Benchmarking China's IPR Protection and Enforcement

In response to China's umpteenth pledge to protect intellectual property, Mr Robert Holleyman, president of the Business Software Alliance (BSA) said: "We will know China has made real progress in reducing piracy only when software companies start seeing substantial increases in sales." Read Sewell Chan's article here.

Mr Holleyman is doing something very constructive: he is trying to bench mark China's protection and enforcement of intellectual property rights. However, he is not looking at piracy of software copyrights, but to the income of the sale of genuine software. This might be the result, but is too simple, since the sale of genuine software is dependent on more factors than IPR infringements.

Mr Holleyman should consider using the enforcement/infringement ratio, which is a bit more complex, but gives a more robust answer to the question, is China's enforcement of IPR going forwards, backwards or unchanged.

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EU Customs Report 2008 About IPR Enforcement Activities not IPR Infringements from China

Yesterday the European Commission Directorate-General Taxation and Customs Union (DG TAXUD) published the 'Report on EU Customs Enforcement of Intellectual Property Rights. Results at the European Border 2008'.

On page 9 we find a crucial alinea, which disclaims the scope the report:

"Although the overall amount of IPR infringing goods entering or leaving the EU cannot be

ascertained from these figures, or whether the problem is growing, the figures do show that IPR

enforcement continues to be a priority for customs authorities in the EU."

Of course it would be interesting to know whether the IPR infringements that originate from China were growing or decreasing. That was the very reason why I devised theEnforcement/Infringement Ratio, see here.

The report states that 80 percent of the cases concerned seizures that were requested by the right holder and that 20 percent of the cases were done on the initiative of customs (ex-officio). So the number of cases and articles detained and the percentages of the countries of origin and provenance were all these products come from are interesting, but only show the perception of the right holders and customs of the goods that are suspected of infringing IPRs. A few times in the report the distinction is not made between seized goods that may or may not infringe IPRs and goods that actually do infringe IPRs.

Read the report here.

Thank you Rogier Creemers for pointing out to me the report.

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USTR in 2008 Report to Congress On China's WTO Compliance: Still Not Satisfied After All These Years

One of the priority issues in the 115 page 2008 Report to Congress On China's WTO Compliance, released by the United States Trade Representative (USTR) in December is, unsurprisingly, the protection and enforcement of intellectual property rights in China. Below you will find a selection of the USTR report which shows where China has room for improvement:

Pg 3. "In two other WTO cases, a challenge to key aspects to China's IPR enforcement regime, along with a challenge to market access restrictions affecting the importation and distribution of copyrighted-intensive products such as books, newspapers, journals, theatrical films, DVDs and music, ..."

More surprisingly, however, is the statement in bold:

Pg 4. "..., including the setting of unique Chinese national standards, the tremendous expansion of the test market for China's homegrown 3G telecommunications standard, China's government procurement practices, an array of policies promoting and protecting "pillar industries,", the promotion of famous Chinese brands of merchandise using what appear to be prohibited forms of financial support, ..." Read IP Dragon's 'Well known and Less Known Aspects of Well-Known Marks.

IP Dragon has dealt with the subject of China's homegrown 3G standard and hopes to interview the government procurement in China specialist and president of the China-Mekong Law Center professor Daniel Mitterhof about the intellectual property in China aspects, this year. After some compliments to China steps to protect IPRs the USTR writes:

Pg 4. "However, some critical reforms are still needed in a few areas, such as further improvement of China's measures for copyright protection on the Internet following China's notable accession to the World Intellectual Property Rights Organization (WIPO) Internet treaties, .and correction of continuing deficiencies in China's criminal measures."

Pg 5. "In addition, effective enforcement of China's IPR laws and regulations remains a significant challenge. Despite repeated anti-pirated campaigns in China and an increasing number of civil IPR cases in Chinese courts, counterfeiting and piracy remain at unacceptably high levels and continue to cause serious harm to US businesses accross many sectors of the economy."

To measure whether China's enforcement of intellectual property rights improves IP Dragon has proposed the use of the Enforcement/Infringement ratio.

Pg 5. "The United States also continued to prosecute a WTO case challenging specific deficiencies in China's legal regime for protecting and enforcing copyrights and trademarks. Following the establishment of a WTO panel last year to hear the case, 12 WTO members joined in as third parties. Proceedings before the panel took place in April and June 2008, and the panel is expected to make its decision public in 2009."

Pg 72. "For example, one major weakness is China's chronic underutilization of deterrent criminal remedies. In particular, legal measures in China that establish high thresholds for criminal investigation, prosecution and conviction preclude criminal remedies in many instances of commercial-scale counterfeiting and piracy, creating a "safe-harbor" for infringers and raising concerns that China may not be complying with its obligations under the TRIPs Agreement."

Pg. 74. "..more work is needed at b the national level and the provincial level to meet the challenges of Internet piracy and fully implement the WIPO Internet treaties."

Pg 75. "...the lack of criminal liability for certain acts of copyright infringement, the profit motive requirement of identical trademarks in counterfeiting cases, and the absence of minimum, proportional sentences and clear standards of initiation of police investigations in cases where there is a reasonable suspicion of criminal activity."

Pg 76. "...China could clarify that certain Internet "deep linking" and other services that effectively encourage or induce infringement are unlawful."

Pg 76. "Disposal of confiscated goods remains a problem under the implementing rules, which appear to mandate auction following removal of infringing features, rather than destruction of infringing goods not purchased by the right holder or used for public welfare."

Pg 76. "The United States also remains concerned about a variety of weaknesses in China's legal framework that do not effectively deter, and may even encourage, certain types of infringing activity, such as "squatting" of foreign company names, designs and trademarks, the theft of trade secrets, the registration of other companies' trademarks as design patents and vice versa, the use of falsified or misleading license documents or company documentation to creat the appearance of legitimacy in counterfeiting operations, and false indications of geographic origin of products."

Pg 76. "The United States has urged China to provide greater protection against unfair commercial use of undisclosed test and other data submitted by foreign pharmaceuticals companies seeking marketing approval for their products. The United States has also encouraged China to undertake a more robust system of patent linkage and to consider the adoption of a system of patent term restoration. In addition, built-in delays in China's marketing approval system for pharmaceuticals continue to create incentives for counterfeiting, as does China's inadequate regulatory oversight of the production of active pharmaceutical ingredients by domestic chemical manufacturers."

Conform the conclusion of my thesis, the USTR points to some extra-judicial factors that influence the enforcement of IPR negatively:

Pg 77. "IPR enforcement is hampered by lack of coordination among Chinese government ministries and agencies, lack of training, resource constraints, lack of transparency in the enforcement process and its outcomes, and local protectionism and corruption."

Pg. 77. "Trade in pirated optical discs continues to thrive, supplied by both licensed and unlicensed factories and by smugglers. Small retail shops continue to be the major commercial outlets for pirated movies and music (and a variety of counterfeit goods). Piracy of books and journals and end user piracy of business software also remain key concerns, although improvements have been seen in business software piracy rates, as discussed above. In addition, Internet piracy is increasing, as is piracy over enclosed networks such as universities."

Pg. 77. "...right holders have monitored China's efforts and report little meaningful improvement in piracy of pre-release titles in several major cities."

Appendix 3 shows a fact sheet of the 18th US-China Commission on Commerce and Trade Meeting, December 11, 2007, was given:

It states about Intellectual Property Rights:

• China reported on steps it has taken since the previous JCCT meeting in April 2006 to improve protection of intellectual property rights in China, including accession to the WIPO internet treaties, a crackdown on the sale of computers not pre-loaded with legitimate software, enforcement efforts against counterfeit textbooks and treaching materials, and joint enforcement raids conduct by the Federal Bureau of Investigation and Chinese security agencies.
• China and the United States agreed to exchange information on customs seizures of counterfeit goods in order to further focus China's enforcement resources on companies exporting such goods.
• China agreed to strenghten enforcement of laws against company name misuse, a practice in which some Chinese companies have registered legitimate US trademarks and trade names without legal authority to do so. The two sides also agreed to cooperate on case-by-case enforcement against such company name misuse.

Appendix 4 shows a fact sheet of the 19th US-China Joint Commission on Commerce and Trade Meeting, September 16, 2008.

It states about Intellectual Property Rights:

• China and the United States noted the importance of ongoing dialogue and cooperative efforts taking place under the JCCT IPR Working Group, which met September 4-5 in Beijing, and agreed to hold regular meetings of the IPR Working Group in the future.
• China and the United States agreed to continue pursuing cooperative activities in addition to formal meetings of the IPR Working Group, on such issues as: IPR and innovation, including China's development of guidelines on IPR and standards; public-private discussions on copyright and internet piracy challenges, including infringement on user-generated content sites; reducing the sale of pirated and counterfeit goods at wholesale and retail markets; and other issues of mutual interest.
• China and the United States welcomed plans to conduct further cooperative meetings between responsible officials regarding: China's patent law amendments now under consideration in the National People's Congress; pharmaceutical data protection; and the Memorandum of Cooperation on Strenghened Cooperation in Border Enforcement of Intellectual Property Rights.
• China and the United States agreed to sign two IPR memoranda of understanding (MOUs) on strategic cooperation to improve the administration and effectiveness of copyright and trademark protection and enforcement, as soon as possible but no later than the end of 2008. The MOUs will be signed between the US Patent and Trademark Office, the US Copyright Office, China's National Copyright Administration and the State Administration for Industry and Commerce.

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Mr László Kovács: "Customs in 2008, a real test for EU-China trade relations"

Mr Lászlo Kovács, European Commissioner for Taxation and Customs Union wrote an interesting article to commemorate the 40th anniversary of the Customs Union. Is there something to celebrate you might ask yourself?

Well at least the Commissioner is belligerent to fight counterfeit and pirated products:

"The growing trend in counterfeiting in some health-threatening sectors like foodstuffs, pharmaceuticals or spare parts is worrying. The EU is a target market of fake products, and China the main source of production, with almost 80 % of all articles seized by EU customs coming from there. Chinese people and companies are equally affected by this illegal industry. But we can do something about this. The EU is committed to strengthen customs cooperation with China in the fight against counterfeiting and the enforcement of IPR. We want to see concerete results in the shape of less counterfeited products on our markets. I am confident that this year, the EU and China can agree on an ambitious strategy to effectively reduce trade in counterfeit goods."

If the EU wants to see concrete results, a plaudible goal, it should consider applying the enforcement/infringement ratio, as IP Dragon suggested here and in its thesis, see here.

Read Mr Kovács article he wrote for the China Daily here.

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Data Key On Road To IPR Transparency

The MailTribune runs an LA Times article called 'Writing their own tickets, Knockoffs still a thriving business in China' by Mr Don Lee. The article draws a picture of Wengang, a city in Jiangxin province famous for its pens/infamous for its counterfeit pens. That the enforcement of IPR is very difficult in this city, thanks to local protectionism, becomes clear in the article.

Mr Lee writes the following passages:

"In a survey in 2007 by the Quality Brands Protection Committee, an industry group made up of 164 multinational companies operating [the organisation has currently 181 members IP Dragon] in China, 70 percent said the situation was worse than or the same as before.

Chinese scholars and government officials contend that there's been a lot more progress in protecting intellectual property rights than that survey would suggest. Nationwide, in 2006, Chinese courts took on nearly 20,000 civil and criminal cases related to such protection, up from about 13,000 two years earlier.

"This shows that IPR awareness in China is getting much stronger," said Tao Xinliang, dean of Shanghai University's Intellectual Property School. Yet lack of enforcement, and even collusion, on the part of local authorities remains a major barrier. And few places may be as tough to crack as Wengang."

When the Chinese courts took on more civil and criminal cases related to IPR protection in comparison to a year before, this does not necessarily mean that IPR protection/enforcement is better. Because even if the enforcement actions have gone up, it is possible that the infringements have also gone up. In this light the outcome of the survey of the Quality Brands Protection Committee saying the situation was stable or had deteriorated is not strange at all.

The problem is, of course, that China is not willing or able to measure the total IPR infringements.

Read Mr Lee's article here.

Mr Will Lewis run into the same kind of problems, when he tried to interpet the IP litigation data he received. Mr Lewis writes:

"This data is all cases selected for publication by the courts in each jurisdiction through January 2007. The data collector said that this is only a small number of the cases that were actually decided which raises one gigantic question: what criteria did the courts use in deciding what cases to publish? There may have been bias in the cases selected, and these cases might not be representative of the actual win/loss rates in IP litigation. Also, the low number of cases published involving foreign parties means that there might be large variation in outcomes as more cases are decided."

In other words the data might not be objective. That is why I proposed in my thesis 'Paper Tiger or Roaring Dragon, China's TRIPs Implementations and Enforcement' (page 64) to use the Enforcement/Infringement Ratio which uses data that can be gathered independently from China.

Given the data, which can be critisised, I agree with Mr Lewis' interpretations. His second interpretation is: "Trade secret is the most difficult IPR to protect." This will be even more so when the new Labour Contract Law will go into effect, January 1, 2008, so that the scope of non-compete agreements will be restricted. Read more about what the Labour Contract Law has to do with IPR here.

Mr Dan Harris of China Law Blog was surprised by the frequency of victory by the IP holder: "I expected such numbers in trademark cases, but the numbers in patent cases are better than I expected and in copyright cases much better than I expected." Read Mr Harris' article here.

Read Mr Lewis' IP litigation data interpretations here.

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How To Measure IP Enforcement: Enforcement/Infringement Ratio and "Data Data and Data"

One of the recommendations of my upcoming thesis called: 'Paper Tiger or Roaring Dragon? China's TRIPs Implementations and Enforcement' is the need to increase transparency about IP enforcement (and of course it is the raison d'être of IP Dragon). To know whether China's enforcement progresses or declines I proposed the enforcement/infringement ratio which can be compared to the preceding enforcement/infringement ratio. I got a few emails asking questions about the enforcement/infringement ratio. I hope I answered your questions with the following (if not, please let me know):

Denominator: enforcement

How to measure the enforcement activities of China? One could use the aggregate number of foreign companies that effectively made use of China's enforcement routes (administrative, litigation, criminal and customs). A problem is that companies who enforce their IPR in China do not want to tell the world about it, because they fear that this will deteriorate their businesss opportunities in China. To overcome this fear an anonymous database could be made available.

Nominator: infringement

How to measure the infringement activities in China? The total number of IP infringements is very hard to determine for China. One could use the seized infringed goods originating from China by a network of customs outside China. The checks should be done in a uniform way. Up to now, the value of China’s exports of counterfeit and pirated goods is bigger than that of counterfeited and pirated goods used for domestic consumption. That is why using the data of the seizures of counterfeit and pirated goods by a network of foreign customs are relevant.

To get feedback about this ratio I talked to the people from the World Customs Organisation (WCO), European Union Directorate General Taxation and Customs Union (EU DG Taxud) and the Organisation of Economic Cooperation and Development (OECD). The theoretical idea of the ratio was well received. But all had questions about the practicalities of the ratio: i.e. How to get reliable data?

The OECD just came out with part IV, the executive summary (parts I-III will be made public later), of a comprehensive report about the economic impact of counterfeiting and piracy world wide. Its conclusion is that transparency about IP enforcement is key, but that in practise it is is very hard to gather, even for the OECD with all its expertise and resources. A fortiori this might be the case for data about IP enforcment in China.

The executive summary of the OECD report says:
"Information on counterfeiting and piracy falls far short of what is needed for rigorous analysis and for policymaking. Priority should be given to (i) improving information that is available from enforcement activities (i.e. customs and other law enforcement agencies) and (ii) expanding the use of surveys to collect basic information on developments from right holders, consumers and governments."

These additional information should be, according to the OEDC, systematically collected, comparable and comprehensive. See pages 18-21 of Part IV The Economic Impact of Counterfeiting and Piracy Executive Summary.

Asked about what was the biggest challenge to get transparency about IP enforcement, the remark from Mr. Wolfgang Hübner, counsellor in the OECD's Directorate for Science, Technology and Industry was telling: "Data data and data." The methodology of the OECD report was to send a questionnaire to all WCO member countries of which 90 responded. The quality of those responses was not consistent.

On a smaller scale, for example in the EU or in a network of a few EU members, it might be feasible to get the systematic, comparable and comprehensive data about IP enforcement.

That is why the EU or a network of a few EU members might be a great candidate to make use of the enforcement/infringement ratio.

The realisation that transparency about IP in China is of great importance cristallised May 22, 2007 into a Memorandum on Strengthened Cooperation in Border IPR Enforcement between the General Administration of Customs (GAC) and the US Customs and Border Protection (CBP), which was signed by Mu Xinsheng, Minister of Customs and U.S. Customs and Border Protection Commissioner W. Ralph Basham (see picture).

In the memorandum the two countries agreed to exchange information on significant intellectual property rights seizures each quarter in order to track violators and conduct enforcement actions. "The country receiving information will have 90 days to report to the providing country on enforcement actions resulting from this disclosure of information.
U.S. and Chinese Customs officials have pledged to exchange counterfeit and pirated goods seizure statistics every six months for goods originating in or destined for the other country. The statistics exchange will describe the number of seizures, quantity and value of goods, description and/or Harmonized Tariff Schedule classification of the commodities, mode of transportation and the main ports of import and export for the goods in the two countries."

See the news release of the US Customs and Border Protection here.

Another thing agreed upon in the memorandum is that both countries must provide information of up to 10 specific IPR-related seizures each quarter. That sounds not very ambitious. But it might be a first step to give access to each other's IPR enforcement activities. Read Zhu Zhe's article about it for the China Daily here.

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Cost of Piracy Overestimated Says OECD, Underestimated Says ICC

Steve Whitehouse of Thomson Financial reports about an unpublished Organisation for Economic Cooperation and Development (OECD) study which puts trade losses in 2005 at up to 200 billion US dollar, considerably lower than the 600 billion US dollars estimated by the International Chamber of Commerce. Read Whitehouse's article via Forbes.com here.

US officials estimate the costs for companies [1] around the globe. of China’s counterfeit and piracy exports as between US $ 50 [2] and 60 billion [3] a year.

However, objective statistics about IP in China are a great challenge for scholars. That's why IP Dragon proposed to use the Enforcement/Infringement ratio, for it does not give absolute figures, but at least gives an indication of whether the situation improves or deteriorates, read more here.

China is not the only one to blame for its lack of transparency. Trade associations and lobby groups have their own agenda. Some argue that Business Software Alliance has misrepresented the facts [4] or that Motion Picture Association of America claims a right to misrepresent the facts [5].

Notes:
[1] This excludes the lost tax revenues for governments, lost employment, and extra costs for health and safety.
[2] “U.S. officials say its exports cost legitimate producers worldwide up to $50 billion a year in lost potential sales,” Associated Press, ‘China’s piracy hurting its own industries’, July 7, 2006, available at: http://www.msnbc.msn.com/id/13617619.
[3] “International companies are losing more than $60 billion a year because of piracy in China, according to the U.S. government,” ‘U.S., EU to Fight Counterfeits From China, Russia’, Bloomberg, June 19, 2006, available at: http://www.bloomberg.com/apps/news?pid=10000100&sid=aTSjqiimKzYc&refer=germany.
[4] “BSA or just BS”, Economist, May 19, 2005, available at: http://www.economist.com/business/displaystory.cfm?story_id=E1_PJJPQNS.
[5] Ryan Singel, “Copyright Groups Continue Fight Against Anti-Lying and Spying Bill-Updated”, Wired Thread Level, April 11, 2007, available at: http://blog.wired.com/27bstroke6/2007/04/copyright_group.html.

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