Monday, May 17, 2010

What is so special about Special 301 vis-à-vis China? Part III

Previous parts can be seen here: Part I, Part II.

So what does the report say about China?

On the positive side:
  • An increase in the number of civil IP cases in the courts (would be nice if the report states the numbers);
  • Largest software piracy prosecution in Chinese history in 2009;
  • "Continued and constructive discussions in the Joint Commission on Commerce and Trade (JCCT) and the JCCT Intellectual Property Rights Working Group" (this might be a diplomatic way of saying that the U.S. and China are on speaking terms, but nothing concrete has come out of the meetings, why not mention it otherwise?);
  • October 2009 the National Copyright Administration of China, the Ministry of Education, the Ministry of Culture, and the National Anti-Pornography Office issued the Notice on Strengthening Library Protection of Copyright, which directs libraries to adhere to the Copyright Law;
  • Judicial enforcement related to infringing activities in retail markets in Beijing and Shanghai;
  • Judicial authorities sentencing wholesalers to prison terms;
  • Holding retail market landlords liable for failing to take appropriate measures to prevent infringement;
  • Shanghai municipality is seen as bright spot regarding IPR enforcement;
  • Zhejiang province has shown progress, undertook more trademark infringement investigations than any other Chinese province (which could however also indicate that they have a higher level of infringement than the other provinces; what is needed is to use the IP enforcement/infringement ratio);
  • Jiangsu province demonstrated, according to USTR, its recognition of the importance of IPR protection: "including through a Suzhou court's criminal sentences in a high-profile software piracy case (sounds rather anecdotal to come to this conclusion, then again it is also encouragement) and set an example of transparency by publishing IPR decisions online:
Room for improvement:
  • The USTR is concerned about the proliferation of the manufacture, sale, and distribution of counterfeit pharmaceuticals in China;
  • China's domestic chemical manufacturers that produce Active Pharmaceutical Ingredients (API) can "avoid regulatory oversight by not declaring that the bulk chemical is intended for use in pharmaceutical products." (according to Mike Palmedo, PIJIP, this is more a health issue not an IP issue, see 'What was said during the Special 301 hearing about IP in China?' below);
  • Internet piracy is significant in China. Unauthorised retransmission of live sports telecasts over the internet is a problem (see Michael Mellis, Major League Baseball Advanced Media L.B., 'What was said during the Special 301 hearing about IP in China?' below);
  • Pre-loaded illegal content on cellular telephones, palm devices, flash drives and other mobile technologies (see Eric Smith, IIPA, 'What was said during the Special 301 hearing about IP in China?' below);
  • "Other countries still need to adopt and implement legislation or improve existing measures to combat illegal optical disc production and distribution, including China, India, Paraguay, and Thailand, which have not made sufficient progress in this area." This is rather vague language: In case of China does the USTR need to implement legislation or improve existing measures? That remains unclear;
  • Government use of legitimate software is a problem in China;
  • The report gives the USTR's view about what the US achieved with the WTO Dispute Settlement cases DS362 (China - Measures Affecting the Protection and Enforcement of Intellectual Property Rights) and DS363 (China - Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products);
  • USTR is concerned about the promotion of China's "indigenous innovation". They give one example: preferential government procurement. As a comment about my post about the subject "Anonymous" gave many more examples as a comment on my post about the subject. See them here.
  • The share of IPR-infringing product seizures at the U.S. border that were of Chinese origin was 79 percent in 2009, a small decrease from 81 percent in 2008.
  • "Business software theft (theft is a misnomer, since the software is not taken a way, but copied and used without authorisation by the rights holder) by enterprises is particularly troubling as it not only results in lost revenues to software companies but also lowers the business costs of offending enterprises and my give these firms an unfair advantage against their law-abiding competitors." Don't know why infringed business software is singled out. All companies making use of a counterfeit or pirated product have an unfair advantage in comparison to law-abiding competitors;
  • That during a recent internet enforcement campaign, see here (Managing IP) or here (China Daily), in which 558 cases were investigated and 375 websites were shut down, demonstrates according to the USTR that if the Chinese government chooses to utilise its enforcement resources and personnel to deal with an IPR problem, it can produce results. The question is whether these actions are structural.
  • "The United States notes that at times particular enforcement actions are directed not only at copyright or trademark infringement, but also include infringement activities that may be considered more serious under the Chinese legal system." Is this a cryptic way of saying that China is more interested in controlling the media? And one should take into account that article 41 (5) TRIPs requires no special allocation of resources to the enforcement of law in general in absolute terms, nor to the enforcement of intellectual property rights in relative term;
  • Retail and wholesale market have still pervasive problems. Despite 1. attention from brand owners, the Chinese central government and foreign governments; 2. resources from brand owners; 3. contractual agreements with landlords;
  • Civil damages for infringement are deemed inadequate; minor penalties levied by courts;
  • U.S. trademark and copyright industries report that administrative fines are too low; and imposed too infrequent, to provide deterrence. The ambition level of TRIPs is not helping: the wording of article 61 TRIPs is not that remedies should provide a sufficient deterrent, but that they should be sufficient to provide a deterrent. China’s implementation of article 61 TRIPs is one of the most vehemently debated issues. Many WTO members seem to expect a lot of this enforcement route. But they should perhaps do some self reflection first, because criminal enforcement in IPR cases is underdeveloped in most countries, or, as professor Hugenholtz (IvIR, UvA) pointed out, not even available, as is the case with patent law. Maybe that is why there has been no jurisprudence or decision of a competent WTO body thus far;
  • Market access barriers create incentives to infringe products such as movies, video games and books;
  • September 2009, Ministry of Culture issued a "circular that bars providers of imported, but not domestic, digital music from distributing their content online unless they obtain content approval"; and the foreign providers have to enter into an exclusive licensing arrangement with a wholly Chinese-owned entity;
  • Some landlords and infringers ignore applicable court rules;
  • November 2009, the Standardization Administration of China (SAC) released the Draft Regulations for the Administration of the Formulation and Revision of Patent-Involving National Standards (Chinese) for public comment. The USTR reports that it is "concerned about the expansive scope, the feasibility of certain patent disclosure requirements and the possible use of compulsory licensing for essential patents included in national standards" (Article 9, Chapter III: "(1) The patentee agrees to license, on a reasonable and non-discriminatory basis, any organization and person to implement the patent when implementing the national standard at a price significantly lower than the normal royalties; "; Compare the just released Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, of which section 284 states that "(..) in case of a dispute, the assessment of whether fees imposed for patents in the standard-setting context are unfair or unreasonable, will be based on whether the fees bear a reasonable relationship to the economic value of the patents." Article 12, Chapter IV of the Chinese draft regulation: "In principle, a compulsory national standard shall not involve a patent."; Article 13, Chapter IV of the Chinese draft regulation: "For a compulsory national standard that indeed needs to involve a patent, the patentee shall grant license free of charge or the national administration department of standardization shall request the related departments to consult with the patentee about disposal of the patent. If the related departments fail to agree with the patentee on the disposal of patent, the approval for release of the national standard will be temporary withheld or a compulsory license will be granted according to law.") which could indeed give a disincentive for innovation by foreign rights holders in the development of standards in China. Not only the U.S. but also the European Commission is taking a different approach to standards and IPR from China;
  • October 1, 2009, the Third Amendment to the Patent Law is effective (Patent Law 2008). USTR writes that rights holders have raised a number of concerns, including the effect of disclosure or origin requirements on patent validity (rightly so, because it is unclear), inventor remuneration (no reason for this fear, see 'Are Statutory Compensation Rules for Inventors Scary?';
  • China's recently got a "naked" Bolar exemption, article 69 (5) Patent Law 2008, which exist of the safe harbor provision. I am not sure whether it is bad that there is no possibility of extending the term of patent protection, as is possible in the U.S. system. I am not sure whether the State Food and Drug Administration (SFDA) has long delays. And 20 years seem long enough to get a return on the investments of innovators. And otherwise generic producers have to wait longer, which might be bad for competition. And in principle, the law applies in the same way to Chinese and foreign companies in China. The USTR has concerns about effective protection against unfair commercial use, as well as unauthorised disclosure, of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products;
  • Guangzhou province's IPR enforcement is seen as inconsistent with respect to valuation methodologies for calculating damages, fines and penalties, and the criminal IPR cases initiated are deemed too low;
  • According to the USTR, IPR enforcement at the local level is poorly coordinated among Chinese government ministries and agencies; rife with local protectionism, corruption, high thresholds for initiating investigations and prosecuting criminal cases, lack of training, inadequate and non-transparent processes.
The report states that "the overall level of IPR theft in China remains unacceptable." The usage of the term 'IPR theft' could be confusing. Because the IPR are not stolen, but infringed. If they were stolen the rights holders would not have the intellectual property rights anymore.

Mike Masnick wrote an interesting article for TechDirt with the title 'USTR Announces What Countries Have Been Naughty When It Comes To Intellectual Property'.

I have put my comments on Mr Masnick's article in italic.

IP Dragon: Naughty is a term that might be perverse in the case of counterfeited medicines and food/beverages that have proved lethal in China.

Mr Masnick asserts the following about Section 301:
- standard used is mythical;
IP Dragon: Why mythical? The USTR listens to the witnesses, reads the public submissions, and reviews, evaluates and determines whether the standard of proof has been met. If so then it comes with a qualification. What exactly the standard of proof is, is difficult, because it inadequacy and ineffectiveness of intellectual property is contingent on several factors, see directly below.

- no methodology;
IP Dragon: The USTR, together with the interagency Special 301 subcommittee made an assessment. Imput: apart from public engagement, 571 submissions, there was a hearing, seetranscript of 23 witnesses (But only four talked about China, see pages
64:21 65:6,7
69:4,4,5,8 70:10
70:20 71:2,10
93:7,11,16 94:3,4
96:2,3,7,8 128:17
136:14 268:8,13
:9,20) For each country they took the following factors into account:
  • level of development (this is hard to measure, and controversial: China for example is a country fragmented in regions of different developmental speeds);
  • international obligations and commitments (this might be easy);
  • concerns of rights holders and other interested parties (question is whether the rights holders and other parties heared form a representative group);
  • trade and investment policies of the United States.
John Rawles' legal-philosophical theory of the Veil of Ignorance (devising a legal system without knowing whether it will be applied to you or to someone else) is hard when you want to devise a system for protection and enforcement of intellectual property rights. Especially in case your IP system takes the above-mentioned factors into consideration: it is hard to forget your own level of development, your international obligations and commitments and the particular interests of your own industries.

- Masnick alleges that Section 301 is biased, because it is based on what the entertainment and pharmaceutical industry do not like;
IP Dragon: Academics and journalists should be as objective as possible. Lawyers and marketeers should defend one side/show the best side of something. Governments should be fighting for the interests of their citizens. Including the industry. Industry groups should be fighting for the companies they are representing.

- it is not taken seriously, because "even people of the US Copyright Office" are making fun of it;
IP Dragon: This argument should not be taken seriously.

- no real interest in hearing consumer concerns;
IP Dragon: there was public engagement. 571 submissions that are public via, with docket number USTR_2010_003.

- no interest in sovereign rights of countries;
IP Dragon: It is each country's right, to protect the interests of its citizens and industry as well as possible. The U.S. trying to do this for a decade with Section 301. Whether it have been effective is another question.

- Mr Masnick wrote that the USTR wants to "monitor" countries that do compulsory licensing of patents.
IP Dragon: However, one can read in the USTR report that "the United States respects our trading partners' rights to grant compulsory licenses, in a manner consistent with the provisions of the TRIPS Agreement and encourages our trading partners to consider ways to address their public health challenges while maintaining intellectual property systems that promote investment, research, and innovation." The USTR also writes that it will follow the scope and procedures related to compulsory licensing. Not so strange. And in the case of standards and IP in China there are enough reasons to be concerned.

- Canada is included in the list;
IP Dragon: I will focus on China only.

- Michael Geist's wrote: "According to the report, approximately 4.3 billion people live in countries without effective intellectual property protection." Masnick suggest that if the USTR has a problem with the countries where the majority (4.3 billion) of people live, then the problem might be the U.S..
IP Dragon: 1. this reasoning is: if most people approve of something, therefore it is true. This is a fallacy ad populum, 2. the people who live in a country do not necessarily agree with their government or their legislation.

A commentor using the name Daemon_ZOGG made some interesting remarks:
- many consumers don't care about whether the product is produced by the original manufacturer as long as the quality is good;
IP Dragon: could be the case.

- half of the time pirated media and software are as good or better than the real products;
IP Dragon: it is a trend that pirated and counterfeit goods are getting a better quality and sometimes are better in tune with the needs of local markets. The way the products are manufactured could be degrading for the environment, and employees, could involve child labour and the funding of organised crime.

- because of the global market, jobs were sent overseas and piracy is a collatoral damage.
IP Dragon: income from innovation (patents), creativity (copyrights) and commerce (trademarks) via intellectual property rights (IPR) is a growth market and creates jobs. Because of globalisation and digitisation, each company has more chances but is at the same time more vulnerable. Rewards and risks are linked.

But what is really special about Special 301?
If you are a WTO member state and you have an IP related problem with another WTO member state, you can take the take the case to the Dispute Settlement Body (DSB) of the WTO. But what if you are a company or a person? Then you first have to lobby with your government to take your case to the DSB. Every U.S. person (natural or legal) can take their case to the USTR. Until there is a possibility for industry groups, individual companies or natural persons, to bring their case against another country for not meeting their IPR obligations and commitments, there is a valid reason for the Special 301 procedure's existence.

To be continued, see Part IV.

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