florida ROBERT B. ADERHOLT, Alabama
MAX BAUCUS, Montana
CARL LEVIN, Michigan
DIANNE FEINSTEIN, California
BYRON DORGAN, North Dakota
EXECUTIVE BRANCH COMMISSIONERS
STEPHEN J. LAW, Department of Labor
PAULA DOBRIANSKY, Department of State
David Dorman, Staff Director (Chairman)
John Foarde, Staff Director (Co-Chairman)
(ii)
C O N T E N T S
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Page
STATEMENTS
Chow, Daniel, C.K., Robert J. Nordstrom Designated Professor of
Law, Ohio State University, Michael E. Mortiz College of Law,
Columbus, OH................................................... 2
Smith, Eric H., president, International Intellectual Property
Alliance, Washington, DC....................................... 6
Zimmerman, James M., partner and chief representative, Beijing
office, Squire, Sanders & Dempsey, LLP, Beijing, China......... 9
APPENDIX
Prepared Statements
Chow, Daniel C.K................................................. 31
Smith, Eric H.................................................... 35
Zimmerman, James M............................................... 72
INTELLECTUAL PROPERTY PROTECTION AS ECONOMIC POLICY: WILL CHINA EVER
ENFORCE ITS IP LAWS?
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MONDAY, MAY 16, 2005
Congressional-Executive
Commission on China,
Washington, DC.
The Roundtable was convened, pursuant to notice, at 2 p.m.,
in room 192, Dirksen Senate Office Building, John Foarde (staff
director) presiding.
Also present: Demetrios Marantis, Office of Senator Max
Baucus; Susan Roosevelt Weld, general counsel; Keith Hand,
senior counsel; Adam Bobrow, counsel, commercial rule of law;
and William A. Farris, senior specialist on Internet and
commercial rule of law.
Mr. Foarde. Good afternoon, everyone. Let us get started.
We have developed a reputation, whether deserved or undeserved,
for both starting on time and ending on time, so we are going
to try to keep up our three and a half years of good record
this afternoon.
I would like to welcome everyone on behalf of Chairman
Chuck Hagel and Co-Chairman Jim Leach of the Congressional-
Executive Commission on China, and also on behalf of the
legislative and executive branch members of the Commission who
have been named so far.
This afternoon, our inquiry is about intellectual property
and its protection, or lack thereof, in the People's Republic
of China. All of our members have been interested in our trade
relationship for many years, and all of them share an interest
in the protection of intellectual property [IP]. They
recognize, as I am sure everyone here recognizes, that
America's intellectual property industries, which rely on IP
protection for their revenues, significantly contribute to the
U.S. economy and represent a growing proportion of our gross
domestic product [GDP]. This sector includes not only the
copyright industries, such as motion pictures, musical
recordings, and book publishing, but also industries that rely
on the value of their trademarked brands. It also includes
patent industries, such as the pharmaceutical industry and many
manufacturing businesses.
The health of U.S. IP industries, as well as the
development of IP industries in China, may depend on whether
China continues its role as the largest producer of pirated
products in the world or joins the ranks of nations that
protect IP.
So this afternoon we want to examine the current crisis
resulting from the lack of IP enforcement in China, and looking
beyond the simple question of how much piracy and
counterfeiting occurs, we hope to examine the policies that
have created the current problems and assess whether they are
likely to continue in the future.
Our panelists this afternoon will explain the scope of the
problem, analyze its source, and assess which strategies can
advance IP protection in China. We are delighted to have three
extremely distinguished and knowledgeable panelists this
afternoon. I will introduce them in detail before they speak.
Our procedure is as we have operated for the last three and
a half years at these Issues Roundtables. Each panelist will
get 10 minutes for an opening presentation. After about eight
minutes, I will tell you that you have a couple of minutes
left, and then that is your signal to wrap things up.
Inevitably, you will not cover everything that you want to say
in your initial presentation, but we will be able, we hope--and
that has certainly been our experience--to pick up anything
that has been left unsaid during the question and answer
session, which will follow the opening presentations.
Each of the members of the staff panel here will get the
opportunity to ask a question and hear the answer for about
five minutes each, and then we will just continue to do rounds
until 3:30 arrives, or we run out of steam or exhaust the
subject, whichever comes first. On a subject this interesting
and complex, I doubt we will get to the exhaustion-of-topic
problem this afternoon.
So let me then recognize, with great pleasure, Mr. Daniel
C.K. Chow, Robert J. Nordstrom Designated Professor of Law at
Ohio State University's Michael E. Mortiz College of Law. Mr.
Chow
specializes in international trade law, international business
transactions, international intellectual property, and legal
issues concerning China. He has authored numerous books and
articles,
including two well-known case books, but he is probably most
well-known as the author of this wonderful tome, ``The Nutshell
Series: The Legal System of the People's Republic of China,''
and we have all benefited from it. Mr. Chow is fluent in
Mandarin Chinese and reads and writes Chinese at a high level.
He obtained his bachelor's degree from Yale College and his
J.D. from Yale Law School.
Welcome, Dan. Thank you for coming this afternoon.
STATEMENT OF DANIEL C.K. CHOW, ROBERT J. NORDSTROM DESIGNATED
PROFESSOR OF LAW, OHIO STATE UNIVERSITY, MICHAEL E. MORTIZ
COLLEGE OF LAW, COLUMBUS, OH
Mr. Chow. Thank you, Mr. Foarde. Does the staff panel have
a copy of the PowerPoint printout? Let me begin on page one.
My topic today is trademark counterfeiting, so I am going
to focus on the counterfeiting of trademarks, products, and
brands. I am not going to focus on patent infringement or on
copyright piracy, but I am going to focus specifically on
product counterfeiting. Let me begin, nonetheless, by saying
that the counterfeiting problem in China is recognized by many
as the most serious counterfeiting problem in world history.
The PRC Government itself estimates that the counterfeit trade
in China is between $19 and $24 billion per year, and about 8
percent of its gross national product.
U.S. industries that do business in China estimate their
losses to be in the billions to tens of billions of dollars per
year. In China, 15 to 20 percent of well-known brands of
consumer products are counterfeit. You can find them in every
large city, in every street market in China.
One thing about this that I want to emphasize is that no
problem of this size and scope could exist without the direct
or indirect involvement of the government, and I want to detail
how that occurs in my talk. I also want to highlight an ominous
development, which is that exports from China of counterfeit
products, which are already serious and which make this into a
global problem, are about, in my opinion, to increase
significantly as a result of China's entry into the World Trade
Organization [WTO]. I will discuss that in detail.
If we could go to the second page, please.
What are the origins of such a problem? Well, first, let me
say that China is the world's largest recipient of foreign
direct investment. It surpassed the United States as a
recipient of foreign direct investment--I mean foreign
capital--in the year 2002. But along with capital, foreign
direct investment is the best source of technology transfer in
the world today. In fact, when you look at a company such as
Coca-Cola, the value to Coca-Cola of its trademark in China is
worth much more to that company than the millions, tens of
millions, or hundreds of millions of dollars of capital
investment that Coca-Cola has put into China.
So, too, with trademarks of companies like Procter &
Gamble, Johnson & Johnson, Unilever. All of these marks, all of
these intellectual property rights [IPRs], are actually far
more valuable to the company than the value of the capital that
the company might put into China. So because it is the world's
largest recipient of foreign direct investment, China now has
unprecedented access to the world's most valuable intellectual
property.
The second cause of this problem, I think, is that although
China is the world's largest recipient of foreign direct
investment, China's legal system still has many gaps, it is
still weak, and it is still developing. That, in combination
with the value of the product or intellectual property that has
gone into China, has led to one of the world's most serious
counterfeiting problems.
I will also talk about issues of political and legal
reform, but let us go on now and I want to discuss the issue in
detail, if we can turn to the third page. I am going to talk
now about the economics of counterfeiting in China. If you look
at the map here, you can divide counterfeiting really into two
distinct segments. First, there is the manufacturing end of it,
and second, there is the distribution end.
With respect to the manufacturing end, if you look at the
map, the shaded area of the map shows the southeast region of
China, Guangdong Province and Fujian Province, which were two
of the areas first open to foreign direct investment, and which
is where most of the manufacturing occurs. The manufacturing
occurs in the south, but let me emphasize here the role of
criminal organizations in counterfeiting, organized crime in
Hong Kong and in Taiwan. Most of the people in Hong Kong have
their ancestral home in Guangdong Province; most of the people
in Taiwan have their ancestral home in Fujian Province. But
criminal organizations involved in smuggling, prostitution, and
narcotics have now moved into the counterfeit trade because it
is so lucrative. They supply the capital and they supply the
know-how by investing in factories in Guangdong and in Fujian
Province, and they use the international borders of Taiwan and
Hong Kong to elude law enforcement and detection.
The second part of the counterfeiting industry that I want
to point out is the distribution end. Of course, as everyone
knows, it is no good just to have a counterfeit product, you
must be able to deliver it to the end-use consumer. So,
distribution plays a vital role in the counterfeit trade.
Here on the map are highlighted five different wholesale
markets throughout the central and northern region of China.
Each of these wholesale markets is located near a strategic
urban location, large and densely populated urban areas such as
Shanghai in the east, Beijing and Tianjin in the north,
Guangzhou and Shenzhen in the south. These wholesale markets,
many of them open-air or partly enclosed, serve the vital role
of delivering the counterfeit product to the end-use consumer,
as retailers who will come to these wholesale markets will be
able to buy counterfeit goods and then take them back to street
kiosks, street stalls, and small retail stores for their
purchase by consumers.
I want to focus for a moment on Yiwu, which is in Zhejiang
Province, that you see on the map on the east here. If I had a
screen, I would point to it, but unfortunately I do not. If you
see it, it is on the east coast of China. This city is well-
known as the counterfeiting capital of China.
The thing to understand about these distribution centers is
that many of these wholesale markets are established by local
governments. Local governments, specifically the local
Administrations of Industry and Commerce [AIC], invest in and
protect these local markets.
In Yiwu, there are 100,000 different products, 200,000
visitors per day who purchase 2,000 tons of goods. Between 80
and 90 percent of these goods are counterfeit and infringing
goods. I know this for a fact because I spent many weeks in
Yiwu when I was working in China and saw personally the scope
of this problem.
In 1997, the China Small Commodities Market, the largest
wholesale market in Yiwu, grossed $2.4 billion in total revenue
in China. That is larger than Procter & Gamble, Nike, Unilever,
and Johnson & Johnson combined. That is larger than their total
yearly revenues.
The role of counterfeiting in Yiwu, it is no exaggeration
to say, supports the entire local economy and legitimate
businesses, such as restaurants, nightclubs, warehouses,
transportation companies, and hotels. All of them have grown up
and they support the trade in counterfeit goods. If you shut
down the trade in counterfeit goods in Yiwu, you will probably
shut down the local economy. Because the government has
invested in these wholesale markets, they are heavily defended
at the local level.
If you skip the chart on the next page, I know I am running
out of time already. I would like, now, to move to the chart on
the State Administration of Industry and Commerce [SAIC] on
trademark enforcement activity.
I just want to highlight for you the nature of the
enforcement issue. I am just going to talk about this briefly
and skip over most of this subject, but it is detailed in my
written statement.
In the year 2000, there were 22,000 enforcement cases which
were brought by the State Administration of Industry and
Commerce. The average fine in those cases was $794. We are
talking about a multi-billion dollar industry, and the fine was
$794. Perhaps even more startling, if you look at criminal
prosecutions, there were 45, total. That is 45 cases out of
22,000 enforcement actions that were then transferred over to
the authorities for criminal prosecution. The level of
enforcement, I think, in China, does not create deterrence.
Now, if we can go to the next page on exports. As I know my
time is running very low, I am going to now emphasize the most
significant point on this page, which is that in my opinion
there is going to be a significant increase of counterfeit
products from China, which already accounts for probably 80
percent of all of the counterfeit items that are exported in
the world today. There is going to be a significant increase
because, in 2004, China, in accordance with its WTO
commitments, has eliminated the export monopoly that had been
enjoyed by state trading companies. Prior to 2004, a
counterfeiter had to get the cooperation and compliance of a
state trading company, which had a monopoly on export rights,
before they could export counterfeit product. Now, in 2004,
that monopoly has been eliminated. It means that any
counterfeiter now can export counterfeit product. As there are,
in my view, no criminal penalties specifically directed at the
exporter of counterfeit goods, I think we are going to see a
significant increase. In fact, mid-year 2004 figures show a
sharp jump in the amount of counterfeit product that is being
seized by U.S. Customs.
Finally, if we can go to the last page, let me just talk
now about future trends. The issue, as I see it, in China is
that, really, counterfeiting occurs at the local level. It
supports local economies. Shutting down counterfeiting will
mean, in many instances, shutting down entire towns and
municipalities which will cause problems of unemployment,
dislocation, and social chaos, which is something that the
Chinese Government fears more than anything else.
On the one hand, you have the tremendous cost of the
shutdown and crackdown on counterfeiting. On the other hand,
you have multinational companies in China which are very afraid
of offending the Chinese Government and they do not want to do
anything that might jeopardize their business interests.
So I think right now there is no political will on the part
of the Chinese Government to crack down, because right now
counterfeiting is not causing the Chinese Government pain.
Until it does, I do not think there is going to be a
significant change in the situation.
Thank you very much.
Mr. Foarde. Thank you very much, Dan, for a sobering and
very quick overview. We will come back to some of the issues
that you have raised in the question and answer session. I take
it they did not give you the key to the city for all the time
you spent in Yiwu, right?
Mr. Chow. No. We stayed in the best hotel, though, I must
say. It was run by the counterfeiters.
[The prepared statement of Mr. Chow appears in the
appendix.]
Mr. Foarde. I would like, now, to recognize Eric Smith, who
is president of the International Intellectual Property
Alliance [IIPA]. IIPA is a private sector coalition of six U.S.
trade associations which represents over 1,300 companies
producing and distributing materials protected by copyright
laws throughout the world.
Mr. Smith serves as chairman of the ITAC-15, the executive
branch's Trade Advisory Committee on Intellectual Property
Rights, and regularly advises the U.S. Government on
negotiating strategy in the trade and intellectual property
rights arena. He was formerly chairman of IFAC-3, the
predecessor to ITAC-15, as well as a member of IFAC-4, which
formally advised the U.S. Government on e-commerce issues. He
is a former trustee of the Copyright Society of the United
States, and former chairman of the D.C. Bar's Committee on
Copyright. He has written numerous articles on communications
and international copyright, and has lectured worldwide on many
subjects related to both domestic and international copyright
law, U.S. trade policy, and intellectual property and new
technologies.
Eric hails from California, and holds a J.D. from the
University of California at Berkeley--Boalt Hall, 1967--and
obtained his bachelors degree with honors from Stanford.
Welcome, Eric Smith. Thank you for sharing your expertise
with us this afternoon.
STATEMENT OF ERIC H. SMITH, PRESIDENT, INTERNATIONAL
INTELLECTUAL PROPERTY ALLIANCE, WASHINGTON, DC
Mr. Smith. Thank you, Mr. Foarde. I appreciate it. This is
a terrific forum to highlight both the counterfeiting and
piracy problems in China, and I really appreciate the
opportunity to talk to all of you about it. Mr. Chow introduced
the topic quite well. I am going to speak about copyright
piracy.
Our organization represents, as you mentioned, six trade
associations, 1,300 companies that account for about 6 percent
of the U.S. GDP and about 4 percent of U.S. employment, and
that has been growing every year since we started doing the
first study in 1990.
These industries employ workers at about three times the
rate of the economy as a whole. The situation globally for the
copyright industries is very difficult because of the ease of
copying, but China is a particular problem for us because the
levels of piracy are the highest in the world. For example, in
each of our industries, piracy runs about 90 percent of the
market. That means 9 out of 10 copies available in China are
pirated. Given the global demand and the demand in China for
our products, for movies, for music, for software, these
companies should be generating literally billions of dollars of
revenue in the Chinese market. When you think about it, how do
you make money in a market where you are competing for 10
percent of the market?
But it should not be forgotten that an additional problem
in China is the lack of market access for each of these
sectors. The copyright sector is probably the most closed to
doing effective business in China than any other U.S. business
sector, partly because of the sensitivity of many of these
industries; the Chinese Government always viewed film as a
major propaganda tool. But the combination of high levels of
piracy and the inability to get legitimate product into the
market combines to create, in our case, a very conservative
estimate of $2.5 billion in losses a year. Now that is just
measuring what the market is today. If you were to look at what
the market should be with market access and the ability to form
anti-piracy organizations like we have in every other country
in the world, and if piracy stayed at 90 percent, the losses
would be many times that.
I wanted to leave you with some key thoughts. I have given
in my written testimony, and I have handed you our rather
comprehensive February 301 submission that we give to the
Office of the U.S. Trade Representative [USTR] every year, that
goes into detail about the problems in China from a copyright
piracy standpoint.
The Chinese enforcement system relies almost entirely on
thousands of people who run administrative raids against
pirates and counterfeiters. As Mr. Chow said, the fines are the
cost of doing business, basically. We did a survey in Beijing a
little while ago with respect to actions taken at the request
of one of our industries, the motion picture industry, and
looked at the fines that were assessed in those cases. These
were administrative cases brought by the Beijing Copyright
Bureau, in conjunction with the Ministry of Culture and other
agencies that worked together. We discovered that the fines
tended to average a little bit above the cost of buying a blank
tape. With this kind of penalty structure, as Mr. Chow
mentioned, there is simply no disincentive to continue in this
business.
In the trademark area, we understand there have been some
criminal cases. I think Mr. Chow mentioned 40. In our area, we
have been able to count, over the last 10 years, maybe, to our
knowledge, 10 criminal cases. We know of only one criminal case
that involved foreign copyrighted works. This really gets to
the nubbin of the issue, I think. In every other country in
which our companies do business, and that is 100 countries, all
use their criminal law as a way of dealing with piracy.
The profits are so high in this business that if you are a
CD factory owner--and there are now 83 factories in China, many
of which churn out pirated product on a regular basis--the
money is so high that, without criminal enforcement and the
potential of jail terms, there is going to be no possibility of
ever getting a handle on this problem. We have been, and the
U.S. Government has been, asking now for 15 years, really, for
the Chinese to undertake an enforcement program that has
deterrent penalties, and we have yet to really see it.
In the Joint Commission on Commerce and Trade [JCCT], which
convened last April when Vice Premier Wu Yi was here, the U.S.
Government and the Chinese delegation met, and the Chinese
delegation committed--Wu Yi committed--to significantly
reducing
piracy rates. A year later, during the USTR out-of-cycle review
process, the formal legal process that they use to evaluate
what China has been doing, there has only been a negligible
change in the piracy levels in China.
I think in the recording industry, piracy rates went down
approximately 5 percent, from 90 percent to 85 percent.
However, on the other side of the equation, Internet piracy
skyrocketed. We do not have any way of really measuring
Internet piracy yet, but China is going online, and it is a
very serious problem and the legal infrastructure is not there
yet.
So we have a situation where piracy rates have not been
significantly reduced, and during the course of that one-year
period, we know of one copyright piracy case that involved the
two Americans who were arrested in Shanghai.
Let me just spend a couple of minutes on that case. That
case was initially prosecuted under Article 225 of the criminal
law of China. That is the part of the criminal law that says it
is illegal to engage in a business operation without the
license allowing you to do it. It is not a piracy offense, it
is illegal business operations. At the end of the day, when
that case was finally decided, the prosecutor broke that down
to an Article 217 case, which is, in fact, the crime of piracy.
There has not been much news about that. We were happy that
that happened, because it is the first time that that has
happened. The problem with criminal prosecutions under Article
225, is it just sends the wrong message to Chinese society.
I would just leave you with this one fundamental point.
Unless China is willing to use its criminal law procedures to
deal with
piracy, they are not going to be able to substantially change
the situation. Now, China cannot continue to operate in the
atmosphere in which they are operating now. They have to move
up the value chain. They cannot continue to be a low-wage
manufacturing country.
We have the examples of Korea, Taiwan, and other countries
in the Asian region that have driven down piracy rates from, in
the mid-1980s, 100 percent piracy in Taiwan and Korea, to--
believe me--piracy rates at the latter part of the 1990s that
were down to 15 percent. How did they do it? Very simple. They
put pirates in jail. If it was not a jailable offense, they
fined them at levels that were deterrent. Until China makes the
political commitment to do that, it is not going to be able to
deal with this problem.
In 1995-1996--and this goes to the point that Mr. Chow made
at the end of his presentation, and this is a point about
incentives--the Chinese Government was facing $2 billion worth
of retaliation if they did not close their CD factories. The
Minister of Propaganda finally ordered the closure of those
factories. They were in the provinces.
Mr. Chow is absolutely right, it is a local issue, too. But
until the Politburo and the central political leadership of
China makes that kind of a decision to say ``enough'' and
announces it into the society, nothing is going to change in
China. We are working now with USTR, looking at the possibility
of a WTO case. We are strongly supportive of the JCCT
commitment on both the market access and the piracy side, and
there is an IPR working group.
Madam Ma is going to be in town next week. So this hearing,
in particular, is very timely and we hope that the Chinese
delegation gets the kinds of messages from the U.S. Congress
that they need to get in order to solve this problem. Thank you
very much.
[The prepared statement of Mr. Smith appears in the
appendix.]
Mr. Foarde. Thank you very much, Eric Smith, for another
rich presentation. We will pick up some of those issues as well
in the question and answer session.
I would like to go on now and recognize an old friend, Jim
Zimmerman, partner and chief representative of the Beijing
office of Squire, Sanders & Dempsey, LLP. Jim concentrates his
practice on foreign investment matters in China and represents
multinational clients in a broad range of industries with
respect to their joint venture investments, manufacturing
investments, liquidation and dissolution of investments,
mergers and acquisitions, regulatory compliance, customs and
trade matters, and dispute resolution. Jim is the author of
several books, chapters, and articles concerning Chinese law,
customs regulations, and trade policy related issues, including
``The China Law Deskbook,'' which is a publication of the
American Bar Association. He is a governor and vice chair of
the Board of Governors of the American Chamber of Commerce in
China [AmCham], and chair of the Legal Committee for that
Chamber. He is also chair emeritus of the China Law Committee
of the ABA's International Law Section. He is on the panel of
mediators for the U.S.-China Business Mediation Center, jointly
operated by the CPR Institute of Dispute Resolution and the
China Council for the Promotion of International Trade. Jim is
also on the panel of arbitrators for the International Court of
Arbitration of the International Chamber of Commerce [ICC] and
has served as an arbitrator in ICC cases.
Welcome, Jim Zimmerman. It is great to have you here in
Washington.
STATEMENT OF JAMES M. ZIMMERMAN, PARTNER AND CHIEF
REPRESENTATIVE, BEIJING OFFICE, SQUIRE, SANDERS & DEMPSEY, LLP,
BEIJING, CHINA
Mr. Zimmerman. Thank you, Mr. Foarde. It is a pleasure to
be here.
My comments will be on behalf of not just myself and my
firm, but also on behalf of the American Chamber of Commerce in
China. We are here in town this week as part of the Chamber's
annual Washington Doorknock Program. I have prepared a written
statement and I will send that by e-mail to you later today. If
anyone would like a copy of that, they can ask me or send me an
e-mail.
Basically, my perspective is a little different. I come
from the perspective of being on the ground in China and
spending a lot of time meeting with government officials,
meeting with court officials, and to get their insights on IP
enforcement.
But let me start by saying this. In January of this year
the U.S. Ambassador to China held an IPR roundtable and I
provided the comments on behalf of the U.S. industry. I made
the following comment: ``Since its accession to the World Trade
Organization in
December 2001, China has made significant improvements to its
written laws governing intellectual property rights. However,
there has been minimal progress in establishing a system of
effective enforcement.'' My comments were picked up by the
press in the United States and by the press in China. The press
in China, in the China Daily, focused on the comment that
``significant improvements have been made.'' The press in the
United States focused on the comment of ``minimal progress in
establishing a system of effective enforcement.''
Therein lies the problem, which is a perception issue. Some
people in the United States believe China has done nothing, and
I do not believe that is true, as I will go into some detail
later. At the same time, China believes that it has made
significant improvements, not just to their written laws, but
with respect to enforcement. That is not true, either. Much,
much, much more work needs to be done in a lot of different
areas, and China does need to be strongly encouraged to make
some progress, and progress this year.
The progress that they have made is that they have spent a
great deal of time re-writing their laws and amending
regulations, adopting rules and standards. They have improved
the court systems. They have gone from a situation where they
were without a legal system 25 years ago, to one where they
have an environment, at least to some degree, in which the rule
of law is followed.
The IP court, specifically in Beijing and Shanghai, at
least, has highly trained judges. They have retired most of the
military officials, most of the Party officials, and have put
in place qualified judges, for the most part.
Now, the situation in the courts right now is that there is
a significant amount of litigation, but that has been filed
mostly by domestic companies. At least 90 percent of the
litigation in the courts is between domestic parties, and less
than 10 percent may involve a foreign party. Somebody is taking
advantage of the court system in China. It is not the
foreigners, but the domestic companies because the issue of IPR
enforcement strongly affects domestic companies. I agree 100
percent with Dan and Eric on their observations, but a big
impact is on the domestic companies as well and their ability
to get the benefit of their IP rights.
But progress needs to be made. Leadership needs to be shown
in a number of areas. I do agree with what Eric is saying and
Dan is saying about criminal prosecution. The PRC Government
needs to demonstrate the political will to put people in jail
and to enforce the laws.
In a meeting with the Supreme People's Court in February,
the AmCham leadership discussed the judicial interpretation on
IPR criminal penalties that came out in January 2004. On its
face, the judicial interpretation lacks specificity. It is not
detailed enough. There is much that needs to be clarified,
specifically with respect to the liability of organizational
end users with software, with respect to the liability of
exporters, and also with respect to infringement that may be a
health and safety issue.
One question we posed to the Supreme People's Court was,
``Well, what if you are below the threshold? '' Hence, you have
a situation where you do not reach that threshold for criminal
liability, but someone dies as a result of a tainted drug? The
Supreme People's Court did say that a crime would be committed
in that instance, but not under the judicial interpretation,
but some other law. The Supreme People's Court, in no uncertain
terms, told us that they will use their leadership to strongly
enforce the judicial interpretation. So, it is left for
observation what they will actually do. At the end of the day,
what really needs to take place is that they need to bring
prosecutions. That is something that we are encouraging them to
do.
Second, what needs to take place is that China must
dedicate more resources to IP-related issues. As an example,
the Trademark Office is significantly understaffed. In this
regard, I have seen situations where we have applied or
petitioned on behalf of clients to invalidate infringing
trademarks and we have been told by the Trademark Office staff
that they have over 20,000 cases, and they are still dealing
with cases that were filed in 1999. This is the Trademark
Office telling us that they are understaffed. It is unheard of
that a Chinese Government official would make that kind of
statement, but it is true. They are under-staffed. It is almost
like a cry for help, that they need more resources. Now, one of
the things that we are stressing--the American Chamber of
Commerce--is that the government needs to add resources to get
that backlog of cases taken care of.
Bear in mind that the 20,000 case backlog also involves
domestic companies. The case that we are waiting for
specifically is a U.S. company versus a Singapore company,
foreigner versus foreigner. There is no political risk here.
There is no political issue. The Trademark Office will not be
protecting some domestic enterprise. It is a case, from our
view, that should be quickly decided, but they are backlogged.
So, the dedication of additional resources must be encouraged.
It is very important. In addition, the Chinese Government
agencies responsible for trademark and patent registration are
behind because they do not have the resources.
Third, they need better agency coordination. One of the
things that we have been pressing for is better communication
and coordination of cases between IPR-related agencies. In
China, it is common for China Customs to be doing one thing,
and the SAIC doing another thing, and they do not coordinate
with one another. They do not even pass files to one another.
That is a real practical and logistical problem. There is also
no agency coordination between province to province, from city
to city.
How do you get the message to them on these issues? I do
believe that one forum is the JCCT, which will be meeting this
summer. Now, we do not want to be in the same position we were
last year where we came up with a list of bullet points and
then they do not make progress. We do need to get the message
to the Chinese that they must make progress on these issues.
So on the criminal side, at the end of the day they have
got to throw violators in jail. They have got to enforce their
laws. We need to see statistics on that. We need transparency.
We need to see that people are being prosecuted. They need
better inter-agency coordination, and then they also need to
dedicate more resources. Another issue is--and this is a role
that the American Chamber and other organizations can play--is
to encourage China to believe that if they protect intellectual
property and do away with the companies that are making
billions on counterfeit goods, there is a tremendous potential
tax revenue that they are losing out on.
The IPR Roundtable raised that issue to the Chinese
Government. Can you imagine the PRC Government's tax revenue if
all companies were making legitimate products and they put the
counterfeiters out of business? Because the counterfeiters are
out of the system, they are likely not paying taxes. They are
not in the system, they are out of the system. As Dan
mentioned, a lot of the counterfeiters are criminal
organizations. They are not paying taxes in China. Those people
should be paying taxes. The same thing is true with legitimate
foreign companies that want to sell their goods in China and
demand market access. If they are legitimately selling their
goods, that potentially is tax revenue that the PRC Government
can tap into.
So, those are things that the Chinese Government needs to
be told, and not just, ``you are going to be subject to a
Section 301 investigation,'' but to be told some of the
positive side on this.
Those are my comments for now. I would be happy to answer
any questions that you might have on this issue.
[The prepared statement of Mr. Zimmerman appears in the
appendix.]
Mr. Foarde. Jim, thank you very much also for some useful
and timely information.
I would like to let our panelists rest their voices for a
moment while I make an announcement or two. I would like
everyone to also attend next week's Issues Roundtable, which
will be on unofficial religions in China. We will be looking at
the religious groups that are not so-called ``patriotic''
religious groups. That roundtable will be on Monday, May 23, at
2 p.m. in room 2255 of the Rayburn House Office Building, so we
hope to see you on the other side of the Capitol next week.
Also, the statements, and eventually the transcript, of
today's roundtable, will be up on our Web site at www.cecc.gov.
You will also find the transcripts and statements from all of
our earlier hearings and roundtables. If you are not already
signed up for our master mailing list, you can do that on the
Web site and then you will get all of the announcements about
hearings, roundtables, and other activities.
So, now let us go on to the question and answer session. As
I said before, we will let each of the staff panel up here
question either one individual panelist, or all of you, for
about five minutes each. If the question is directed at just
one panelist but the other two have comments, by all means, we
would like to hear those responses, because the whole purpose
of the exercise, from our point of view, is to hear your ideas
and get those on the record.
I am particularly pleased this afternoon to exercise the
prerogative of the chair and waive my own first set of
questions to recognize my colleague, Demetrios Marantis, who
has just joined
Senator Max Baucus' trade staff. Senator Baucus was our first
chairman and Demetrios is now working for him. Max Baucus
spends a lot of time thinking about our issues and is in touch
with us frequently. So, Demetrios, over to you, and welcome.
Mr. Marantis. Thank you very much for that kind
introduction. I would like to thank the panelists. That was
extremely useful. Given the recent release of USTR's Special
301 report, this roundtable is rather timely. I have one
question that I would like to address to Eric, but I would be
curious as well as to what the rest of the panelists think. The
issue that has been of concern to Senator Baucus, as well as to
the whole Finance Committee, relates to IPR enforcement in
China.
As you probably know, all 20 Senators of the Finance
Committee sent a letter on April 30, urging the Administration
to step up its enforcement of the Trade-Related Aspects of
Intellectual Propety Rights [TRIPS] commitments in China, with
a view to a potential WTO dispute settlement case. My boss,
Senator Baucus, was a bit disappointed that USTR's out-of-cycle
review did not include the initiation of a WTO dispute
settlement case against China, given that we have been hearing
from the Administration that piracy in China is at ``epidemic''
levels and the losses, Eric, that you mentioned that the
copyright industries are facing on a yearly basis, are pretty
staggering.
So I just would like to get your thoughts as to what you
all think the utility of WTO dispute settlement against China
is, particularly on the copyright and trademark side of things,
and why we are where we are in terms of not being in a place
where we can initiate a dispute settlement case against China,
and whether or not WTO dispute settlement is the way to go to
address some of these issues, or if you have other thoughts as
to what would be a more effective use of the Administration's
resources. Thank you.
Mr. Smith. Thank you, Demetrios. As you may know, the
enforcement text of the TRIPS agreement is a part of the
agreement that is not a bastion of clarity. To bring a case
under Articles 41 and 61 against a country that has piracy at
the levels of China, the first thing you would say is, how,
possibly, could a country such as China be in compliance with
any kind of enforcement obligation when you are running a 90
percent piracy rate? But in the WTO, you have to prove your
case absolutely. And you are quite right. We asked for the
commencement of WTO consultations. USTR decided not to do that.
They decided to move forward with a process of using Article 63
of the TRIPS agreement to get more statistics from the Chinese
Government about the exact nature of what is going on there,
because as you know, China's system is wholly non-transparent.
It is very, very difficult to find out what is going on,
particularly when you are talking about cases brought and
results obtained in cases.
We are working very closely with USTR right now in moving
along that line. We understand what USTR did. It would not have
been our first choice, but they made the decision to move
forward in a deliberate way. They have invited us to go along
with them. We are in the process of preparing what is going to
be, or what will possibly be, a very large and extremely
important case.
We wish that the language in those two sections of the
TRIPS agreement were clearer and that we could use them with
less risk of losing a case. We think we can win the case, but
we have a ways to go to develop the evidence to get there.
Mr. Foarde. Do either of the other panelists want to
address that? You can have a minute or two, if you would like.
Mr. Zimmerman. A quick comment on that. I agree with Eric.
The language in the TRIPS agreement on enforcement is
uncertain. To bring an action would be time-consuming. I think
that the choice of remedies that the USTR has taken will
probably move China faster. If they do not make progress, then
there is the option of pursuing a formal enforcement action
under TRIPS. I think, right now, the strategy is a smart
strategy. With the various organizations pressuring, or working
with USTR to pressure, China, we are hopeful that action will
be taken this year. I do believe China knows that this year,
2005, the United States is very serious and wants action, and
wants to see accomplishments this year.
Mr. Chow. Let me just say, from the trademark perspective,
I think many companies with trademarks in China are very
reluctant to confront China. The whole idea of bringing a WTO
dispute settlement action, or worse, much worse, a Special 301,
is something that many of the companies on the ground are very
reluctant to do because they do not want to do anything that is
going to offend the Chinese Government. That is part of the
issue here, that the multinational companies that are in China
now have to decide how far they are willing to go. Many of them
scream all the time at the U.S. Government, but they do not
want to do anything to offend the Chinese Government. That
includes Special 301, that includes WTO dispute settlement. So
I think industry, on the trademark side, big companies, part of
the Quality Brands Protection Committee that is the
multinational companies in China that are lobbying the Chinese
industry, they are very conflicted on this issue. They are not
sending clear signals to the U.S. Government. USTR, of course,
is going to listen to its constituency. There is a lot of
reluctance to confront China.
Mr. Foarde. Thanks, all three of you, for that response.
Let me recognize Susan Roosevelt Weld, who is the general
counsel of the Commission. Susan.
Ms. Weld. Thank you very much, John. Thank you for all of
your remarks. I am interested in whether you three think that
bilateral cooperative efforts by the United States can do
anything to help cure this problem. I guess I will start with
you, Mr. Smith.
Mr. Smith. This is a very frustrating topic. Some of my
colleagues who I work with right now used to be in the U.S.
Government, and they were engaged bilaterally with China. I
have been engaged, the U.S. Government has been engaged, for 15
years now. With respect to this topic, enforcement, there
really has been very little progress. Over the last year,
following Wu Yi's commitment about substantially reducing IPR
infringements, that has not happened. Is it going to happen in
the next year? With Jim Zimmerman, we really hope so. But
absent that progress and without the incentives that Mr. Chow
is talking about, one begins to question whether or not the
Chinese have the incentive to do this.
Over the long term, they must. They cannot continue to live
as a counterfeit culture. The question is when? In the case of
the copyright companies, unlike the trademark companies--I
should not draw this distinction too harshly--our companies do
not really even have market access. Many of the companies in
the trademark area are doing business in China and making
money. They are getting hurt by counterfeiting. Many of our
companies are not making anything in China. So we have a
slightly different perspective on this question, as we did in
1995 and 1996 when the trademark community did not join in the
301 action, which was basically a copyright industry driven
action.
But now we are in a WTO world. A 301 bilateral world is
much more difficult now. So, we really have to look, first, at
multilateral remedies. That is where you come up against
Articles 41, 61, and the TRIPS agreement.
Mr. Foarde. Does anyone else want to address that? Please,
Jim. If you have a comment, go ahead.
Mr. Zimmerman. I was going to add that this is the first
step. The bilateral negotiation is the first step, and I do
think it is a helpful step. We will just have to see how it
plays out.
I am optimistic. We have to remain optimistic. Part of that
optimism is based on some of the assurances that we received
from Chinese Government officials, how they are serious about
it, and they do want to improve. They want the relationship
with the United States to improve, so they have an incentive to
really make progress.
And when I say 2005 is the year, it is because we also
understand that the U.S. Congress is under pressure from a lot
of different quarters from people who are not happy, but at the
same time, I think that China realizes that and understands
that they are going to have to listen this time. It is just
like in 1995, when they had the Section 301 hanging over their
heads. Right now, they have got these negotiations that are
hanging over their heads.
Mr. Chow. Well, just going back to this whole issue of
bilateral negotiations, I think that the United States is going
to take its lead from industry. I can tell you that when I
worked in China for a multinational company, we met with the
U.S. Government. What we said to the U.S. Government was,
``well, we would like you to talk to the Chinese Government,
but please do not use our name and please do not make them
angry.'' That is what we said, because that was essentially the
attitude of the companies. So I think that the companies
themselves have to make a decision: how far are they willing to
push this, or is this really a situation that is more or less
the status quo?
Mr. Foarde. Thank you, all, very much.
Putting on these Issues Roundtables, although they may seem
quite seamless, requires a great deal of organization and hard
work. So we give the privilege of asking questions at each
roundtable to the one staff member who has done the most heavy
lifting to organize it. In this case, it is our friend and
colleague, Adam Bobrow, our senior counsel for commercial rule
of law. Adam, over to you for some questions.
Mr. Bobrow. Thank you, John. And thank you very much to the
panelists. This has been very informative and we have heard a
lot of very good testimony so far.
I would like to switch gears a little bit. We think of this
sometimes as a simple situation in which you have people who
want to see DVD movies or want to buy trademark products and
other things, and some sort of a culture of willingness to let
this stuff get made under the table without enforcement. The
Chinese Government believes nobody is getting hurt, so what is
the big deal, and that it is that simple.
But I would like to look a little bit behind that and see
whether or not the panelists have any feeling about whether or
not some of the policy decisions that the Chinese Government
makes in other areas have led to this situation where there is
no real incentive for enforcement against infringers.
Let me give a particular example. It is probably a bit
outside your specific expertise, so you do not necessarily have
to address the specific example. But in the case of China's 3-G
standard that they are developing domestically, it is known as
TD-SCMA. CDMA is a U.S.-company owned, IP-protected, patent-
protected standard for cell phone communications. TD-SCMA
obviously is going to be built--you can tell from the name--on
top of that.
The Chinese Government has recently issued draft
regulations that would seem to indicate that, in the situation
under which there would be patents or other IP-protecting and
underlying technology that is announced in the standard, they
would issue a compulsory license for that technology without
using the term. This is where I think the rubber hits the road.
Regarding IP domestically, the Chinese Government has
decided who, what, where, when, and how it will generate a
Chinese-owned IP system that will move their manufacturing
economy up the value chain.
At the same time, enforcement of IP rights owned by
innovators, whether they be foreign or domestic, have never
really received the same sort of policy attention by the
policymakers in the central government. Therefore, as Dan
outlined, with the local enforcement authorities, and because
those authorities unfortunately are tied up in a web with the
illegal counterfeiters, there is perhaps too little incentive
to get actual enforcement on the ground.
The first part of my question is, I guess, to what extent
do you think that I am making this much too complicated? The
second part of the question is how do you actually generate
that will at the political or policy level in the central
government to get the enforcement to occur at the local level?
I will open it up to any of the panelists who would like to
answer that.
Mr. Smith. Maybe I could start. I think it is wrong to say
that local Chinese rights owners are not being damaged by what
is going on China. I think, in the trademark area, we have
heard about whole cities being devoted to counterfeiting. But
just the examples in our area, if you are a Chinese filmmaker,
or you are a Chinese performer, or you are a music composer, or
you are a software developer, you are in big trouble. You
cannot make a return on your investment. Now, we know that
these people complain all the time in the only way that they
can, politically, to the Chinese Government about this problem,
and they are not getting any recompense and it is very sad.
If you look at what has happened with other governments,
governments have started to listen and realize that they are
hurting themselves worse than they are hurting U.S. companies.
So, maybe that is more specific to the copyright area than it
is to other areas.
On the other hand, I think your general observation is
probably close to correct. I think there are a lot of
policymakers in China that have looked at this as, ``how do we
build into our system a 10 percent growth rate, because that is
what we need to stay even, and rule of the law be damned. The
fact that we have laws on the books and we are not enforcing
them, we are letting them just go, we think that is what we
need to grow.''
I think Jim made the point that the growth rate from legal
businesses is going to be, in our judgment, and we think the
economic literature supports this point, the growth rate from
encouraging legal businesses is greater than encouraging
businesses based on naked copying. China is going to have to
realize that very soon. We hope Jim is right, that they realize
it in 2005, because we are dying and we cannot wait too much
longer.
Mr. Zimmerman. A couple of comments. On the standards
issue, there is a big debate going on in China as to whether or
not the inclusion of patents and standards should be a
voluntary process or a compulsory process. There were some
draft regulations from the Standard Administrations of China
released for public comment last September, and then there was
a big uproar about that because it was basically a compulsory
process. The Chinese Government backed off. Two things to
China's credit on that: one, they did allow for public comment;
second, it was a relatively transparent process.
Now the issue has not been resolved, but I can tell you
this: there are some elements in China that believe the
inclusion of
foreign patents and standards could be characterized as foreign
domination, given the history of foreign domination and foreign
intervention in China. So there are a lot of people that do not
like that idea. They do not like foreign standards being
imposed on China, they want to create their own.
Unfortunately, that does not encourage innovation. The
debate, I think, is a healthy debate going on in China right
now, because they are trying to break away from being viewed as
the low-valued knock-off economy. They want to move toward
something where their homegrown IP has value, because as we
have mentioned, that is where the true economic development
lies--in China getting away from being a knock-off culture to
one based on innovation, and we have to encourage China to move
in that direction.
Many foreign companies are encouraging innovation because
they are setting up R&D operations and hiring local engineers,
hiring creative people in China, and showing them how to
develop new technology that will be homegrown. China needs to
protect that homegrown technology and to protect the foreign
technology as well, give them equal status. But if they move in
a direction where they are going to have a lack of incentives
and force patent holders to be part of standards without any
compensation, that will only perpetuate the problem.
The other question as to whether there is a government
policy in general of supporting infringement? I do not think
so. I think you give China too much credit when you suggest
that they are developing a policy which encourages
infringement. I think it is more a lack of resources, lack of
coordination of agencies, lack of political will, and those are
things that they need to correct.
Mr. Chow. Just turning to the patent issue and the
compulsory license issue, as far as I can see, this is really a
different type of dispute. As far as I can see, I think this is
a legitimate trade issue. I am not even convinced that what
China is trying to do here is wrong.
I think every country wants to acquire advanced technology
and that they want to implement policies that will allow them
to do so. That is very different from counterfeiting, which is
organized criminal activity. These are illegal factories that
are not registered. These are not state-owned enterprises that
are registered, and that have a fixed permanent location, that
have a legal identity, that have a business license. We are
talking about illegal, underground factories financed by
criminal organizations. There is no dispute about that, but
that is completely wrong. Nobody in China argues that that
should be in any way supported.
The other thing I want to mention also is I agree with Jim
that I do not think there is a policy supporting infringement
in China. I do not think that there is any coordinated view in
the central government or any attempt, conscious or
unconscious. I think that this process has begun because, very
simply, counterfeiting and piracy are extremely lucrative
economic crimes. There is so much money to be made, that
criminal elements and other loose elements of society are just
naturally drawn to it.
Mr. Foarde. Let me now recognize Keith Hand, who is senior
counsel with the Commission staff. Keith.
Mr. Hand. Thanks, John. Thank you for the presentations.
They have been very interesting.
I would be interested in talking a bit more about the
domestic pressures for enforcement. We have been touching on
that issue here and there through the course of our discussion,
and I was very interested in Jim's point that 80 percent of the
infringement cases are brought by domestic entities for
domestic infringement.
Are there domestic trade associations analogous to yours
that are bringing pressure for greater enforcement or is
advocacy in China more dispersed, an individual company with
influence raising this issue with the Chinese Government?
On the issue of the infringement cases, is there a
significant difference in plaintiff success rates and
enforcement rates in domestic versus domestic cases as opposed
foreign versus domestic cases?
Mr. Zimmerman. First, the question on whether or not there
is support by domestic associations. I do know with respect to
DVD manufacturers, the Chinese organization that was
responsible for managing that issue was leading the
negotiations for the various Chinese DVD manufacturers to
encourage them to negotiate with what was called the 3-C and 6-
C group of patent holders--which are the foreign companies that
hold the IP rights to the DVD technology. That association--and
I cannot remember the name off the top of my head--encouraged
its member companies to negotiate royalty-related agreements
with the various foreign technology holders. They had mixed
success. They were able to negotiate arrangements on behalf of
several companies, but there was still room for improvement in
terms of the negotiations. But the point is that there are some
associations that are taking the lead. Now, I am not aware of
what the film or the music industry is doing, but there are
more and more domestic companies and more and more domestic
organizations that realize the value of IP and realize that
their members are losing out. So I think that if you were to
look at some of the organizations that have been behind those
issues, I think you'll find that they are keen to push the
question, but I do not have the answer right now on that.
In terms of the success in litigation, it is a mixed bag
for both domestic and foreign companies. I think that foreign
companies are more successful in the courts in the major
cities--and that is not just IP, that is with regard to any
kind of dispute. If you bring an action in a local court or
provincial court there is a risk that the foreign litigant may
experience local protectionism or that the local Party might be
politically influential and impact the case. So, the foreigners
will do much better in the larger cities. The courts are
treating cases in Beijing and Shanghai professionally. But I do
not have statistics in terms of the success rate, because
sometimes success is measured in various ways; hence, even
though a company might lose, the result might be fair. We find,
in terms of arbitration cases before, like the China
International Economic & Trade Arbitration Commission [CIETAC],
CIETAC claims that in 75 percent of their cases involving
foreigners, the foreign party prevails. My statement to CIETAC
was to give themselves some credit because even though a
foreign party may lose, the result may be fair. I have actually
had cases where we have lost but the results were very fair.
For example, I had a matter where the amount at issue was $20
million, but we lost and the amount that was actually awarded
was $50,000. So, given the results, we actually won. Thus, it
does not matter if you win or lose, it is whether or not the
result is fair and whether or not the court or the arbitrators
followed the law and parties' contracts.
Mr. Smith. If I might respond to that question. I agree
with Jim. The civil court system, and the IPR courts, and the
intermediate courts in China have improved significantly.
Unfortunately, civil litigation is not a way to get at criminal
enterprises engaged in counterfeiting and piracy. It just is
not deterrent. Certainly from our industry's standpoint, it is
not the way to go for us. No one is making money, and you would
make even less if you spent it on lawyers engaged in civil
litigation because it would not really be deterrent.
That being said, the recording industry brought, over the
last three or four years, maybe well over 100 civil cases
against licensed CD and DVD factories. These were not
underground plants, because you cannot bring a civil case
against an underground plant if you do not know where it is.
You can only bring a criminal case with the help of the
government, and we are not getting criminal cases. Those cases
were mostly settled for damages that had an impact, but it is
simply not the way ultimately that you are going to deal with
the problem of piracy, though it is very important to China to
work on the rule of law and make their civil courts work. It
just is not relevant in our area.
The second thing you asked is about trade associations.
Yes, there are trade associations: China Audio-Video
Association and Computer Software Association of China. First
of all, many of these trade associations comprise primarily
state-owned enterprises. How aggressive is that trade
association going to be against its own government? You hear
lots of talk in the background, but they are not going to be
out there screaming like a private sector trade association in
the United States might scream.
An exception to that is probably the Computer Software
Association, which has a number of private company members. But
even there, the politics within China--look, the Chinese are
masters of divide and conquer, and that is what they are doing
with us. Everybody is scared to death of saying anything
negative about China for fear of retaliation. There is no
question about that.
The last point I wanted to make, in response to you, Adam,
is the Chinese invented the pirate format in Asia, the VCD.
They invented it. About a year ago, or a year and a half ago,
we heard news that they were going to ``invent'' or innovate a
new DVD format, but this format would not have any protection
on it. It would be a completely in-the-clear format. Of course,
the motion picture industry was absolutely apoplectic about
this possibility, and it has not happened.
Third, the Chinese Government has just recently announced--
and there was a hearing in the House Government Reform
Committee yesterday on this subject--a procurement regulation
that, according to the Business Software Resellers Alliance
[BSRA] member, would probably kill any ability of a foreign
software company to sell software in China, because that
procurement regulation would require state-owned enterprises,
et cetera, to purchase only Chinese software.
So I do not subscribe to the view, and I do not think our
members subscribe to the view, that there is any sort of great
conspiracy here behind the scenes. I think there is just a
combination of a lot of different things going on, a lot of
lack of cooperation, and some agencies that have specific
missions that are probably very anti-foreign. The combination
of all of those elements gives you what we have today, which is
a horrendous situation for IP owners.
Mr. Chow. Civil litigation is for legitimate business
disputes when you have a plaintiff and a defendant who are
willing to show up in court. That is all right, and the local
companies that are bringing these cases they have legitimate
business disputes. But civil litigation does not preserve the
element of surprise. When you deal with counterfeiters, you
have to surprise them, because they are not there if you do not
surprise them. So what most people in China do is they bring an
administrative action, an enforcement action that is an ex
parte action, where you show up and 15 minutes later the AIC or
the PSB go with you and you raid the factory and then you seize
all the goods. Then what happens is that there are penalties
that do not create a deterrent. So, I think civil litigation
certainly is important for China's long-term progress, but it
is not the answer for counterfeiting.
Mr. Foarde. Thank you all again for those answers.
I would like now to recognize my friend and colleague,
William Farris, who is our senior specialist for the Internet,
and has also taken over duties as our press director. William.
Mr. Farris. Thank you. One of the areas I look at is
censorship in China. It seems like we were talking earlier
about issues of political will and capacity. It seems like when
it comes to censorship, China has a great deal of political
will and a great deal of capacity. Mr. Smith, I believe you
mentioned, perhaps indirectly, that China's method of handling
cultural imports is affecting the ability of copyright holders
to make money in China. You also mentioned that the two
foreigners arrested in Shanghai were initially charged under
Article 225, which, as I understand it, is the law on which the
Supreme People's Court also has issued an interpretation that
says that illegal publications would be prosecuted under that
law.
I am wondering if you, or perhaps the rest of the
panelists, might be able to further comment specifically on why
they were arrested under Article 225, and why the charge was
eventually changed to a charge under Article 217 of the
criminal law, and also any issues relating to how China's
censorship regime affects the ability of U.S. copyright or
other intellectual property holders to make money in China.
Thank you.
Mr. Smith. Well, I think our industries face censorship in
almost every developing country in the world, so we are used to
having our movies and our music censored. You build around
that. You can adjust to it. One of the difficulties in China,
is that pirates do not go through censorship and, in the case
of the music industry, for example, local music companies do
not go through censorship. So, that is sort of a national
treatment violation, right there.
The Internet is another example. I will just give you an
example. I think I mentioned it in my testimony. There are
something like 200,000 Internet cafes in China, with 100 to 300
seats each. Most of them are devoted to game playing. These
Internet cafes are intensely regulated, but there is no
regulation that says they cannot pirate, and in fact, they all
do. They download off the Internet, they get pirated games. It
is just a real big problem.
So the control that the Chinese Government has over its own
society to prevent social misbehavior, to prevent pornography,
many of these 225 actions that have been commenced over the
last 10 years were really actions against pornographers. Now,
there was pirated product seized in the raid, but the real
gravamen, we think, of a lot of these criminal actions was to
get at the pornographers, because that they view as a really
serious problem that they need to stop, and we just would like
to see them to make the judgment that piracy is like that.
Mr. Foarde. Would any other panelist want to make a
comment? Please, go ahead. Go ahead.
Mr. Zimmerman. One of the concerns with Chinese law in
general, and including the IPR judicial interpretation, is that
it is very vague, very generally worded. It gives the
government as much wiggle room as possible, and, unfortunately,
much enforcement is in the hands of those who are interpreting
the law.
Subjective enforcement is a concern because, without
specificity, we have to guess how they are going to interpret
or implement the law and regulations. That wiggle room creates
problems because there is too much discretion in the hands of
the PRC agencies. Such discretion is why some enforcement
activities are politically motivated and the politics have to
be played to encourage somebody to prosecute or to seize goods.
That is a problem with Chinese law, in general. It is very
general, the way it is worded, and leaves a tremendous amount
of discretion on the part of the agencies or the court with
respect to the judicial interpretation. Unfortunately, we have
to anticipate how the law is going to be applied and we have to
have some faith that they will, because of outside pressure,
move forward with criminal prosecution. That is the key thing
here, is that at the end of the day, at the end of the year, we
are going to count the success of achieving benchmarks, and we
are going to find out if they put people in jail. It is not
just the guy on the street that is selling the DVDs that has no
political power, no political strength, but it is the factory
owners and the government officials protecting them. Those are
the people that have to go to jail, and that is what we are
looking for.
Mr. Chow. We have talked a lot about the difficulty in
obtaining enforcement, and we have not gone into a great deal
of detail, but it is just really incredible how many obstacles
there are to effective enforcement. I will just give you a very
simple example. When I was working in China, we went to the
Public Security Bureau [PSB], and we said, ``Well, we know of a
counterfeiter, and what we want you to do is to arrest them.''
What the PSB said to us was, ``Well, will you give us a reward?
'' I said, ``What do you mean? '' ``Well, we want 50,000 RMB
per arrest.'' That is not that much. That is about $6,000 U.S.
dollars. But the U.S. corporation has to worry about the
Foreign Corrupt Practices Act, and of course we said no. But
they would not do it unless you paid them a case fee, 50,000
RMB per head. So, that is just to give you an idea.
There are so many others, and I can go into detail about
evidentiary issues and what counts as evidence and what does
not. There are just so many issues and so many obstacles, it is
very difficult to get that type of enforcement.
Mr. Zimmerman. It is not a user-friendly system.
Mr. Foarde. Let the record show that the comment was that
it is not a user-friendly system. Let me pick up on the
questions now. One for Dan Chow. I was struck by your comment
on trading rights eventually or suddenly being able to be
acquired by counterfeiting companies, domestic counterfeiting
companies in China, which I take it was not the case before.
How much relationship, if any, does this have with the trading
rights commitments that the Chinese Government made in the WTO
accession process?
Mr. Chow. When China joined the WTO, China committed to
further liberalize its economy and its legal system so that it
could foster legitimate trade. Part of the same liberalizations
which help legitimate trade also help the illegal trade in
counterfeit goods. Specifically, what I mentioned was that,
under China's pre-WTO system, only state trading companies had
the privilege of exporting products from China. This is an
example of the lifting of a restriction that is going to help
both legitimate and illegitimate trade. So, for example, the
reason why China has to eliminate the export monopoly that
state trading companies have is to facilitate legitimate
businesses who do not then have to go through the process of
hiring a state trading company to export their products.
Well, if you eliminate the monopoly rights that state
trading companies have on exports, that means anybody,
including counterfeiters, can export without the help of a
state trading company.
What has happened today is that counterfeiters find a
cooperative state trading company that is willing to export
counterfeit goods, but that involves work, that involves
payments, and that is something of a barrier. But by lifting
that export monopoly and by giving a general right to every
company, except with respect to certain types of goods, such as
cotton, which are restricted, now any company can export.
Now, if you are a counterfeiter and you can export to
Eastern Europe where there is no legitimate product, so they
cannot tell, and where it appears that there is no specific
criminal law directed at exports, what is going to happen is
you are going to see an explosion in the amount of exported
products from China. I believe, in the first half of 2004,
there has been a sharp increase in the number of seizures by
U.S. Customs. So the same measures that will liberalize trade
in China and help legitimate trade will also, in the short
term, I think, lead to an increase in commercial piracy.
Mr. Foarde. I would be happy to have either one of you
address that.
Mr. Zimmerman. Just for clarification on that, there is a
distinction between the trading rights and the distribution
rights. To China's credit, last summer they did provide for
wholly foreign-owned enterprises to have trading rights, and
that was in the amended foreign trade law. That was six months
before their WTO obligation kicked in. But on distribution
rights, it is still something that we are waiting for. The new
notice that came out two weeks ago, is still unclear on the
process of obtaining distribution rights.
Now, the impact of all of that on IP issues is that because
things are relaxing, I think you are going to find more and
more counterfeits in the export market. So, with meeting the
WTO obligations on trading rights, distribution, or whatever,
it is going to make it worse because now they are exporting
everywhere.
Mr. Smith. We are actually a little bit more concerned on
the import side, again, as part of the market access problem,
getting legitimate product into China. Basically, the export of
CD product, after the 1996 closures, went down to a trickle.
Now it is back up. It is an interesting comment, because most
of the exporting was not done before, and it was smuggled out.
So, that has not made much difference.
But what we were really hoping for was to be able to import
directly to the Chinese consumer without going through China
Film or the China monopoly importer for the record industry, or
the CMPIEC for book publishing. For those industries, all that
is still in place right now. We still have to go through those
monopoly organizations, in part because the trading rights did
not apply in the film industry. In the publishing industry, we
are trying to figure out now why publishers are importing
through the monopoly. They should have full trading rights.
They should be able to go directly to the consumer. So, these
are things that need to be worked on and resolved.
I just want to say that what they did in the judicial
interpretations is that they did kind of a back-handed thing.
For somebody who exports or imports, it is not a direct
offense. You are an accomplice to some other offense. I do not
know quite how that is going to work. But they just did not go
the whole way. To give you another example of this, there was
an internal Supreme Court research study done before the
judicial interpretations were issued, and that study
recommended, I believe, that the threshold be measured by the
of the value of the legitimate product, not of the pirated
product. You can imagine, if you are selling a DVD for 60
cents, you have to have a heck of a lot of DVDs before you
meet, for a major crime, the $54,000 threshold at 60 cents.
That is a lot of product. It was recommended that they get rid
of that. In the political processes, they worked through the
JIs, or the judicial interpretations, and that did not happen.
In part, it was to maintain this kind of discretion that Jim
was talking about. They did not want to have a hard-and-fast
rule that said this is going to be a crime, this is not going
to be a crime. They wanted to be able to make sure that they
could play with it.
Mr. Foarde. Our shadows are getting long this afternoon,
but I think I would like to take the privilege to ask the last
question for the afternoon and just pick up on a theme that I
think both Jim touched on, and Eric as well, in your opening
presentations, on how China compares with the sort of
counterfeiting history of Taiwan, Hong Kong, and South Korea.
If you could help us a little bit to understand your views
about where China is on that continuum and get into that a
little bit more deeply in the couple of minutes we have
remaining, I think it will be very useful for us.
Mr. Smith. I can say that it is a little difficult to talk
about Taiwan in this context, because what happened was, from
1989 through 1998, they had an enforcement campaign that drove
audio and video piracy rates, as I say, down to like 12 and 15
percent. We crowed about Taiwan as our success story. Then what
happened, is the Taiwan government let the OD factories, the
optical disk factories, go. They kind of relaxed and the
pressure went off. All of a sudden, there were 60 factories.
Organized crime took over and they were investing on the
mainland, they were investing in Hong Kong, they were investing
in Thailand and Malaysia, and it went out of control and piracy
went back up to 50 percent. So, it is now back down. It is
going back down again. I would say you could cite Taiwan as an
example of a country very much like the mainland, but much
smaller, where the political will was there.
Korea is another example. Within a period of maybe five
years, they went from 90 percent piracy rates down to 15
percent piracy rates. So, again, a smaller country, a country
that at the time had a government that was not as
democratically oriented as it is now, and the piracy situation
in Korea is not quite as good. It is a whole new thing. The
Internet is in Korea now. It is the most wired country in the
world and piracy is out of control. But back in the days before
the Internet, piracy was under control.
So, our message is, China could do this. This is not
impossible. You do not have to take every person on the street
and make them a cop to stop piracy. It is called smart
enforcement, deterrent enforcement, not just throwing bodies at
it. The SAICs have 100,000 employees and they are doing
trademark enforcement. I do not work much with the SAICs, but
there are a lot of people. It does not necessarily take a lot
of people. It takes smart enforcement, not bodies.
Mr. Foarde. If either of you would like to comment on that
in the minute or so we have remaining, please.
Mr. Zimmerman. I think there is a pattern between Taiwan,
South Korea, and China here, and also, with Mexico and Latin
America, where you have countries that have underdeveloped
legal systems and where their focus is on low-cost
manufacturing. They are going to find a way to make money and
make money off counterfeiting. I remember in the early 1970s in
Mexico, there were knock-off eight-track tapes and cassettes
that were readily available on the streets. I am not sure if
you will find those today. I think Mexico has made progress on
IPR issues. But there is a pattern. China is, of course, a
bigger country.
I do agree with what Eric is saying. What is required is
smart enforcement. It is coordination of resources, dedicating
more resources, and then having the political will to go after
those criminal organizations and to shut them down. But we have
also got to keep reminding China that there is a tremendous
benefit for their own industry, for their own tax revenues to
make this a priority. We cannot keep saying to them, ``Hey,
this is to protect foreign companies,'' or ``this is to protect
foreign IP holders.'' That is part of the equation.
The other part of the equation is that you have to protect
your own industry, and, most importantly, to protect themselves
and their reputation internationally. China has a lot to gain
by being an international player. They have a lot to lose by
being labeled as a hub for knock-off manufacturing. That
reputation is not something that China wants or needs.
Mr. Chow. I know that many people draw comparisons between
Taiwan, South Korea, and China. But Taiwan and South Korea felt
the pain of counterfeiting, and that has not happened to China.
I am not sure if it is going to happen to China.
The other thing is that there is this basic assumption that
we have that no nation can achieve a high level of industrial
and economic development without respect for IP laws. But I am
not sure that that historical lesson is going to apply to
China. I mean, I think we may be seeing the emergence of a new
type of economy, one in which piracy rates remain permanently
higher than anything we have ever seen before, and the economy
continues to grow. That is what is going on. The economy
continues to grow at rates which are the envy of the world.
China continues to be the largest recipient of foreign direct
investment in the world, consumer wealth and spending continue
to increase, all this against a background of a commercial
piracy problem that has no parallels in world history. So, I do
not know that the historical lesson is going to apply to China,
and I think that China may test that. We may be seeing
something new.
Mr. Foarde. I take it from what we have heard before,
particularly from Eric, that there is not universal agreement
on that point, but I am glad that we heard a diverse set of
views on this question.
Our time for this afternoon is up, unfortunately, so we are
going to have to leave it there. I would like to thank, on
behalf of Senator Chuck Hagel, our Chairman, and Congressman
Jim Leach, our Co-Chairman, our three panelists, Eric Smith,
Jim Zimmerman, Daniel Chow, and also all of you who came to
listen this afternoon.
We hope you will join us again next week on Monday
afternoon at 2 p.m. over in 2255 Rayburn for a roundtable on
unofficial religions in China.
So we will call this one closed for today. Thank you all.
[Whereupon, at 3:34 p.m. the roundtable was concluded.]
A P P E N D I X
=======================================================================
Prepared Statements
----------
Prepared Statement of Daniel C.K. Chow
may 16, 2005
Counterfeiting in China
I. INTRODUCTION
In terms of size, scope, and magnitude, counterfeiting in China is
considered by many to the most serious counterfeiting problem in world
history. (As used here, counterfeiting refers to the unauthorized use
of trademarks owned by another on identical or similar goods.) A recent
study by the PRC State Council Research and Development Center reported
that in 2001 the PRC economy was flooded with between $19-$24 billion
worth of counterfeit goods. Brand owners in China estimate that 15 to
20 percent of all well-known brands in China are counterfeit and
estimate their losses to be in the tens of billions of dollars.
Counterfeiting is estimated to now account for approximately 8 percent
of China's gross domestic product.
China is also a leading exporter of counterfeit products to other
countries in Asia, Europe, and the United States. In 2003, China
accounted for 66 percent or over $62 million of the $94 million of all
counterfeit and infringing goods seized by the U.S. Customs Service at
ports of entry into the United States. Mid-year figures in 2004
indicate that seizures are sharply higher with $64 million seized in
the first half of 2004 alone. An ominous development is that beginning
in 2004, exports of counterfeits from China to the United States and
other parts of the world may begin to increase significantly for the
foreseeable future.
II. ORIGINS AND CAUSES OF COUNTERFEITING
There are several explanations for the unprecedented size and scope
of counterfeiting in China:
(1) Foreign Direct Investment and Advanced Technology. China's
economic growth through the decade of the 1990s has been fueled in
large part by foreign direct investment (FDI) from multi-national
enterprises (MNEs). In the 1990s, China emerged as the world's second
largest recipient of foreign direct investment behind only the United
States and in 2002, China surpassed the United States to become the
world's largest recipient of foreign direct investment with $50 billion
of foreign capital inflows. FDI is the best means in the world today
for the transfer of advanced technology, intellectual property, and
other forms of valuable information. In many cases today the
intellectual property component of a FDI in the form of patents,
copyrights, and trademarks is the most important component of the
foreign investment. For example, the value of the Coca-Cola trademark
in China is worth more many more times to that company than the
millions of dollars in capital that it has invested in China. The same
is true for the patents and copyrights owned by pharmaceutical
companies and software companies doing business in China today.
However, while MNEs are creating a transfer of technology through FDI
that is being absorbed into China's legitimate economy through joint
ventures and wholly foreign owned enterprises some of this intellectual
property is also being diverted into China's illegitimate economy as
pirates steal this technology to engage in counterfeiting and other
forms of commercial piracy. It is no coincidence that China, the
world's largest recipient of FDI, advanced technology, and intellectual
property also has the world's most serious commercial piracy problem.
(2) State Support of Counterfeiting and Local Protectionism. No
problem of this size and scope could exist without the direct or
indirect involvement of the state. In China, the national government in
Beijing appears to be sincere in its recognition of the importance of
protecting intellectual property rights, but national level authorities
are policy and law-making bodies whereas enforcement occurs on the
ground at the local level. At this level, local governments are either
directly or indirectly involved in supporting the trade in counterfeit
goods and are often reluctant to punish counterfeiters.
(3) Ineffective Legal Enforcement and Lack of Deterrence. China has
a developing legal system that is weak in many respects by comparison
to legal systems in advanced industrialized countries such as the
United States. While China's intellectual property laws are now
considered by most observers to be in compliance with the standards set
by TRIPS, enforcement of these laws remains inadequate and fails to
create sufficient deterrence of counterfeiting.
The combination of these factors--the world's largest influx of
foreign direct investment and widespread access to advanced technology,
direct or indirect government involvement and support of the
counterfeit trade, and a weak legal system that does not create
sufficient deterrence for counterfeiters in a very lucrative trade--has
resulted in a counterfeiting and commercial piracy problem that is
unprecedented in world history.
III. OVERVIEW OF COUNTERFEITING IN CHINA
The illegal trade in counterfeit goods in China can be divided into
two components: manufacture and distribution:
(1) Manufacture: The manufacture of counterfeit products tends to
be concentrated in China's southeast region in coastal areas near
Taiwan and Hong Kong. Criminal organizations in Hong Kong and Taiwan
involved in smuggling, prostitution, and narcotics have now branched
out into counterfeiting because of its lucrative nature. These criminal
organizations supply the capital and startup costs and use the borders
between China and their headquarters in Taiwan and Hong Kong to
frustrate and elude law enforcement.
(2) Distribution: Distribution of counterfeit products occurs
through a series of large open air or partially enclosed wholesale
markets. These wholesale markets are found in strategic locations
around the country and are positioned to serve large densely populated
urban areas. These wholesale markets are established and regulated by
the local Administration of Industry and Commerce (AIC), a branch of
the local government responsible for promoting, regulating, and
policing commercial activity. Based on the experience of the author,
every wholesale market in China traffics in counterfeit goods. As AICs
are also one of the primary government entities in China charged with
enforcement against counterfeiting, AICs are faced with a conflict of
interest as they are charged with policing and enforcing the very
markets in which AICs and the local government have a substantial
investment and financial interest. Shutting down these wholesale
markets would not only result in a direct loss of revenue to the AIC
but would also have many repercussions as many retail businesses,
hotels, restaurants, and nightclubs are all supported by the trade in
counterfeit goods.
IV. BARRIERS TO EFFECTIVE ENFORCEMENT AGAINST COUNTERFEITING
(1) Local Protectionism: While it appears that central level
leaders understand the importance of protecting intellectual property
for promoting China's long-term economic development, central level
authorities are legislative and policymaking bodies. Actual
implementation and enforcement of the law occurs at the local level
where there continue to be questionable commitments to suppressing
counterfeiting, copyright piracy, and other forms of economic crimes.
Local areas benefit directly and indirectly from counterfeiting. In
some areas, counterfeiting provides jobs and generates revenue that are
essential to support the local economy. In some cases, counterfeiters
voluntarily pay substantial taxes to local authorities. In other cases,
legitimate businesses such as hotels, restaurants, nightclubs, storage
and transportation companies have been created to support the trade in
counterfeit goods. The payment of taxes and the creation of lawful
supporting businesses has integrated counterfeiting into the legitimate
local economy. It is no exaggeration to say that some local areas in
China are entirely supported by the trade in counterfeit goods and that
local residents are ready to use any means necessary to protect their
illegal trade. A crackdown on counterfeiting would result in shutdown
of the local economy with all of the attendant costs of unemployment,
dislocation, social turmoil, and chaos. Because the costs of a
crackdown at the local level can be so severe, counterfeiting is
heavily defended at local levels.
(2) Inadequate Punishment: Local protectionism and a weak legal
system contribute to the lack of adequate enforcement against
counterfeiting. The result is that the Chinese enforcement system does
not create deterrence. To be sure there is no lack of enforcement
activity. To the contrary, it is relatively easy to obtain an
administrative action in the form of a raid and seizure action against
suspected counterfeiters. The problem is that once the enforcement
action is completed the level of fines and criminal prosecutions are so
low that whatever sanctions are meted out do not create deterrence. For
example, the average fine imposed on the counterfeiter or infringer in
2000 was $794, a figure that is so low as to be considered a cost of
doing business in a very lucrative trade. The amount of compensation
awarded to brand owners in 2000 stands at $19, a negligible amount.
Damages awarded by AICs seek to award the brand owner the profits
earned by the counterfeiter after deducting all expenses (as
represented by the counterfeiter) and are not based upon economic
losses suffered. As for criminal prosecutions, in 2000 only about 1 in
500 cases were referred to judicial authorities for criminal
prosecutions. Enforcement in China does not create fear in
counterfeiters or deterrence.
V. EXPORTS FROM CHINA
Recent changes indicate an ominous development: exports from China
are likely to increase dramatically beginning in 2004.
(1) Exports to the United States: In 2003, U.S. Customs seized a
total of $94 million of counterfeit and infringing goods in ports of
entry at the United States. Of this total, products originating in
China accounted for 66 percent of the total and $62 million of the
total. The 2003 figures for China represent a significant increase over
comparable 2002 figures when China account for 49 percent of all
counterfeiting and infringing products and $48 million of the total $98
million of illegal product seized by U.S. Customs. Counterfeits from
China and Hong Kong (through which many counterfeits produced in China
are transshipped) accounted for $80 million or 75 percent of the total.
No other country accounted for more than 3 percent of counterfeit
products. As many counterfeit products, such as auto parts, that
originate in China are transshipped through other countries, such as
those in South America and through Canada, before ultimately entering
the United States, China likely accounts for a significantly higher
percentage than the 66 percent set forth the 2003 U.S. Customs
statistics. It is possible that China accounts for as much as 80
percent or more of the counterfeits goods that enter the United States.
Note that the $94 million figure represents only the value of the
products that are seized by U.S. Customs in 2003, which can only be a
tiny fraction of what enters the U.S. market. If the total value of the
products seized represents 1 percent of the counterfeiting and
infringing product that enters the U.S. market then the total value of
counterfeits that entered the U.S. market in 2003 is approximately $10
billion with China accounting for between $6 and $8 billion of that
total. It is possible that the actual figures are much higher.
(2) WTO Commitments: There is likely to be a significant increase
in the amount of counterfeit products exported from China to the United
States beginning in 2004 and for the foreseeable future for several
reasons. In accordance with its WTO obligations, China has amended its
foreign trade laws in December 2003 to eliminate the monopoly on export
rights that had been limited to state trading companies. Under prior
law, only certain designated state trading companies were permitted to
lawfully export products from China to other countries. This
restriction meant that counterfeiters had to find a compliant state
trading company that was willing to work together with the
counterfeiter in exporting the illegal goods overseas. To be sure,
there was no shortage of export companies willing to work with
counterfeiters in exporting counterfeit and infringing products, but
this requirement nevertheless created an additional obstacle and costs
that have now been removed. The effect of the elimination of the
monopoly on exports rights means that anyone can now lawfully export
products from China. As counterfeiters are likely to take full
advantage of the elimination of this restriction, exports of
counterfeits from China to the United States are likely to surge for
the foreseeable future. U.S. Customs mid-year seizure figures for 2004
indicate that there is a sharp increase in seizure activity: $64
million in counterfeit goods were seized by mid-year 2004 compared to
$38 million by mid-year 2003.
(3) Lack of Criminal Laws: China does not appear to have any
current criminal laws that specifically apply to the export of
counterfeit products. As the earlier discussion indicated, China has
criminal laws against commercial scale counterfeiting within China,
although the effective enforcement of these laws is impeded by various
obstacles. In the area of exports, however, it is arguable that there
are no applicable criminal laws at all, and that counterfeiters can
export with impunity from both civil and criminal liability. As
pressure mounts on China to obtain better enforcement results within
China, it is likely that counterfeiters will turn increasingly to
exports as a source of revenue.
Prepared Statement of Eric H. Smith
may 16, 2005
Mr. Chairman, Members of the Commission and Commission Staff, IIPA
and its members thank you for the opportunity to appear today to review
China's record on enforcement of its copyright law against widespread
piracy and China's compliance with its WTO-TRIPS obligations. IIPA
represents the U.S. copyright industries. Its six member trade
associations consist of over 1,300 U.S. companies,
accounting for millions of U.S. jobs. The copyright industries, in
2002, contributed over $625 billion to the GDP, or 6 percent of the
U.S. economy and almost 5.5 million jobs or 4 percent of U.S.
employment. These companies and the individual creators that work with
them are critically dependent on having strong copyright laws in place
around the world and having those laws effectively enforced. On
average, the copyright industries generate over 50 percent of their
revenue from outside the United States, contributing over $89 billion
in exports and foreign sales to the U.S. economy. Given the
overwhelming global demand for the products of America's creative
industries, all these numbers would be significantly higher if those
trading partners, including China, that continue to allow piracy to
flourish in their own economies were to significantly reduce piracy
rates by enforcing their copyright law vigorously.
Before turning to the important topic of this Roundtable, I want to
provide you with a brief update to IIPA's comprehensive February 2005
Special 301 submission on China to the U.S. Trade Representative. In
that submission we called for entering into a new, multilateral
dialogue in the WTO with the Chinese government as a way to persuade it
to take aggressive action--as promised in the Joint Commission on
Commerce and Trade Meetings over one year ago--to significantly reduce
the rate of piracy in all IPR sectors including the copyright sector.
We then provided a summary review of what had happened in China over
the last year to redeem that commitment. Our conclusion: China has
failed to comply with its commitment made over one year ago in the JCCT
to significantly reduce piracy rates. While some modest reductions have
occurred in some sectors, by no measure have piracy rates been
significantly reduced. In fact little has changed in the marketplace
for our members and their companies, despite reports of increased
raiding activity and seizures of many pirate products. For the record,
I am submitting a copy of that Special 301 submission which tells the
story of the failure of an enforcement system to deter rampant piracy
in the potentially largest market in the world.
On April 29, 2005, USTR issued its decision resulting from the out-
of-cycle review of China's enforcement practices announced on May 3,
2004. USTR reflected in this decision its deep concern over China's
lack of progress in the enforcement area by elevating China to the
Priority Watch List. It also announced a number of other initiatives,
one of which was to work closely with our industries with an eye on
utilizing WTO procedures to bring China into compliance with its WTO
obligations. Since that time we have met with USTR to begin this
process and will work intensively with USTR toward the mutual goal of
bringing China into compliance with its WTO TRIPS obligations, its
bilateral obligations to the United States in the 1995 and 1996 IPR
agreement and action plan, and its commitments made to our government
in the JCCT process.
This process has now commenced in earnest. USTR will also be
seeking information from the Chinese government under the transparency
provisions of the TRIPS agreement, and is committed to using the JCCT
process to encourage the Chinese government to implement key reforms on
both the enforcement and the all-important market access front.
Mr. Chairman, our industries are deeply frustrated by the lack of
real progress by China in taking effective action to deter piracy and
to open up its market to legitimate cultural and high technology
copyright products. China remains one of the most closed markets in the
world for the U.S. copyright industries. Onerous market access
restrictions affect all our industries. Notwithstanding Premier Wen's
pledge to address the $162 billion trade imbalance between the United
States and China by increasing China's imports from the United States,
China is retaining--and, in some sectors, augmenting--market access
restrictions for creative and high-tech products that represent
America's comparative advantage.
Copyright piracy represents perhaps the largest barrier to
effective market access in China. An average (and truly staggering) 90
percent piracy rate has persisted for years despite repeated ``strike
hard'' enforcement campaigns, steamroller campaigns, and public
statements from many high level government officials supporting
stronger enforcement. While our Special 301 submission highlights the
current situation in China, I wanted to give you a brief flavor of what
copyright companies confront in trying to do business in China in face
of these trade barriers and these inexcusably high piracy levels.
Taking the business software industry first--one of our nation's
most productive and important creative sectors: The software industry
faces piracy rates in China of 90 percent, one of the highest in the
world for that industry. China leads the world in the production and
export of counterfeit software--software packages that are purposely
designed to replicate the original legitimate product. Losses to U.S.
software publishers were estimated by the Business Software Alliance
(BSA) at $1.47 billion in 2004. China was the 6th largest market in the
world for personal computers and ranked 26th in legitimate software
sales. This increasing disparity not only damages the U.S. industry but
hurts Chinese software developers as well.
China has failed to criminalize the most damaging type of piracy to
the business software industry--the unauthorized use of software within
businesses and government institutions. This is a violation of the
TRIPS Agreement. Combined with the total absence of a criminal remedy
is the absence of all but a few administrative actions against this
type of piracy with woefully low and non-deterrent fines. As a
consequence, piracy rates continue to remain at staggering levels.
To make matters worse, China is on the verge of shutting down
access for U.S. and other foreign companies to the largest purchaser of
software in China: the Chinese government. It would accomplish this by
adopting draft government procurement regulations that would expressly
favor Chinese software only. In short, the
situation for this critical copyright sector is truly dire in China
with no significant improvement in sight.
The U.S. motion picture industry is facing a 95 percent piracy rate
in China (the highest in the Asia Pacific region, and among the highest
in the world) which represents a worsening of the situation from the
previous year. Losses to just the motion picture industry, from 1998
through 2004, are estimated at over $1 billion (not including losses
from Internet piracy, which are growing alarmingly). While raids and
seizures have increased somewhat following Vice Premier Wu Yi's 2004
enforcement campaign, administrative fines remain far too low to deter
pirate activity and, as I will describe later, criminal cases have been
extremely rare despite Chinese promises to use this TRIPS-required
remedy. According to a recent newspaper report, the legitimate home
video market in China represents about 5 percent of the estimated total
market of $1.3 billion (which is itself a very conservative estimate).
Of the 83 optical disc factories licensed by the government (and an
unknown number of ``underground'' unlicensed plants), many continue to
churn out pirate DVDs. The export of pirated home video product, which
had slowed to a trickle after the U.S. Section 301 action (and
threatened retaliation) in 1995-96, has resumed and is growing. The
total optical disk plant production capacity, a significant amount of
which is devoted to producing pirate product, is now close to 2.7
billion units annually. Optical disks sourced in China and containing
pirated films have been seized in over 25 countries around the world.
The massive quantity of pirated movie product available in China is
evidenced by the fact that pirate prices start around $0.60 per unit
the lowest price in Asia. As with the other copyright industries, any
enforcement that occurs is conducted by administrative agencies, with
overlapping jurisdiction and often little coordination, and fines
imposed are a mere ``cost of doing business.'' A recent anecdotal
study, conducted by IIPA member, the Motion Picture Association (MPA),
revealed that the average fine imposed per pirate home video product
(DVD, VCD) seized in raids resulting from MPA complaints is only
slightly higher than the cost of purchasing a blank disk--clearly of no
deterrent value. The lack of deterrent administrative penalties is a
key reason, in addition to the almost complete lack of criminal
enforcement that piracy rates persist at 90 percent of the market and
above.
Accompanying and reinforcing this piracy situation are onerous
market access restrictions, including a Government-owned, monopoly
importer, very limited competition in distribution, and a quota of 20
theatrical films allowed into China annually on commercial terms. The
pirates capture 100 percent of the market for films not permitted
legally in China. Even those films permitted theatrical release suffer
piracy rates of 70-75 percent, because of the long delays before most
American films are given screen time. Another consequence of the lack
of competition in importation and distribution is the non-competitive
pricing in the Chinese market. Cumbersome licensing requirements
burdens the retail sale of legal home entertainment product, holding
down revenue potential and helping keep the market in the hands of the
pirates. These barriers and those to all our industries must be removed
in the JCCT process.
The entertainment software industry, one of the fastest growing
copyright-based industries, faces similar high piracy rates and
estimates the value of pirated video games in the market at $510
million in 2004. Demand for entertainment software products is growing
rapidly but is being soaked up primarily by the pirates. This demand is
exemplified by the exploding popularity of ``massively multiplayer
online roleplaying games'' (MMORPGs) where literally thousands of
players can compete against one another simultaneously. Demand for
MMORPGs in China grew at 40-45 percent over expectations in 2004. This
increasing demand has fueled, in part, the growth of Internet cafes in
China. (It is estimated that there are close to 200,000 Internet cafes
in the country, with a seating capacity of between 100-300 seats, of
which 60 percent are involved in game play.) While U.S. game
publishers, represented by IIPA member, the Entertainment Software
Association (ESA), have engaged in some licensing of the cafes, the
vast majority of the product used is pirated, either available at the
cafe or downloadable from the Internet. This dire situation has been
all the more exasperating since the Chinese government extensively
regulates the activities of these Internet cafes and often and
vigorously revokes licenses for actions the government deems
inappropriate. However, as far as we know, the government has never
sought to include in this extensive regulatory scheme prohibitions
against the widespread and blatant piracy at these cafes in its
business licenses (which are otherwise very thorough). Moreover, no
copyright enforcement of any kind has occurred. The legal
infrastructure governing the Internet still is not helpful to copyright
enforcement. Takedown of pirate sites is negligible; penalties non-
existent.
Cartridge-based handheld games are also hard hit by the pirates
with manufacturing and assembly operations throughout China with
exports throughout Asia, Latin America, the Middle East and Europe.
Enforcement attempts have been relatively successful in terms of raids
and seizures but, like with other industries,
administrative fines are non-deterrent and criminal enforcement action
very rarely undertaken, even against factories generating millions of
dollars in illicit profits. Entertainment software products are also
subject to a protracted content review process, by two separate
agencies contributing to market entry delays. Given the immediate
nature of the demand and lifecycle of best selling games, this leaves
the pirates virtually uncontested in the market prior to the official
release of a new title. There are also Internet and investment
restrictions that must be significantly eased or abolished.
The U.S. book publishing industry, represented by IIPA member, the
Association of American Publishers (AAP), faces both significant offset
printing of pirated books, primarily in translated editions, and
massive commercial photocopying of textbooks and reference books on and
near University campuses. There are 580 licensed state-owned publishers
in China, 50 of which are considered major. There are only a few
privately owned publishers but they must buy publishing rights from the
state-owned publishers. U.S. publishers issued 4500 translation
licenses in 2004, a significant number but far below China's potential.
All the best selling books are then
virtually immediately pirated by outlaw ``printers'' and made available
through independent bookstores, stalls and street vendors. To give an
example, the famous self-help bestseller ``Who Moved My Cheese'' sold
over 3 million copies in China. It is estimated, however, that the
pirates sold another 6 million copies. The Harry Potter books, and
other best sellers like Hilary and Bill Clinton's books ``Living
History'' and ``My Life,'' John Grisham's books and others all face a
similar fate from the pirates. Former General Electric President, Jack
Welch's biography, ``Winning,'' has sold over 800,000 copies but with
an equal number of pirate copies available in the market. English
language textbooks are also heavily photocopied in their entirety and
there are six known websites which make available entire copies of
textbooks that are downloaded and then photocopied. Enforcement against
this vast piracy is spotty and all done administratively through the
local and national copyright bureaus. Any resulting administrative
fines are non-deterrent. We know of no criminal enforcement. The book
publishing industry also faces market access barriers--U.S. publishers
are not permitted to publish, sign authors, or print their books in
China.
The recording industry, represented by IIPA member, the Recording
Industry Association of America (RIAA) did experience a minor reduction
in the piracy rate for sound recordings, from 90 percent in 2003 to 85
percent in 2004 in ``hard goods'' piracy, but with significant
increases in Internet piracy. Losses remain in excess of $200 million
per year from continued optical disk manufacture and distribution
within the Chinese market and significant levels of audiocassette
piracy (still an important format in China). The recording industry
faces many of the same problems with optical disk piracy confronting
the motion picture industry. Millions of pirated music CDs are readily
available throughout China. Some of these pirate products have found
their way into the export market. China continues to rely on its failed
administrative enforcement system, which relies on numerous
inspections, product seizures and, when the pirate doesn't flee, the
imposition of small, non-deterrent fines.
Internet piracy in China, as in other countries in the world, has
become a huge problem for the recording industry. Thousands of active
websites such as www.9sky.com and www.chinaMP3.com are giving away, or
offering links to, thousands of pirated songs. (These not-for-profit
acts of piracy are not criminalized in China, as they are, for example,
in the United States.) International criminal syndicates are apparently
using Chinese servers to hide their illicit activity (www.boxup.com)
and many Asian pirate sites are doing a thriving business in China,
such as www.kuro.com from Taiwan.
Market access restrictions are severe, contributing to piracy and
market losses. U.S. record companies cannot ``publish'' or release a
recording without permission of a state owned company and cannot
manufacture, distribute or engage in retailing of its products, which
artificially segments the market and makes it extraordinarily difficult
for this world class industry to participate in the Chinese market. Its
products are subject to censorship while domestic (as well as pirate)
recordings are not--a national treatment violation.
All in all, the copyright industries estimate their total losses in
excess of $2.5 billion in 2004 due to piracy in China. The simple fact
remains that these losses and the 90 percent piracy rates will NOT be
significantly reduced without subjecting major piracy to criminal
enforcement accompanied by deterrent penalties and substantially
increasing the administrative fines specified in the copyright law and
imposing them in practice. To date, even after the JCCT commitments,
this has NOT happened and there is a real question whether the Chinese
government as a whole (Vice Premier Wu Yi has been a staunch defender
of better enforcement) can muster the political will to take these
absolutely necessary actions--actions that have been key to significant
reductions in piracy levels in other countries in which our companies
operate. China cannot exempt itself from the rules--that enforcement
against piracy requires deterrence and criminal remedies. The global
community recognized this when it fashioned the Article 61 criminal
obligation in TRIPS and it has proven to be the case in practice.
The Commission has asked the key question that has trouble everyone
associated with China's IPR regime: ``Will China ever enforce its IPR
laws.'' The article in the Far Eastern Economic Review,\1\ provided to
us by the staff, sets out the interesting thesis that this failure has
nothing to do with ``stages of development'' or ``cultural attitudes.''
We completely agree. These shibboleths have regularly been argued to
excuse China (and other countries) from meeting their freely bargained-
for WTO obligations. In fact, other countries have similar ``cultural
attitudes'' and are at or near China's development level and they have
done a far better job bringing deterrence to their copyright
enforcement system thereby reducing piracy rates. Piracy is an economic
crime and responds to economic disincentives placed in the pirates' way
by an effective, deterrent enforcement system. If the risk is too high,
the conduct will cease or be substantially reduced. The authors also
set out the view that Chinese government control over its economy and
the ``command'' nature of the government's involvement contains built
in incentives to continue to permit infringements as a way of
protecting tottering state-owned enterprises. We have no expert view on
this but observe that China has sought to preserve the import and
distribution monopolies that are pervasive in the copyright sector. The
thesis seems to apply more, however, to the patent and trademark areas
of IP protection, rather than to copyright, where it is becoming
clearer to us at least that the harm from copyright piracy is falling
increasingly on Chinese creators and Chinese companies (some rather
large too). These companies, because they are either state-owned (and
find it difficult to confront their own government for its failures),
or are private (and the government, like many governments in developing
economies, are not yet responsive to the entreaties of their private
sector) face a governmental response that derives primarily from
internal bureaucratic needs, first and foremost. An illustration might
be the apparent unwillingness of the Chinese authorities to lower the
thresholds for initiating a criminal prosecution so that they become
workable in practice (a result not accomplished in our opinion in the
new Judicial Interpretations issued in December 2004) and to follow
with criminal prosecutions and deterrent penalties. The reason given is
that bringing more criminal cases would risk overwhelming the
enforcement bureaucracy. However, many other governments face this same
potential argument and have nevertheless determined that criminal
enforcement is a necessary condition to reducing piracy (as well as
being a WTO obligation). Furthermore, we should not underestimate the
problem that the central government faces in controlling what happens
at the provincial level. We believe, however, that, through the
Politburo and the Party structure, this impediment can be overcome, if
the political will is there. It may be that such political will CAN be
generated if the proper ``incentives'' are there. An example of this
would be when the Chinese government (at the highest ``political''
level), in 1996-97, closed many of the CD factories that were exporting
pirate optical disk product globally under threat of U.S. trade
retaliation.
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\1\ Anne Stevenson -Yang and Ken DeWoskin, China Destroys the IP
Paradigm, Far Eastern Economic Review (March 2005).
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Regardless of the reasons why the Chinese government has not, at
least yet, decided to take deterrent criminal actions against major
acts of piracy (as required by TRIPS), to make necessary amendments to
its criminal law (as required by TRIPS), to further amend its Judicial
Interpretations to reduce the hurdles to effective criminal
prosecutions, and to increase administrative penalties and impose them
at deterrent levels, they are nevertheless under an international
obligation (in the WTO), and a bilateral obligation (under the 1995-
1996 bilateral agreement settling the Section 301 case) to do so.
Moreover, it is not in China's own interest to undermine its own
domestic creative industry and to continue to foster trade friction
with its key trading partners. Other governments in the Asian region
have made the political determination that effective enforcement is in
that country's own interest. China must do the same and do so NOW.
Thank you very much for the opportunity to participate in this
Roundtable.
Prepared Statement of James M. Zimmerman
may 16, 2005
AmCham-China's Views on China's IPR Enforcement Record
Thank you Mr. Chairman and staff members for this opportunity to
present the views of the American Chamber of Commerce, People's
Republic of China.
My name is James M. Zimmerman. I am the Vice Chairman of the Board
of Governors of AmCham-China and Co-Chair of AmCham's Legal Committee.
I am a partner and Chief Representative of the Beijing office of the
international law firm of Squire, Sanders & Dempsey L.L.P.
AmCham-China, which is based in Beijing, is an organization that
represents the interests of the American business community in China.
Along with its sister organization in Shanghai, AmCham-China represents
over 2000 companies and individuals from virtually every state in the
union, including small to medium sized businesses and U.S. exporters
without a formal presence in China. We do not represent the interests
of Chinese companies or the PRC government. AmCham-China and its member
companies are in the field every day fighting for market access for
U.S. products and services.
One of our core tasks is to meet with the Chinese government on a
broad range of issues such as for greater market access of U.S. goods/
services, timely implementation of China's WTO obligations, increased
enforcement of intellectual property, and continued improvement of
China's legal system and business environment.
AmCham-China and its member companies--given our on-the-ground
presence and years of in-country first-hand experience--are committed
to assisting this Commission and Members of Congress in obtaining
information and data to assist it with respect to its investigation
concerning the issues addressed in this forum today.
I am here today to share our concerns and efforts with respect to
IPR protection and enforcement in China.
Since its accession to the World Trade Organization (WTO) in
December 2001, China has made significant improvements to its laws
governing intellectual property rights (IPR). However, there has been
minimal progress in establishing a system of effective enforcement.
Indeed, counterfeiting and piracy problems in China are worsening
and affecting both Chinese domestic and foreign brands. More
sophisticated infringement schemes, combined with an increasing number
of exporters, mean more counterfeits are showing up in foreign markets.
Piracy not only amounts in a tremendous loss of revenue to IPR holders,
but is also a consumer health and safety issue since counterfeit
product rarely meets stringent quality standards.
The violation of intellectual property rights impacts almost all
industry sectors including consumer and industrial goods. Among a few
examples, computer software, films, music recordings, clothing,
cosmetics, auto parts, pharmaceuticals, and food and beverages have all
felt the sting of piracy.
In the media sector, it is common for a newly released film in the
United States to surface within days of its American release as a
pirated copy in China. Pirated DVDs in high quality packaging are now
widely available in DVD stores throughout Beijing, despite the Chinese
government's repeated commitments to crack down on piracy.
Piracy is a deeply frustrating problem for our members. More than
three-quarters of respondents to the 2004 AmCham-China & AmCham-
Shanghai membership questionnaire are negatively impacted by China's
poor IPR protection. Ninety percent of our members believe China's IPR
protection is ineffective.
AmCham-China believes that the answer to the problem will only be
tackled with stronger national leadership to address IPR enforcement
issues.\1\ Large department stores and markets openly selling
counterfeit and pirated goods are widespread throughout China,
including in Beijing itself. Chinese agencies report that they
periodically raid these markets, sometimes imposing modest
administrative fines on vendors. However, the fact that these markets
continue to operate in the public eye, with seemingly no fear of
meaningful legal penalty, creates the impression that China's national
leadership lacks the will to stop counterfeiting and piracy.
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\1\ We are pleased with Vice Premier Wu Yi's commitment, made on
behalf of the Chinese government at the April 2004 Joint Commission on
Commerce and Trade (JCCT) meetings, to make specific improvements in
IPR laws and regulations; strengthening IPR education and enforcement;
ratifying the WIPO digital treaties; establishing a joint U.S.-China
IPR interagency working group to tackle enforcement issues; and
promulgating the judicial interpretations on criminal liabilities
standards covering prosecution, conviction, and sentences. However, the
2004 commitments have not bee fulfilled and more work needs to be
accomplished.
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Among other things, we believe that strong IPR protection is not
just to protect the interests of foreign multinational corporations but
also to guard the rights and interests of domestic intellectual
property rights holders and to protect the health and safety of
consumers worldwide that may purchase pirated goods.
With these general comments in mind, AmCham-China supports the USTR
in placing China on a Priority Watch List and initiating WTO
consultations with China under the TRIPS agreement. We believe that
China needs to be put on notice in the strongest and most direct terms
possible, that the IPR problem must be effectively contained or the USG
will be forced to either take WTO action (with all the uncertainty that
entails given the untested nature of the WTO TRIPS Agreement).
AmCham is in favor of exploring ways to taking action against
specific regions, cities, or provinces in the PRC that are areas of
flagrant IPR abuse, or specific Chinese companies which engage in
repeated and gross violations of IPR.
While enforcement efforts have been lax, we believe the Chinese are
growing more aware of their poor performance on IPR there is nowhere
near the required effective and deterrent enforcement measures as
required by WTO. As we have stressed to the PRC leadership, the key to
enforcement is credible criminal sanctions that deters commercial-scale
IPR counterfeiters and pirates.
For its part, AmCham-China has developed an exchange and education
program of its own to encourage more effective enforcement in China and
this program in general includes, among other things, the following
components:
IPR Index of Enforcement: AmCham-Beijing has created an IPR
Index which measures whether China's IPR enforcement is
improving or not. We are currently conducting the baseline
survey and plan to publish the results three times a year. This
information will be available to the public, including the PRC
and U.S. governments. We recognize that we in the private
sector--here and in China--need to provide much more data on
specific examples of inadequate Chinese enforcement. Our IPR
Index will aid this effort and we are also taking steps to
advise and inform our members of the importance of collecting
and sharing such information directly with the USG.
Legal Exchange and Education Efforts: AmCham is pressing
various PRC government agencies and judiciary to take certain
key steps during the next year.\2\ In short, we have stressed
to the PRC government that several laws must be amended/adopted
to provide stronger protection, enhanced penalties, and further
clarification of standards. As part of its efforts, AmCham-
China and AmCham-Shanghai jointly publish an English/Chinese
language issues White Paper on an annual basis for purposes of
educating the Chinese government on areas of concern for U.S.
business, and included in the White Paper is a detailed
analysis of U.S. industries' concerns with IPR enforcement. At
the end of this Statement is a draft of excerpts from our White
Paper and reflects some of the issues we continue to emphasize
to the PRC leadership.
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\2\ On January 19 2005, an AmCham delegation met with key members
of the PRC Supreme Peoples Court (the ``SPC'') to exchange views on the
Interpretation by the SPC and the Supreme People's Procuratorate (the
``SPP'') on Several Issues Concerning Application of Laws in Handling
Criminal Cases Involving the Infringement of Intellectual Property (the
``Judicial Interpretation'') that was effective in December 2004. While
the language of the Judicial Interpretation left much to be desired,
Justice Huang Songyou, Vice President of the SPC, assured us that the
Chinese government was serious about fulfilling its WTO commitments and
gave priority to IPR protection. As stressed to the SPC, the key to
enforcement is credible criminal sanctions that deter commercial-scale
IPR counterfeiters and pirates. We believe that the SPC (the highest
court in China) understands that effective action must be taken.
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Benchmarks and Performance Criteria: This will be indicative
of its commitment to IPR (we developed this list independently
but it bears many similarities to the list of tangible results
expected of China in USTR's April 30 Special 301 Report):
--Impose criminal sanctions against a significant
number of large-scale Chinese counterfeit operations.
This crackdown should be widely publicized in the
media.
--There should be a significant decline in seizures of
counterfeit goods at US and EU ports as a result of
Chinese customs interception actions.
--Chinese patent authorities should avoid retroactive
rulemaking which undermines the perceived value of
Chinese patents and creates unpredictability for
foreign investors. An example of this behavior is the
invalidation of Pfizer's Viagra patent.
--China should substantially increase its budget
dedicated to enforcement of IPR and give national
police the authority to operate across jurisdictions
within China.
--China should substantially increase the budget for
the Trademark Office to resolve the backlog of
invalidation cases pending (i.e., 20,000 cases and some
pending since 1999).
AmCham further believes that the U.S. Government should dedicate
additional resources to counter the effect of PRC-based counterfeiting
and to support China's efforts to develop an effective enforcement
system, including the following:
Significant increase of U.S. Customs personnel dedicated to
interception of Chinese counterfeit goods.
Increase in U.S. Customs' cooperation in cross-border
criminal investigations with China and EU.
U.S. government, particularly USPTO, to engage in more
cooperative technical assistance programs to assist China in
raising the level of IP practice so that U.S. companies can
benefit. An improved patent/trademark examination system may
expedite the grant of IP rights to U.S. companies.
In summary, the AmCham-China and AmCham-Shanghai believe that China
has made progress in the past three years with respect to its IPR laws,
but much focused and aggressive work remains in order to elevate
China's system to international standards and to give worldwide IPR
holders a comfort level that their
intellectual property interests will be respected and protected in
China, and that infringing parties will be punished. China's IPR
standards and regulatory system--as a work in progress--requires strong
national leadership and the dedication of capital and resources to be
more effective and respected.
Thank you for this opportunity.
Excerpts of AmCham-China and AmCham-Shanghai's Draft 2005 White Paper
Concerning Intellectual Property Rights Issues
Central Government Resources: The Chinese leadership needs to
devote more of its political capital and bureaucratic resources to
shaping a national IPR strategy and putting into place an effective IPR
enforcement regime. There is a need for revised laws, regulations, and
policies. The most glaring deficiency in China's IPR regime at this
time is in the need to revise the one key law that was not revised when
China joined the WTO--its criminal code, which should be revised to
provide stronger protection, enhanced penalties, and further
clarification of standards. More attention is needed on the ``big
impact items to improve local enforcement, raise public awareness and
strengthen intellectual property customs protection, and enhance
interagency coordination.
Interagency Coordination: The lack of coordination among the many
Chinese government agencies responsible IPR enforcement prevents
effective enforcement. The Administrations for Industry and Commerce
Trademark Divisions (AIC), AIC Economic Supervision Divisions,
Technical Supervision Bureaus (TSB), Copyright Administration offices,
Customs, Public Security Bureaus (PSB) Social Order Divisions, and PSB
Economic Crimes Investigation Divisions (ECID), to name a few, have
overlapping jurisdiction and authority. Jurisdictional issues need to
be resolved and a program adopted to improve coordination.
Customs Enforcement: Since its WTO accession, China has liberalized
its foreign trade regime. This is a welcome development. An unintended
consequence, however, is that exports of counterfeit and pirated goods
from China have increased sharply in the past two years and are now a
global problem. Further liberalization contemplated by the revised
Foreign Trade Law may well accelerate this trend. Although verbal
assurance from the Supreme People's Court provides otherwise, there is
nothing in the written laws that indicates that it is illegal to export
counterfeit goods from China. This should be rectified and enforcement
resources provided.
The PRC Intellectual Property Customs Protection Regulations, in
effect from March 1, 2004, and the related implementing rules, promise
to improve IPR customs enforcement. We are hopeful that Chinese customs
will invest in the organizational and equipment upgrades necessary to
make these regulations fully effective. This includes the purchase of a
centralized computer system to enable customs officials to track the
activities of counterfeiters and copyright pirates.
The regulations themselves, however, contain several weaknesses.
There are no provisions to transfer suspected cases of criminal
liability to the public security organs. AmCham-China and AmCham-
Shanghai are also concerned about the removal of administrative
penalties from the customs regulations and hope that such penalties
will be reinstated. Presently, however, there appear to be no
punishments for willful trade in infringing goods.
Chinese regulations require IPR owners to carry a heavy burden for
protecting their intellectual property. For example, companies must
provide customs officials with precise information as to which port(s)
counterfeit goods will be going through, even though such information
is very difficult to obtain. IPR owners also are required to post bonds
to cover the risk of counterclaims in the event that a court finds the
detained goods are not counterfeit. The procedures and amounts are
unreasonably burdensome, especially because the courts require a
separate bond in the event that a seizure leads to litigation. We
believe IPR owners should be allowed to post a single bond at the China
Customs in Beijing covering the risk of counterclaims for all customs
branches.
*Criminal Enforcement: The AmCham welcomes the release of the
Judicial Interpretation on Issues Concerning Application of Laws in
Handling Criminal Cases Involving the Infringement of Intellectual
Property, effective in December 2004. While the Judicial Interpretation
significantly reduces the numerical thresholds to trigger criminal IPR
prosecutions, we are disappointed that the Judicial Interpretation
fails to include language concerning, among other things, the criminal
liability for exporters of counterfeits and organizational end-users
(and specifically with respect to the misuse of software products);
methods for calculating value of semi-finished infringing products;
enhanced penalties for repeated offenders, violations of health and
safety, and other aggravating circumstances; and a clear definition of
``illegal business income'' which appears to allow the use of the
infringing party's prices and not the actual loss by the genuine owner
of the IPR. Moreover, the distinction between individual and corporate
infringing activity (with the threshold for unit or corporate activity
being significantly higher than for individual activity) is unfortunate
since it will simply encourage criminals to incorporate to avoid
criminal liability. In the end, the true test of effectiveness of the
Judicial Interpretation--and the resulting work of the courts and
prosecutors--will be whether it is effective in deterring the rampant
infringement of IPR in China and in bringing more criminal prosecutions
and convictions in IP cases.
Administrative Enforcement: The existing system for administrative
enforcement of regulations against piracy and counterfeiting needs to
be improved. The AIC and the TSBs are key agencies providing support to
intellectual property rights holders, but their effectiveness is
limited by policy and legal problems. For example, there are no minimum
standards for administrative fines; only a maximum standard.
Consequently, our members report the amount and scope of administrative
fines is dropping. We encourage the government to unify standards at
the local level, combat local protectionism, and enhance interagency
coordination.
Administrative Fines for Trademark Infringement: The State Council
issued implementing regulations for the PRC Trademark Law, which
entered into effect on September 15, 2002. These regulations provide,
inter alia, for a dramatic increase in the maximum administrative fines
that may be imposed on counterfeiters, from the prior 50 percent of
turnover to the current 300 percent. Unfortunately, these increases in
maximum potential fines have yet to result in a significant increase in
actual penalties imposed. This is mainly due to the lack of guidelines
from the State Council and the Trademark Office of the SAIC as to how
fines should be calculated.
Administrative Enforcement of Software Copyright: Copyright
authorities at the local level are crippled by inadequate manpower,
training, and resources. Appropriate steps should be taken to ensure
that the National Copyright Administration (NCA) and their local
offices responsible for enforcing copyrights are adequately supported,
such that rights holders can have reliable access to administrative and
civil remedies provided under relevant laws against end-user and other
copyright pirates. Effective coordination needs to be established with
the SAIC to increase the enforcement capability of the local Copyright
Administration offices. There must be reliable administrative
enforcement coupled with deterrent penalties to prove that corporate
end-user piracy bears administrative liability. We look forward to the
prompt enactment of administrative rules by the NCA and the Ministry of
Information Industry (MII) to deal with Internet piracy, takedown
notice procedure and ISP liability.
The following issues related to the Computer Software Protection
Regulations (issued by the State Council on June 4, 1991 and amended on
December 20, 2001) should be addressed: (1) the regulations should be
modified to clarify that temporary copies of software are protected;
(2) the exception under Article 17--which allows for the unlimited use
of any software for the purposes of learning and studying the design--
should be amended since it goes well beyond what is permitted under the
Berne Convention and the TRIPS Agreement; (3) the exception under
Article 30 of the Regulations--which creates a significant loophole in
the liability of corporate end-user pirates by allowing an exception to
liability in cases where a party is deemed to have acted without
knowledge--should also be amended as inconsistent with international
standards; and (4) the requirement under Article 30 that allows for a
compulsory license in situations if destruction of the illegally used
software would bring great loss to the infringer--should be deleted or
amended as it is vague and goes beyond the exceptions and limitations
permitted by the TRIPS Agreement.
Local Standards and Local Protectionism: There is significant
variation among
localities for interpreting liability thresholds. Currently, the
provinces and municipalities have very different thresholds for
determining copyright infringement. For example, the Shanghai PSB has
issued its own IPR crime arrest and investigation guidelines, but we
are not aware of any current efforts to provide nationwide standards.
In many cases, local protectionism renders administrative enforcement
ineffective. After raiding counterfeiters, trademark owners too often
encounter local AICs that are reluctant (delays are often more than six
months, and sometimes more than a year) to release the official
administrative penalty decision letters. This has seriously hindered
trademark owners' efforts to recover damages from counterfeiters in
court. We welcome steps to bring cases against administrative
authorities for abuse of their authority in rendering insignificant
fines. We also believe that administrative authorities should be
encouraged to make their decisions publicly available to ensure the
system is fully transparent and in accordance with the law.
Patent and Trademark Registration and Protection: Improving the
trademark registration process would help deter counterfeiters who
preemptively register well-known trademarks, trademark imitations, and
even blatant copies of the trade dress of others. Unfortunately, the
China Trademark Review and Adjudication Board (TRAB) and Chinese courts
do not take bad faith into consideration in cases of preemptive
trademark registration, trademark imitation, and trade dress
infringement. There is also considerable delays with respect to
trademark invalidation petitions before the Trademark Office, which
reportedly has 20,000 undecided cases pending with some disputes filed
in 1999 remain undecided.
Similarly, the China Patent Reexamination Board (PRB) and the
Chinese courts rarely take bad faith into consideration when reviewing
preemptive patent filing at either the invalidation process with the
PRB or infringement suits in court. Currently, a legitimate rights
owner has little recourse against counterfeiters that file utility and
design patents, knowing that such filings lack novelty.
Delays in receiving patents or being granted market access are
another problem. SIPO is understaffed to handle the large volume of
applications. With the resulting backlog of patent applications, it can
take up to five years to receive a patent.
The thin legal grounds underlying the State Patent Office's
decision to invalidate the use-patent for Viagra represent a step
backwards. In its decision to invalidate the patent, SIPO relied on new
guidelines issued after the patent had been granted, and then did not
allow the patentee the opportunity to meet the revised data provision
standard of the new guidelines. The SIPO decision has been appealed to
the courts and at this writing is still in litigation. Although we are
most concerned with SIPO's rationale and procedure in invalidating this
patent, which set an unfortunate precedent, we also note that the
patent did not protect that legal producer. Domestic pharmaceutical
companies widely copied the product and sold it through a variety of
legal and illegal channels.
Patents and Standards: The intellectual property policies of the
standards working groups in China do not conform to international
practices. International standards organizations have an intellectual
property policy that defines how intellectual property is contributed
and made available for implementation of standards. Generally, Chinese
standards groups in high tech areas (Advanced Visual Standard (AVS),
Radio Frequency Identification (RFID), Linux, Intelligent Grouping and
Resource Sharing (IGRS), etc.) either have no such policy, or an
unreasonable policy requiring mandatory patent pool participation,
unreasonable disclosure, and compulsory licensing.
The common practice is to require members of standards working
groups to place all related patents in the patent pool and to entrust
only the standards group to license the technology. In addition to
creating monopolistic control, mandatory patent pool participation
devalues patents in subsequent negotiations, cross licensing, and
defense of intellectual property. Patent disclosure obligations in
working groups typically apply to the entire company rather than the
individual representing the company, and cover not only patents
necessary to the standard in question, but all related patents,
including third party patents and patent applications. Such disclosure
standards are overly broad and impractical. This is compounded by rules
in some working groups that non-disclosed patents must be licensed
royalty free or not asserted.
The AVS Working Group is making an effort to cooperate with
international standards experts to develop an appropriate IPR policy
and related legal documentation. We recommend that relevant agencies
and other Chinese standards organizations study this example.
Patent Protection for Computer Software: Patent examination
guidelines and practices only allow patenting software-related
inventions in the form of the computer that executes software
(apparatus claims) or methods for operating computers using software
(process claims). Protection is not allowed for computer readable media
claims or programs that cause a computer to implement an innovative
process (program product claims). As a result, the only one likely to
be a direct infringer is the end-user who actually uses the software.
This limits the use of software-related patents to protect the
intellectual property of the industry. Many governments, such as the
United States, Germany, Japan, and Korea have already recognized
program product claims. China's failure to do so is not only
discouraging to foreign companies, but also denies protection to
Chinese software enterprises at home and leaves them facing an
unfamiliar environment in international markets full of competitors
seasoned in patent protection of program products. We recommend
revision of the patent examination guidelines to accept program
products claims.