Sorry, but I really can’t let this one go. And unlike the usual articles where the nature of the intellectual property is unclear, or if the writer uses “patent” when he/she actually meant “trademark,” this one is even worse.

The article in question is entitled “Apple Accused of Patent Infringement.” Unfortunately, it’s about the Proview trademark dispute. The thing is, I wouldn’t have been surprised if that headline was simply attached to an article about trademark or copyright. That kind of thing happens all the time — the journalist understood the issue and explained it properly, but the doofus editor who came up with the headline not only didn’t bother to read the actual article, but never bothered to check if the IP reference in the headline was even relevant.

But that’s relatively excusable compared to what we’ve got here. Both the editor and the journalist who wrote the article should be flogged 50 times with a wet noodle for this lede:

A Shenzhen-based enterprise has accused technology giant Apple of patent infringement on the iPad – a trademark both companies claim.

In the same sentence! Seriously, how does that happen? And you can’t explain it with the usual not-familiar-with-English excuse, unless the person thought that “patent” and “trademark” are synonyms, which is hard to believe. To screw up like that, you almost had to mean it.

Glad to get that off my chest.

© Stan for China Hearsay, 2012. | Permalink | 2 comments | Add to del.icio.us
Post tags:

Yes, this trademark dispute is still alive and shows little sign of being resolved without a big payout from Apple. I think this is post #5 for me on this case, which is impressive in its own right for what should be a relatively simple commercial dispute. It is, however, an excellent primer on how even multinationals with valuable IP can fuck up their global portfolios with sloppy lawyering.

You can check out my earlier posts (go here or search for “Proview” on China Hearsay) on this case for background and history of the dispute, but the basics are that Apple, through an intermediary, attempted to purchase a portfolio of “IPAD” marks from a company called Proview (Taiwan). They signed an agreement to that effect that was not only poorly drafted, but the execution was half-assed as well. It turns out that the China mark was not included in the deal (Apple says it was, Proview says no) as it is held not by Proview (Taiwan) but by Proview (Shenzhen).

The two companies have already battled in out in a Shenzhen court. Apple lost that case, which was an attempt to assert ownership of the mark on contract grounds. Note that this was not an infringement case – Apple is not the registered owner, Proview is.

And it looks like Apple has already filed an appeal:

Shenzhen-based display device manufacturer Proview Technology, a subsidiary of Proview International Holdings, announced recently that Apple and its associated company IP Application Development had filed an appeal with the Higher People’s Court of Guangdong Province in their failed iPad trademark lawsuit case. Apple is seeking control and ownership of the iPad trademark in Mainland China, as well as damages and legal costs totaling RMB 4 mln.

Apple laid forth a number of views in its appeal, including that the case should be adjudged according to the laws of the Hong Kong Special Administrative Region; that Proview (Shenzhen) had given written authorization for Proview International Holdings’ Taiwan subsidiary, Proview Electronic, to sign a trademark transfer agreement, under the principle of unnamed agency, meaning that all iPad-related trademarks should be considered by the court to have already been transferred by Proview (Shenzhen) to Apple. Apple will also name Proview Electronic as a defendant in the case. (Marbridge)

I wouldn’t hold out too much hope for Apple in this case. Aside from the issues I’ve discussed in previous posts, this matter of Hong Kong vs. China law seems to be a new one. Perhaps the underlying transfer agreement between Proview (Taiwan) and Apple specified Hong Kong law. For a commercial agreement, that’s certainly no problem. I’m not sure how much that helps Apple, though.

The other issue here is whether Proview (Shenzhen) had given the Taiwan company authorization to sign a trademark assignment agreement on its behalf. This depends, in part, on the language of the assignment agreement, which I haven’t seen.

However, let’s assume that the High Court agrees with Apple, applies Hong Kong law and says that the Shenzhen company gave some sort of authorization to the Taiwan company. Even with that, Apple still has to prove that the assignment agreement in question did, in fact, include the China marks. I assume they were able to do so in the Intermediate Court proceeding, but again, the devil is in the details of that assignment agreement.

Moreover, as I’ve said before, what happens if Apple wins the case? They would not automatically get the trademark. A trademark assignment is a formal process governed by the rules of the Trademark Office and under the ultimate authority of the State Administration of Industry and Commerce. All the court can do is rule on beneficial ownership or, more likely, simply assess monetary damages to Apple. In other words, a verdict might help pave the way to a settlement, but it would not necessarily solve Apple’s problems in the short term. Unless and until Proview (Shenzhen) executes a formal assignment application that is then submitted to the Trademark Office here in Beijing, that mark isn’t going anywhere.

What is Apple’s chief short-term problem? Well, it is using someone else’s trademark illegally — using the hell out of it, in fact. And what happens when you do that? Yes, you guessed it. Infringement lawsuits:

A Shanghai court is to hear a case where Apple is accused of infringement by a Shenzhen-based company for using the iPad trademark on the Chinese mainland.

On February 22, the Pudong New Area People’s Court will hear a suit filed by Proview Technology (Shenzhen)[.]

Let’s be honest about this Shanghai lawsuit. Apple doesn’t stand a chance of winning based on any of the traditional defenses to an infringement charge. And because Proview has already won the Shenzhen case with respect to the assignment agreement, Apple doesn’t even have a favorable ruling on that issue on its side, pending the appeal.

I think it’s pretty clear here that a settlement needs to happen, sooner rather than later. Unfortunately, that price is going to be quite high at this point.

Finally, and just to be clear, this is not another instance of China’s IP enforcement regime failing to protect a foreign company’s assets. Apple made a lot of mistakes here and could have very easily avoided all of this. As I said last December:

If I were purchasing PRC trademarks from someone, I would make sure of three things. First, I would do some basic due diligence and confirm that the signatory of the agreement was the actual (record) owner of the marks. None of this Proview (Shenzhen) vs. Proview (Taiwan) crap. That’s a rookie error, folks!

Second, I would ensure that all IPRs were listed, with registration certificates attached, to the agreement itself.

Third, and perhaps most important, I would require that the trademark owner sign a Power of Attorney for trademark and an assignment application, and furnish these at closing. Given these documents, I (or my agent) could go over to the Trademark Office and make the formal assignment application, with no further help from the IP owner necessary.

Stay tuned. (By the way, are you starting to get tired of all the Apple-related posts? I certainly am, but news is news.)

© Stan for China Hearsay, 2012. | Permalink | No comment | Add to del.icio.us
Post tags: apple, ipad, proview, trademark infringement

The Office of the United States Trade Representative (USTR) today issued the Special 301 Out-of-Cycle Review of Notorious Markets. It identifies more than 30 markets that typify the problem of marketplaces that deal in goods and services that infringe on intellectual property rights (IPR) and help to sustain global piracy and counterfeiting. (USTR)

China is usually well represented on this list. Any surprises this year? Actually, yes. One of the big headlines is that “serial offender” (in terms of this list) Baidu was finally dropped. As I’ve written before, Baidu has been cleaning up its IP act for a while now, and I wouldn’t have been surprised if USTR had given it this vote of confidence last year. The USTR report specifically mentioned that Baidu had been removed this year, citing the deal that the search giant cut with U.S. content owners.

The other big takeaway from the list (here’s the link to the report) is the sheer number of different nationalities involved. Instead of a list that is 40% China, 40% Russia and a few Eastern European nations thrown in, this year we see offenders from all over.

Let’s have a look at some of the categories (I’m not going to mention all of them in detail):

1. Deep Linking: Chinese companies are still the offenders here.

These are online services engaged in “deep linking” to allegedly infringing material that is often stored on third-party hosting sites.

Sogou MP3:  China-based Sogou MP3 reportedly provides easy access to deeplinks of music files for downloading or streaming, and reportedly ignores rights holders’ notices to take down infringing material.

Gougou:  Industry reports that this China-based website actively provides users with deeplinks to infringing music files and torrent links from unauthorized sources.

Lesson to be learned here: get rid of that “gou” in your company name before USTR comes after you.

2. B2B and B2C: Three sites are listed, China’s Taobao and two Canadian platforms (the latter are probably related sites).

Commenters has reported that these Business-to-Business (B2B) and Business-to-Consumer (B2C) websites offer a wide range of infringing products (such as cigarettes, clothing, manufactured goods, pharmaceutical products and sporting goods) to consumers and businesses.

Taobao:  Several commenters reported that pirated and counterfeit goods continue to be widely available on China-based Taobao.  While stakeholders report that Taobao continues to make significant efforts to address the problem, they recognize that much remains to be done.

Quick note here on Baidu vs. Taobao. Obviously these are two very different companies, with completely different business models. The fact that Baidu has successful fought its way off the list, while Taobao is still stuck in the IP ghetto should not be used to make a comparison. As a search engine, Baidu has limited control over what pops up as search results. Therefore, sites that host or otherwise have information about infringing activities can be found on Baidu, or Google, or Yahoo!.

However, that’s not what Baidu has been criticized for in the past. The problems it had with IP owners involved things like deep linking to MP3 files and otherwise maintaining platforms that directly facilitated copyright infringement. Once they got rid of this kind of thing and made peace with content owners, USTR took them off the “bad guys” list.

But Taobao does not have that sort of control. As I talked about yesterday, the sheer volume of transactions on Alibaba’s e-commerce platform means that discrete oversight of each transaction is impossible. That’s why we have a legal system that limits operator liability.

I would suspect, therefore, that because of these control issues, it’s going to be more difficult for a company like Taobao to clean things up than it was for Baidu, and so the former’s inclusion on the list is perhaps not that surprising, even though (as USTR mentions) great strides have already been made by the e-commerce site. Remember that it took Ebay a while to figure this all out, and they have ongoing problems with counterfeit products to this day.

3. Unlicensed programming retransmission: a China company is the only one on the list, but this is really only an example of a widespread problem.

Unlicensed programming retransmission, which includes live sports telecast piracy, affects amateur and professional sports leagues and other television programming rights holders by making protected telecasts and broadcasts freely available, without authorization, over the Internet.

TV Ants:  This peer-to-peer service, which reportedly operates from China, exemplifies this problem.

This is a huge problem with respect to sporting matches that exploits a weakness in copyright law/related rights.

4. Physical markets: 15 are listed, four of which are in China. One of them is Beijing’s Silk Market, perennial bad boy.

The only surprise here is that more markets in China are not on this particular sub-list. Look, China is the manufacturer to the world. Everything is made here, including counterfeits, so four out of fifteen is not unexpected. By the way, other nations represented in this category include India, Indonesia, Mexico, Thailand, Ecuador, Colombia, Ukraine, Philippines, Pakistan, Argentina, and Paraguay.

5. In the following categories, no Chinese companies are included:

Blogs, online forums and newsgroups

Cyberlockers

Social media sites

BitTorrent (indexing and trackers)

Pay-per-download

Offenders in these categories (or their servers) are from: Russia, Canada, Sweden, the Netherlands, Ukraine, Romania, Panama, Switzerland, Bulgaria, UK, and Luxembourg.

What’s the big picture here? IP infringement and counterfeiting is a worldwide problem. The type of IP infringement that is seen by USTR as a huge problem in a given nation seems linked to its economy. For developing countries (South America, Southeast Asia, Eastern Europe), physical markets are the issue. For developed nations (Europe, Russia), online infringement is noteworthy.

China straddles both categories. As the world’s workshop, it has a prominent place on the physical markets list. However, because of its huge population and growth of e-commerce, there are some Net-based activities where China is also cited.

I wonder what next year’s list will look like.

© Stan for China Hearsay, 2011. | Permalink | 2 comments | Add to del.icio.us
Post tags: Baidu, counterfeiting, Special 301, taobao, trademark infringement, United States Trade Representative, USTR

Image via Penn Olson

I’ve written before about the pushback on Alibaba’s new rules for its e-commerce platform, Taobao, but here’s an update on the basics before I get to the legal issues:

Taobao.com, China’s largest online trade platform, has accused those protesting the platform of being illegal merchandisers that had been punished by the platform, a spokesman for the platform said at a news conference on Monday afternoon in East China’s Zhejiang province.

The online and offline attacks were triggered after the platform announced that it would quintuple its service fees starting in October. The protests began with small sellers attacking big sellers. The protests escalated when 200 sellers protested at the Taobao.com headquarters in Hangzhou, the capital of Zhejiang.

A few different issues have been floating around this story. First, did Taobao have the right to raise fees in this way? Although it is a private company, there are laws in China that govern pricing decisions, including the Consumer Law and Anti-monopoly Law, so there is definitely a role here for government to play. Whether Taobao violated any relevant law with respect to pricing has not yet been determined.

I do not know enough to offer a solid, informed opinion, but from the limited facts that have been circulated by the media, I’m not sure what the problem is in terms of pricing. Maybe there’s more going on here?

Second, how should operators of sites like Taobao deal with issues like product quality and counterfeit goods? Thus far, the legal system here as a whole has leaned in the direction of “Notice and Takedown” policies. Essentially, if a site has an adequate internal policy that allows rights holders or other complainants the ability to notify Taobao of a certain problem, and if Taobao responds to these notices in a timely fashion, then the courts will most likely consider that to be an adequate response.

However, there must be balance between protecting the rights of brand owners and consumers, on the one hand, and merchants who utilize Taobao’s services on the other. Under what circumstances will products be removed from the site? When will merchant accounts be cancelled? What will Taobao do to verify complaints?

Taobao, and similar sites, already have their Notice and Takedown policies in place, but the answers to the above questions are still being worked out. Moreover, future civil litigation (and judicial guidance) will definitely help to shape what an adequate policy should look like.

In the meantime, the protests have taken a turn for the theatrical:

A group of online merchants operating on Chinese e-commerce platform Taobao, a subsidiary of Alibaba Group, set up a “mourning hall” for the group’s very-much alive chairman Jack Ma in Hong Kong on Sunday to protest the online sales platform’s new service terms.

A total of 19 protesters gathered at an anti-Taobao protest in Hong Kong’s Times Square on Sunday, setting up a mourning hall centered around a portrait of Alibaba chairman Jack Ma.

As Billy Joel once wrote, “Melodrama’s so much fun. In black and white for everyone to see.” But what do these guys want exactly? And how are they going to get satisfaction? Here’s a clue:

[O]ne of the Hong Hong protest organizers named “Laozhou,” a merchandiser who was also an organizer for the online attacks, sold substandard products from his shop in Taobao.com and his shop was closed by the platform in October.

Laozhou confirmed with Xinhua that he was among the organizers of the “Anti-Taobao” parade. “My products were indeed without washing tags, but it’s up to the government to decide whether my shop should be closed.”

This brings us, therefore, to the third issue: what’s the proper role for government regulators here? Our friend Laozhou suggests that the government should ultimately make decisions about whether a merchant is removed from Taobao.

This guy must be high on goofballs. Jurisdiction and legal scope aside, let’s consider the practicalities here. There’s a reason why the law in many countries now recognizes Notice and Takedown as adequate responses to online infringement, counterfeits, etc. The high volume of transactions on these platforms makes it impossible for either the government or the operators to perform any sort of verification. Moreover, due to high deal volume, the government simply cannot step in and adjudicate in each instance.

Therefore Laozhou’s implication that the government has an adjudicatory role here is simply unworkable. If this were attempted, the flood of cases would mean that brand owners and consumers would have lengthy waits before receiving a hearing. The issue of transaction costs for complainants is another issue; seeing as how many of these deals are low value commercial transactions, any kind of filing fee would most likely discourage a large number of complainants.

But of course, many online merchants would be quite pleased if the system didn’t work efficiently. If the government was involved, everything would be more expensive and much, much slower than the current system adopted by Taobao. This would benefit merchants at the expense of consumers.

It seems as though the protesters are left with a possible complaint about pricing (i.e. the fee hikes) but little else to rail against. Notice and Takedown is already firmly in place in China law, and the protesters are all alone on this issue, fighting not only against Taobao, but also consumers and brand owners. A lonely position to occupy.

I don’t think the theatrics are going to win the day this time.

© Stan for China Hearsay, 2011. | Permalink | 4 comments | Add to del.icio.us
Post tags: Alibaba, copyright infringement, counterfeits, e-commerce, Internet, notice and takedown, pricing, safe harbor

Minor story, but if you’re wondering about recent trends in the intellectual property scene over here, keep your attention on the Internet. According to China Daily, the Supreme People’s Court is planning a judicial interpretation sometime next year to deal with this issue. The SPC issued a statement that included the following stats:

. . . disputes in online copyright infringement have taken up half of copyright cases this year, due to a boost in information exchanges on the Internet.

Copyright infringement took up 60 percent of total IPR cases in the first 10 months of this year. The total number of IPR cases surged to more than 52,000 by the end of October, a 42 percent rise and the first time it went over the record of 50,000.

Most of these cases involve very low damages, but they take up the same judicial resources as any other civil suit. More on this in 2012 . . .

© Stan for China Hearsay, 2011. | Permalink | 2 comments | Add to del.icio.us
Post tags: copyright infringement, Internet, judicial interpretation, Supreme People's Court

In the face of decades-long problems with intellectual property infringement in China, patience has worn thin among IP owners, industry and foreign governments. For those who have counseled patience, one common argument is that not only is China’s IP legal system still relatively new and needs more seasoning (not to mention resources), but also China’s economy as a whole is still developing. Only when the economy has matured to the point where domestic IP owners can exert significant influence on relevant policy, the argument goes, can the IP enforcement regime get to the next level.

I’ve always been attracted to this argument. There’s no question that it takes a while for all of this to gel. You need adequate laws, sufficient resources, strong institutions and highly trained individuals. But none of this is possible with an economy that doesn’t value the protection of IP, and this has been slow to develop.

“Skin in the game” (a term attributed to investor Warren Buffett) refers to the situation where an executive/insider has some of his own money in the company he is running. The idea is that if an individual has a personal stake in the outcome, he will have the same interests as other shareholders and approach management from that perspective.

The same pecuniary interests that drive business managers with “skin in the game” also motivate IP owners.

Although this is anecdotal evidence at best, I this the ongoing copyright struggle between the rival file-sharing sites Youku and Tudou suggests that the “just wait for domestic IP owners” theory outlined above does have merit:

Tudou and the Taiwanese TV station Cti TV jointly announced Friday that they would take legal action against Youku for allegedly reposting episodes of a popular Taiwanese entertainment show “Kangxi is Coming” on Youku’s platform.

Tudou said it will ask for a compensation of up to 150 million yuan ($23.63 million).

Following that, Youku announced that it will file a lawsuit against Tudou, accusing the latter of allegedly pirating more than 60 television serials from Youku.

A few caveats are appropriate. First, this is certainly not the first time that IP litigation has visited China entertainment sites; video file sharing platforms themselves have been subject of many IP suits over the years.

Second, the process by which file sharing sites have teamed up with content owners began a couple of years ago, and not because these operators suddenly “got religion” about IP enforcement. No, both Youku and Tudou realized that public listing in the United States and widespread copyright infringement were not a good mix, and that it was time to clean up their content.

Third, as you may have noticed, the Tudou/Youku story is not about heightened IP enforcement in the country as a whole, but rather a private lawsuit between two business rivals. As such, it doesn’t directly prove the notion that when Chinese domestic IP owners proliferate, policy will undergo a sea change.

All that being said, the lawsuit does tell us something. When a company has a stake in what happens with content it either owns or, in the case here of Tudou, content it licenses, it is then motivated to enforce those rights. In doing so, when these firms run up against the same endemic problems that have faced other IP owners over the years, it stands to reason that these newcomers to the IP game will lend their strong voices to additional legal reforms or stepped-up enforcement.

One could view this lawsuit as just another example of online copyright theft. In the spirit of the holiday season, though, let’s keep our focus on the bright side.

© Stan for China Hearsay, 2011. | Permalink | 5 comments | Add to del.icio.us
Post tags: copyright infringement, Tudou, youku

I bring you this news as a public service. Otherwise, there is little reason to discuss the latest promises by MOFCOM functionaries, unless you’re an optimist. Anyway, here’s what was bandied about yesterday:

The nation will impose flexible fines that are multiple the values of infringed goods, moving away from fixed amounts, Vice Chinese Commerce Minister Jiang Zengwei said at a briefing in Beijing today. China will amend its criminal law to make it more effective in fighting piracy, and improve evidence rules to aid owners of intellectual property, he said.

Interesting timing, by the way. The US Trade Representative’s annual report on China WTO enforcement issues came out yesterday as well. I have no knowledge whether this timing was by design; the government here certainly came out with several articles in the State media today designed to counter the USTR report.

No, I still haven’t read the USTR report . . . check back with me this weekend.

As to the substance of that above quote, it would certainly be helpful if damage awards were higher here, particularly in copyright cases. However, I feel as though we are going around in circles on some of these issues.

Prior to the last round of Copyright Law amendments, the problem was that in cases where the IP owner had trouble proving sales figures, damages would be minimal. So a change was introduced to allow for statutory damages, so that judges could award fixed amounts instead.

Granted, those fixed amounts (e.g. RMB 500,000) could be a lot higher, particularly in cases of large-scale infringement, but at least this is an available remedy when damages can’t be proven.

What do we get with “flexibility”? I don’t know what was meant here, because unless evidentiary rules are changed that would make it easier to prove up damages, then we’re back with the statutory damages approach. {melodramatic sigh}

By the way, in the Bloomberg article where I found that quote, the reporter went to the usual source, the Business Software Alliance, for reaction. Fair enough, I suppose, although one wonders why these guys can’t develop some more independent sources.

Additional to the quote, though, were some passages taken directly from BSA source material without any critical analysis. For example:

While the percentage of pirated software in China has declined, from 79 percent in 2009 and 92 percent in 2003, its value has increased as the Chinese software market expanded, the [BSA] report showed.

The numbers are fine, but it would have been useful to point out that not only does an expanded market lead to higher piracy levels on a product value basis, but it also means that industry is making more money! Jeebus, some balance please.

Finally, and this is mostly just for fun, I enjoyed this bit of blather that Bloomberg shouldn’t have bothered to keep in. Note that this only sounds stupid in English (well, more stupid):

Websites involved in counterfeiting and infringement will be “rectified” and companies producing unauthorized duplications of CDs and DVDs will be “sorted out,” the State Council said.

That doesn’t exactly educate the reader about anything.

© Stan for China Hearsay, 2011. | Permalink | 2 comments | Add to del.icio.us
Post tags: BSA, Business Software Alliance, copyright infringement

Just a quick follow up to yesterday’s post on this topic. I haven’t read all the media reports today (Friday, always busy), but I did check out Malcolm Moore’s piece in the Telegraph, which adds some important details. Amazing what a bit of journalism can do!

If you recall, I mentioned yesterday that I would be very surprised if Apple’s lawyers had failed to perform adequate due diligence on who the registered owner of the “IPAD” trademark was in China. I guess I gave them too much credit?

Apple’s lawyers appear not to have noticed that the rights to the name in China were not actually held by Proview Electronics in Taiwan.

Not sure if Malcolm has a source for this or not (can’t tell because of that “appear” thrown in there, which sounds a bit like speculation). I remain curious as hell about this and would love some confirmation and details of this major screw-up by Apple’s lawyers.

Another issue relates to this third party company that approached Proview to purchase the mark(s). I noted yesterday that it sounded like Apple’s agent. I was sort of right – it is actually a special purpose vehicle used by Apple for these kinds of situations. Here’s what Apple’s lawyer had to say:

Paul Schmidt, a lawyer for Baker & Mackenzie, which is representing Apple, explained that because Apple products are subject to so much hype the firm had to use a third party to maintain confidentiality.

“Apple faces the dual challenges of maintaining the confidentiality of the product [ ...] and ensuring that upon its launch the product can be marketed under the name selected for it,” he wrote, in an affidavit to a court in Hong Kong.

“In order to meet the second challenge, Apple buys up global rights to its product names, but uses a “special purpose vehicle”, he added.

Regarding the hype and secrecy surrounding Apple product launches, Schmidt’s comments certainly ring true. However, it should be pointed out that this is a very common strategy among trademark owners trying to purchase marks and/or domain names. You go in with a big name, and the price immediately shoots upward. Companies with famous brands therefore either use special purchase vehicles with innocuous names or, very often, they work with investigators and other service providers who maintain such identities for the benefit of their clients.

So this sort of thing really is industry practice and not at all out of the ordinary. I was therefore amused at this quote:

“Apple was quite deceptive when it first approached Proview to buy the name,” said Xiao Caiyuan, the head of the Guangdong Guanghe law firm, which is representing Proview.

Ha ha. That’s funny coming from a lawyer in Guangdong, who certainly knows better. But I guess he’s playing his role as client advocate, so it’s all good.

This particular lawyer also had this to say, which is just as amusing, but from the other side:

“They had lawyers in Europe, Hong Kong and Taiwan to look through the paperwork, but they failed to spot that the trademark was registered elsewhere. They tried to claim in court this was because they could not read Chinese!”

This is quite entertaining from my perspective, since this is the exact argument that Chinese companies make when faced with a dispute involving an English-language contract (i.e., I’ve been on the opposite side of that charge several times). In fact, this kind of “defense” is used all over the world. It’s common, but it’s not usually a winner. I suppose it’s always worth a try, but it certainly makes Apple look foolish in hindsight, doesn’t it?

One last issue from Malcolm’s article in the Telegraph, which was great for the additional details it brought to the discussion. However, I do need to point out a slight problem with this:

[T]o comply with Chinese law, [Proview] had registered the rights with its arm on the mainland, Proview Shenzhen. All trademarks in China have to be registered with a China-based company.

No idea where this came from. It’s incorrect. Anyone can hold a China trademark, foreign or domestic. Perhaps there was confusion over who can perform the registration? (domestic applicants can file with the Trademark Office directly, while foreigners must use an agent.) Whatever the reason, if this statement originated with Proview as some sort of excuse, they are either mistaken or being deliberately disingenuous. There is no legal reason why the Shenzhen entity filed the mark as opposed to the Hong Kong or Taiwan company.

Okay, I’m out of here. By the way, while I was out today, I couldn’t help but notice all those iPad advertisements on bus stops, etc. all over Beijing. I wonder when those are going to come down.

© Stan for China Hearsay, 2011. | Permalink | One comment | Add to del.icio.us
Post tags: apple, ipad, proview, trademark infringement

The repercussions of this case out of Shenzhen could be significant, so it’s worth spending a little time on the details. Additionally, some of the reporting has played fast and loose with the facts. By the way, this is my third post on this case (see here and also here).

The basic details: Proview, a Hong Kong company and, through a subsidiary, the owner of the “IPAD” trademark in mainland China, versus Apple, which sells the iPad device. (For background, see Kathrin Hille’s reporting on this in the Financial Times.)

Simple facts. Proview has the trademark and therefore controls use of the “IPAD” name, or similar, in China. Case closed?

Actually, yes. But several things happened before the court ruling that deserve some attention. Let’s first clear up a couple of things.

First, this is a trademark case. There are no other intellectual property rights at issue here. You may have read several articles out there that refer to a potential copyright infringement action against Apple by Proview. This is incorrect and probably stems from this (badly translated) quote in Xinhua:

Li Su, president of the Beijing-based Hejun Vanguard Group, a leading management consultancy firm, has been entrusted by the banks to assume the post of “debt restructuring consultant” for Proview Shenzhen.

After the court’s decision was announced, Li told reporters that the company will claim 10 billion yuan (1.6 billion U.S. dollars) in compensation from Apple for copyright infringement.

“Apple’s actions are strange. They had not obtained the rights to use the ‘iPad’ trademark when they began to sell the iPad on the Chinese mainland in September last year,” said Huang Yiding of the Hejun Vanguard Group’s public relations department.

“Their copy infringement is very clear. The laws are still there, and they sell their products in defiance of laws. The more products they sell, the more they need to compensate,” he said. [my emphasis]

There is no such term as “copy infringement” in English, and I suspect this poor translation led this Xinhua reporter to use the term “copyright infringement” by mistake. Unfortunately, a lot of other reporters out there using Xinhua as a source just did the usual cut and paste, not stopping to wonder what sort of copyright infringement was going on.

Second, what sort of trademark case was this? Some history is useful:

[Proview] registered trademarks for the IPAD name in the EU, China, Mexico, South Korea, Singapore, Indonesia, Thailand and Vietnam between 2000 and 2004, trademark databases show.

[ . . . ]

According to Mr Yang, Proview Electronics (Taiwan) agreed in 2006 to sell the “global trademark” for the IPAD name to a US-registered company called IP Application Development (IPAD) for £35,000 ($55,104). Proview did not at the time suspect the company had any link with Apple.

However, Mr Yang claims that the trademarks for the Chinese market were not included in that agreement. These were filed in 2000 by Proview Technology (Shenzhen), another affiliate of Proview International, the group’s Hong Kong-listed holding company, rather than by the Taiwan unit.

FYI, I think this “IPAD” company was a front for Apple. Smells like it, huh?

What were Apple’s options? Either they could go after the trademark itself, or they could sue Proview (Taiwan) under a contract theory based on the 2006 assignment agreement, claiming that the agreement did include mainland China. This may in fact be occurring parallel to the Shenzhen action, I have no idea.

With respect to the China mark, though, there are two problems with the contract action. First, apparently Proview (Shenzhen) was the owner of the PRC mark, not the signatory of the assignment agreement, Proview (Taiwan).

Second, even if a court somewhere ruled that Proview had breached the 2006 agreement, that wouldn’t mean that Apple would automatically be assigned the PRC mark. They might get monetary damages (not so useful since Proview is nearly bankrupt), but a foreign court ruling about ownership of a PRC trademark is completely worthless – the China Trademark Office would ignore it.

So, a contract action looks tough. What about a trademark case? Since the mark has already been registered, Apple only had one administrative route: a trademark cancellation. They could file with the Trademark Office and argue, for example, that Proview filed the mark in bad faith.

But that’s a loser. Proview filed the mark way before the iPad was on the market. Unless there was some evidence that they had advance knowledge of the “iPad” name, a cancellation wouldn’t work.

What are we left with here? The case being reported on this week was an action initiated by Apple against Proview in Shenzhen. Since Proview (Shenzhen) is obviously located in that city, we can assume that Proview (Shenzhen) was the target.

But what was the cause of action? Reuters used the following language:

A court in southern China has rejected a lawsuit by Apple Inc, accusing a Chinese technology company of infringing its iPad trademark[.]

Trademark infringement? How is that possible? Apple is not the trademark owner, Proview is. That’s nonsensical.

Here is the Financial Times‘ description:

Apple then sued Proview Technology (Shenzhen), asking the court to declare the US company the rightful owner of the IPAD trademarks in China. The Shenzhen Intermediate People’s Court rejected that request earlier this week in a ruling that Apple can appeal.

Apple wanted the court to declare them the rightful owner of the mark? Based on what? No other argument out there I can see except one based on the 2006 assignment agreement. This is speculation, but I assume that the Shenzhen court was essentially ruling that either: Proview (Shenzhen) can not be held responsible for the promises made by Proview (Taiwan) in the assignment agreement; or the agreement did not include the PRC mark.

I sure hope that the court did not rule on the latter, that the 2006 “global” agreement did not include China. If so, it would mean that some lawyer over at Apple committed malpractice.

It’s very difficult to believe that this happened, but what would have been the error? Well, it’s standard practice with an IP assignment or license agreement to specify (with great detail) which IP rights are at issue. This sometimes includes a list of the IPRs within the body of the agreement itself, but always includes an attached appendix with a comprehensive list of all IPRs plus copies of all registration certificates.

If I were purchasing PRC trademarks from someone, I would make sure of three things. First, I would do some basic due diligence and confirm that the signatory of the agreement was the actual (record) owner of the marks. None of this Proview (Shenzhen) vs. Proview (Taiwan) crap. That’s a rookie error, folks!

Second, I would ensure that all IPRs were listed, with registration certificates attached, to the agreement itself.

Third, and perhaps most important, I would require that the trademark owner sign a Power of Attorney for trademark and an assignment application, and furnish these at closing. Given these documents, I (or my agent) could go over to the Trademark Office and make the formal assignment application, with no further help from the IP owner necessary.

Apple should never have signed off on that 2006 agreement without the necessary transfer documents. I’m sure there’s a story behind that, and I’d love to hear it.

What’s next for this dispute? Looks like Apple is going to have to pay through the nose for this mark. No other options that I can see, and Proview is already ramping up infringement suits against Apple, cases they will win.

© Stan for China Hearsay, 2011. | Permalink | 5 comments | Add to del.icio.us
Post tags: apple, ipad, proview, trademark cancellation, trademark infringement

Image via CALT - please don't sue me.

This intellectual property case is really funky, as in “WTF is this all about?” Here are the basic facts, and then I’ll chime in with a bit of admittedly confused commentary:

The China Academy of Launch Vehicle Technology (CALT) is suing BMW China for allegedly using images of the Long March rocket in advertisements without permission. The case opened in the Fengtai district court Wednesday.

I didn’t know there was a China Academy of Launch Vehicle Technology (中国运载火箭技术研究院). Cool. You learn something new every day.

So it sounds like some sort of trademark infringement case. CALT apparently has the rights to a logo that was used by BMW without authorization. Case closed, yes?

These additional facts do not help at all:

According to the court, CALT filed the lawsuit alleging BMW used its figurative mark CZ-2F rocket in an advertisement in Vistastory magazine in 2010. The academy is asking for 100,000 yuan ($15,708) in compensation.

“CZ-2F rocket’s image is well-known for being designed to launch the Shenzhou spaceship and Tiangong-1,” said Deng Zemin, the lawyer representing CALT. “Clearly BMW used the fame of the rockets to promote their products and increase their market influence without approval, which constitutes ‘unfair competition.’”

OK, first, is it the figurative “mark CZ-2F rocket” or the “figurative mark,” which is an image of the “CZ-2F rocket”? In other words, are we talking about a trademark here or is the word “mark” being used as a military-style identifier along with the number? I already have a headache.

Right, on to the IP case. Thanks to whoever wrote this story, I really have no idea what sort of legal theory we’re dealing with. At the top of the list, we’d have to put unfair competition, since that was mentioned specifically. However, that quote probably isn’t definitive.

What are the other possibilities? Copyright? A rocket isn’t protected by copyright law, even if the design is distinctive. Images and renderings of the rocket would be protected (e.g. a photograph, blueprint, schematic, or painting) if CALT owned those rights.

Not much to go on in the article, although this sounds a lot like copyright:

BMW argued, since the Long March rocket family has been launched more than 100 times, the images in the advertisement are considered public domain, according to a court press release.

Does that mean that BMW was using photographic images, which might be protected? Unfortunately, that’s the only indication of a copyrighted work, and since the article also contains the words “trademark” and “unfair competition,” I am rightly confused. (More on this later when we get to trademark.)

Just to be thorough, what about a design patent? Possible. The aesthetic features of the rocket could be protected via industrial design, but there is no indication that we’re dealing with that sort of IP here.

That leaves us with trademark as the “anchor” form of IP that would be used in an unfair competition case. Does CALT own some sort of trademark on the image of the rocket as a logo?

Let’s assume for the moment that CALT does have such a trademark. If so, what products/services would it be registered under? Which class includes “rockets and other launch vehicles”? Class 12? What about automobiles? (I assume that BMW’s ads involved car sales).

Crap, I might as well waste more time by doing a quick search . . . yeah, there it is. Class 13, some sort of rocket logo on several different mechanical devices including rockets and launch platform technology. And yes, they also have the logo in Class 12 under . . . wait for it . . . automobiles. Pretty wide trademark coverage for a rocket.

So if BMW used an image in car ads that looks like that logo, then I’d say their case is in trouble. Doesn’t matter that the image of the rocket is out there in the public domain, that’s copyright-speak. If their image looks like that logo, then there’s a trademark argument to be made.

[Note: According to a super secret source of mine working on a similar litigation with CALT as the plaintiff, the trademarks in that matter were not identical or substantially similar.]

If you’re still confused as to why that “public domain” argument is irrelevant, consider a company like Great Wall Wine, whose logo includes an image of the Great Wall. That image is certainly out there in the public domain, yet a private company like that can still get protection for it as a trademark. Copyright never enters into the picture. Get it?

This brings us back to unfair competition and this claim:

“The slogan ‘BMW: experience the passion while improving our society,’ copied an idea on CALT’s website reading ‘rocket boosters help China take off,’” Deng told the Global Times. “It also implies the company has something to do with the launch. It’s totally inappropriate.”

This suggests “passing off,” which is a violation of the Anti-unfair Competition Law. I’m open to the trademark infringement theory (although now that I’ve seen the actual logo (which is kind of ugly), I’m skeptical that BMW used an image that was substantially similar), but I don’t really have enough information to say anything about the passing off charge. Without seeing the ad itself, all we have is the language “BMW: experience the passion while improving our society.”

It’s possible that the ad is suggestive of a BMW role. You never know. But so what? Unfair competition is all about the competition, and there needs to be commerce going on here. BMW is not passing off its own rockets as originating from CALT, it’s selling cars. Where’s the consumer confusion? And as BMW’s lawyer said: “as an incredibly famous automotive brand, it’s unnecessary for the company to use CALT’s trademark to boost its image.” That’s not a defense, but it’s true nonetheless.

By the way, in that other ongoing litigation involving CALT and this trademark, the legal theory there is also unfair competition, even though the defendant is in no way a competitor of CALT. Maybe that was chosen because the straight-on trademark infringement case was weak.

If I was CALT, and the two images are indeed similar, I’d stick with the trademark infringement theory. If the trademarks are different, I really don’t know where this whole thing is going.

Also, if anyone can send me a link/image to that BMW ad, that would be nice.

© Stan for China Hearsay, 2011. | Permalink | 7 comments | Add to del.icio.us
Post tags: BMW, dispute resolution, trademark infringement, unfair competition

Well, perhaps not earthquakes, but other nasty stuff. At least that’s what the software industry keeps telling us.

As you might know, I’ve been pretty tough in the past on piracy statistics, particularly those generated by industry groups like the Business Software Alliance (or their lackeys). I have a great deal of sympathy for the BSA and their piracy problems all over the world, but I am repeatedly annoyed by obvious attempts to gain favor with governments by inflating statistics and generally making things sound even worse than they are.

Piracy rates for digital media are already sky high. Why does industry feel the need to make things appear even worse?

Anyway, several studies/reports have been criticized in the past, including at least one from research firm IDC. This isn’t just from me. Check out these headlines:

The Economist: BSA or Just BS? Software Theft is Bad, So is Misstating the Evidence

ZDNet: Lies, Damn Lies, and Statistics

The Australian: Piracy Stats Don’t Add Up

Sounds like some folks have lost faith in BSA/IDC information. And the hits just keep coming. Here’s the latest, which was reported on in China Daily as straightforward news, with no quotes or comments from any dissenters:

A company could lose $106,000 every time its IT system crashes because of pirated software, just one of the many potential problems arising from the absence of licensed software, a report has found.

An external hacking attack could cost a company $109,000 and the loss of valuable data could cost $63,000 as a result of using pirated software, which poses potential security threats, said a report by market research company International Data Corp (IDC) on Tuesday.

Now I’m sure these numbers are based on the experiences of some company out there. In other words, I’m not accusing anyone of making this stuff up. On the other hand, I’ve never trusted this “it can hurt you” PR strategy. And I know whereof I speak. I’ve been involved in law firm marketing for years, and the most common technique in that biz is to publish information designed to scare clients into coming to you for help. You lawyers out there in the newsletter racket know what I’m talking about. (Not to mention accountants, business consultants . . . shit, just about anyone in the service industry.)

If we’re dealing with counterfeit pharmaceuticals or contaminated food, then yes, the “it can hurt you” warning makes sense and is probably a good tactic. But for software? Yes, I understand that everything from airplanes to steel factories run on software and that glitches can lead to expensive downtime.

Pirated software is often less stable than the real thing, and so these losses are a genuine risk (although depending on the situation, that risk could be extremely low). But that’s not the point. My problem here is that I simply don’t trust a report, designed to scare companies into swearing off pirated software, that originates from BSA/IDC. The fear factor already makes it kind of slimy, and with the track record of these organizations when it comes to this sort of data, well, I’m going to need some third party validation before I take this seriously.

© Stan for China Hearsay, 2011. | Permalink | 5 comments | Add to del.icio.us
Post tags: Business Software Alliance, copyright infringement, digital media, IDC

It’s no secret that the U.S., specifically certain American industries and their champions in the U.S. government, are less than pleased with the state of intellectual property rights enforcement in China. The big players here include pharmaceutical companies, the entertainment industry, and software developers.

What are their options? One line of attack is through multilateral negotiations and use of multilateral organizations, like the WTO. These industries were instrumental in having IP rights included in the trade agenda in the 1990s via the Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement. This was part of the grand bargain struck between developed and developing nations when the WTO was established. The promise: we’ll throw you a bone when it comes to areas like agriculture if you’ll agree to tougher IP laws and market access for services (e.g. banking and finance).

Some would argue that the developing countries are still waiting to this day for that promise to be fulfilled, but that’s a subject for another post. On the IP side, those Member States adopted TRIPs and agreed to the minimum standards established under that agreement. As other countries joined WTO, including China, they also agreed to uphold TRIPs.

The problem with that, from the industry perspective, is that TRIPs sort of froze everything in time. Sure, the agreement forced many developing countries to upgrade their legal systems. China, for example, engaged in a sweeping change of its IP laws in the late 90s/early 2000s, including amendments to the trademark, copyright and patent laws.

All well and good, but industry did not get everything it wanted, and going back to the WTO and getting that consensus-driven body to adopt tougher standards in a future negotiating round has proven impossible. Indeed, we’ve been stuck in the next negotiating round (Doha) for many years now, with no end in sight.

So much for the WTO. But if industry is not happy about IP in China, what else can be done? Well, there’s always bilateral negotiation, and certainly whenever the U.S. and China get together for official talks, intellectual property issues are high on the agenda. Several notable victories have been made over the past few years, including the fairly recent debate over China’s “indigenous innovation” policy, which has been revised to reflect industry concerns.

However, bilateral negotiations can only get you so far. Certainly the pharmaceutical, entertainment, and software industries (among others) have had agenda items hanging out there for years, with no indication that their wishes will be granted by Beijing, notwithstanding pressure by the U.S. government.

So much for bilateral talks. Any other options? If multilateral and bilateral solutions aren’t working, there is always the regional option. If the entire WTO membership won’t play ball, and China refuses to accede to demands by itself, what about a regional solution?

Enter the Trans-Pacific Partnership:

Ongoing trade negotiations involving the United States and eight other Pacific Rim nations have come under increasing scrutiny for the intellectual property provisions being discussed, amidst concerns that they could lead to higher drug prices, harming public health and access to medicines in developing countries.

The objective of the TPP is to establish a free trade agreement among the United States, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam. Five rounds of negotiations have taken place since March 2010; still in its early stages, the TPP has been the subject of growing global interest. (ICTSD)

What’s the plan here? The U.S. has a history of entering into bilateral and regional trade agreements and including IP provisions that are tougher than TRIPs standards. This is usually referred to as “TRIPs plus” and includes issues like data exclusivity and patent linkage (for the drug industry) and extension of copyright protection (for the entertainment industry). The U.S. strategy has been criticized in the past as utilizing unequal power to foist industry-driven legal reforms on developing countries.

In other words, the U.S. couldn’t get certain reforms past the entire WTO membership, but perhaps it can pick off developing nations via bilateral, or alternatively regional, trade agreements. This is one of the issues surrounding the TPP negotiations.

The language recently released by USTR gives a clue to where negotiations are at this point:

TPP countries have agreed to reinforce and develop existing World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) rights and obligations to ensure an effective and balanced approach to intellectual property rights among the TPP countries. Proposals are under discussion on many forms of intellectual property, including trademarks, geographical indications, copyright and related rights, patents, trade secrets, data required for the approval of certain regulated products, as well as intellectual property enforcement and genetic resources and traditional knowledge.

First, note that the goal is to “reinforce and develop” TRIPs, which is as close to a direct reference to “TRIPs+” that we’re going to get. It means provisions that raise TRIPs standards and make further progress on issues important to U.S. industry.

Second, the list of areas under discussion not only include the ones driving the discussion (copyright, patents, trade secrets and data protection), but also throws in other IP issues that are important to developing countries (genetic resources and traditional knowledge).

Third, there has obviously been some pushback on the U.S. agenda, otherwise we would not be seeing language like “balanced approach” and some of those line items mentioned above. Cautionary comments from one nation, New Zealand, have already been leaked to the public (read it here).

What does all this have to do with China? After all, the TPP negotiations do not include China at the moment, and many have characterized the U.S. move as a way to coalesce regional support behind the U.S. as an alternative to China, a rising Pacific power. Indeed, much of the coverage of the TPP in the past couple of weeks has focused on defense issues.

But even if China never becomes a member of TPP, such a regional agreement would have a significant effect on international IP standards. If the U.S. is successful in getting all of these nations to sign off on TRIPs+ provisions, then those standards become more widely recognized internationally.

For example, if the TPP includes a minimum copyright protection period of 70 years (many nations only have a 50-year period), the U.S. could at some point bring this up in bilateral negotiations with China, essentially saying “Hey, why are you guys holding out on this issue? All the other nations around you already changed their copyright laws. Why are you the only hold out?”

In effect, when it comes to the TPP, U.S. strategy may include not only the military containment of China, but also a legal encirclement with respect to IP laws.

© Stan for China Hearsay, 2011. | Permalink | One comment | Add to del.icio.us
Post tags: regional trade agreements, Trans-Pacific Partnership, TRIPs, WTO

See which myths and/or conventional wisdom run counter to this bit of news:

One leading home appliances manufacturer Midea lost a patent lawsuit to one of its archrivals, being ordered to stop the infringing act and pay a fine.

Myth #1: China does not recognize intellectual property rights, and the victim is usually a foreign company. Well, sometimes it is a foreign IP owner, but most cases involve Chinese infringers as well as infringees. If you put a random selection of victims of China IP infringement in a room together, the majority of them would be Chinese.

The Guangdong Provincial Supreme People’s Court upheld the verdict made by the Zhuhai City Intermediate People’s Court, settling the three-year intellectual property dispute between Midea Electric Appliances and Gree Electric, both being listed in the Shenzhen Stock Exchange.

Myth #2: Chinese companies don’t care about intellectual property. Here we have two very large, publicly-traded Chinese companies who engaged in a multi-year patent infringement lawsuit. That sounds like a lot of caring to me.

Midea is also subject to a fine of 2 million yuan ($315,000), according to the supreme court ruling.

China’s largest air conditioner producer Gree filed the lawsuit against Midea in 2008, after finding four models of Midea products copied its patented “sleep” function technology, an invention which helps adjust room temperature in users’ sleeps according to their preferences.

The Zhuhai intermediate court decided Midea guilty of the patent infringement in April 2011. Midea, however, appealed to the higher court.

During the litigation, Midea applied to the State Intellectual Property Office to revoke Gree’s patent of invention, but failed in September 2009.

Myth #3: Chinese company portfolios are just filled with “junk patents” that are used for nuisance value in lawsuits. Sometimes, perhaps, but here we have an invention patent that was sufficiently robust to withstand an invalidation challenge. Air conditioning technology may not be rocket science, but we’re talking about a lot of money here.

This case will not make the front page of the New York Times, nor will it probably hit the wire services overnight. No complaints there, it’s not that newsworthy.

Indeed, it’s a very run-of-the-mill IP suit, although the players are heavyweight corporations. But that’s the point. This is the kind of thing you (not to mention government officials) never read about, and the idea that these cases are nonexistent becomes internalized.

But hey, if the only thing you ever see is a headline like this: “Commemorative Shanzhai iPad Has Steve Jobs Rolling in His Grave,” what else are people going to think?

And that’s not a criticism of the press. That Steve Jobs/fake iPad story was interesting, and the Midea/Gree one is kind of a yawner (to most folks).

In other words, aside from writing this post, and distributing it to all three of my readers worldwide, I’m not sure how to effectively debunk these myths.

© Stan for China Hearsay, 2011. | Permalink | 8 comments | Add to del.icio.us
Post tags: Gree, Midea, patent infringement

This is not exactly a new problem for the U.S. military. There was a report issued in 2008 that identified counterfeits in the military supply chain as a big issue, noting that the problem stems from Clinton-era cost-cutting measures relating to procurement. Given this year’s Penatagon budget, which is much higher than many countries’ GDPs, the most surprising part of this whole story is that the U.S. military is actually engaged in saving money. God knows what they’re spending the rest of it on.

The latest complaints come from members of the Senate Armed Services Committee, which held a hearing this week on the counterfeit parts scourge and reported the following findings:

The U.S. Senate Armed Services Committee said its researchers had uncovered 1,800 cases in which the Pentagon had been sold electronics that may be counterfeit.

“A million parts is surely a huge number. But I want to repeat this: we have only looked at a portion of the defence supply chain. So those 1,800 cases are just the tip of the iceberg,” said Senator Carl Levin. (Telegraph)

[ . . . ]

In more than 70 percent of the cases in which investigators traced parts back to their source, the trail led to China. And nearly 20 percent of the remainder were traced to Britain and Canada — resale points for counterfeit Chinese parts[.] (Washington Post)

[ . . . ]

The Senate Armed Services Committee found counterfeit parts — usually from China — on at least seven aircraft, including the Lockheed Martin Corp. C-130J transport plane, Boeing P-8A Poseidon maritime patrol and L-3 27J Spartan transport.

“Suspect electronic parts from China were installed on military systems and subsystems that were manufactured by Raytheon Co., L-3 Communications and Boeing,” said the memo from the committee’s staff[.] (Bloomberg)

OK, this is obviously a big problem both in terms of the number of parts as well as the safety/security ramifications. Senator John McCain, ranking member on the committee, was absolutely right when he said that risks of hardware failure (e.g. planes, missiles) due to this problem are unacceptable.

Neither can I argue with Senator Levin’s pronouncement: ““We cannot allow our national security to depend on electronic scrap salvaged from trash heaps by Chinese counterfeiters[.]”

On the other hand, some of the criticism of China seems a bit odd. First, the emphasis on aggregate statistics by country of origin certainly singles out China as the bad guy. But seriously, we’re talking about electronics manufacturing. Where else is the stuff going to come from, particularly when price is an issue?

Second, Levin went after China’s intellectual property system directly, pointing out that counterfeit markets exist in Shenzhen and that “China’s authoritarian rulers could stop the counterfeiting ‘if they want to stop it.’”

Old story, no easy solutions. China has a big IP problem, as everyone recognizes. But it’s a complex matter that covers a lot of territory; a lot more is going on here than counterfeit chips ending up in U.S. military hardware.

As I’ve said countless times on this blog, yes, the government could shut down those markets or police the hell out of the DVD sellers on the street corners. Maybe they should. However, each dollar spent doing that comes out of someone else’s budget. Is Levin seriously telling the government here how they should prioritize their IP enforcement expenditures? Should China cut the budget of the guys investigating fake pharmaceuticals to make the U.S. military happy?

The committee report said that China should “act promptly” on this issue. I don’t think that kind of entreaty is likely to fly here in Beijing.

Additionally, Levin’s use of the word “authoritarian” is telling. Specifically, it tells me that he doesn’t know enough about China. The IP problem is not one that can be easily fixed by an edict from the Central Government. It is a nationwide problem, with many of the counterfeiting operations being shielded by local governments. If Levin thinks that an official in Beijing can simply reach down (in a figurative sense) and tell local officials to cut this shit out, then he’s living in a dream world.

Third, it appears that Levin is pissed off because China did not cooperate with U.S. investigators:

[C]ommittee staff members were stopped in Hong Kong and refused visas into China by officials who warned that their investigation was “sensitive and could be damaging to U.S.-China relations.” (Washington Post)

I don’t know the details here, but I’m not surprised. These weren’t agents of the FBI or investigators from the FDA (both agencies have offices here), but committee staffers. Perhaps Beijing was worried about a political fishing expedition? If that was the case, they certainly wouldn’t want to let these guys run loose in local manufacturing facilities. (One wonders what would have happened if Beijing had sent over a delegation from the State Council to inspect American factories.)

I’m certainly not a fan of nationalists, but I actually think this guy has a point:

Song Xiaojun, a former Peoples’ Liberation Army officer who has become a nationalistic commentator in the Chinese media said the US had “got itself into the position it is in”.

“The US has been dismantling its factories since the 1960s,” he said. “And since the Clinton government, the US has turned a blind eye towards military requisitioning. As it keeps cutting its procurement budget, weapons dealers will keep providing cheaper quality products,” he added. (Telegraph)

Who is primarily responsible for this problem? The U.S. contractors who included these counterfeits into their systems. And they are only doing this because of cost concerns mandated by U.S. government policy. Note that in the end, the recommendations of the committee had nothing to do with China and everything to do with increased quality control and remediation measures on behalf of contractors.

China, with its well-known IP problems, is a convenient target here, but I think that these criticisms are ultimately misplaced. While the parts originated in China, the problem is an American one.

© Stan for China Hearsay, 2011. | Permalink | 12 comments | Add to del.icio.us
Post tags: counterfeit, electronics, fakes, shanzhai

You may recall a brief comment I made some time ago (“Worse Than the Cold War“) about U.S. Congressman Frank Wolf and his misguided attempt to stop all science and technology cooperation between China and the U.S., in particular any contact with representatives of the PRC space program:

Seriously bad idea, not to mention paranoid. The provision would also prohibit NASA from hosting Chinese government visitors, which seems way over the top.

Look, I’m a huge fan of international science and technology cooperation. The history is pretty clear that what is now called “science diplomacy” has been remarkably effective. During the Cold War, S&T programs not only kept the dialogue going between the US and USSR during some tough times, but were also at the forefront of the thawing that occurred during the period in the 1970s known as detente.

Well, unfortunately Wolf got his way in the end, and the restriction was stuck onto a budget resolution and ultimately signed by Obama. Score one for the Cold Warriors and paranoids in the U.S. government who think that shutting off dialogue with other countries is a great policy solution. Hey, it worked really well in denying North Korea nuclear weapons, didn’t it?

Anyway, what was the response from the U.S. government? Obama’s Office of Science and Technology Policy (OSTP) went ahead with U.S.-China science dialogue. The director of the office was recently hauled in front of a House committee to answer for his “crimes.”

Last month, the US Government Accountability Office determined that OSTP violated a statute that prohibits OSTP and US space agency NASA from using federal funds for certain bilateral engagements with China.

OSTP director John Holdren testified that he was told by the Justice Department that the office’s activities fell under the president’s executive authority to conduct foreign diplomacy, and that the statute therefore did not apply to OSTP.

There are three issues here. First, there is a very significant legal question regarding the power of the Executive Branch to determine whether a law is unconstitutional or not. In other words, deciding whether to follow the law as enacted by the country’s Legislative Branch. The New York Times has a good piece that covers this issue:

While the power of the department’s Office of Legal Counsel to nullify statutes has led to fierce debate in recent years, the highest-profile disputes have involved national security issues like surveillance, where significant portions of the material are classified.

By contrast, the executive branch’s writings in the current dispute are public. They illustrate how one president’s assertion of executive power — sometimes in memorandums that are secret at the time — establishes a “precedent” for his successors to develop by applying it to new circumstances. Each repetition cements and expands the claim without a court ever weighing in.

In the present case, the Obama Justice Department issued an opinion that the rule pushed by Frank Wolf was unconstitutional and that the head of the OSTP could disregard it. This was the reason that Holdren was raked over the coals by Wolf and others during that hearing.

I’ve got mixed feelings about this issue. On the one hand, I certainly disagree with the underlying legislation here. It’s absolutely ridiculous and makes Wolf and the entire U.S. government look like reactionary idiots that have forgotten their history.

On the other hand, I recall what happened when George Bush disregarded a lot of other laws, mostly relating to espionage and military matters (waterboarding, anyone?). Remembering that scary time, I would much prefer that U.S. Presidents follow the law and not find convenient legal excuses for disregarding it.

Second, there is the rule itself, which says that no money can be spent by OSTP on bilateral (U.S.-China) engagement. Does this encroach upon President Obama’s ability to conduct foreign policy? I’m no constitutional scholar, but it probably doesn’t. Cutting off money like that certainly does meddle in the U.S.-China relationship, but unfortunately Congress does this kind of thing all the time, including frequent threats to cut off funding for the many U.S. military adventures.

I think Congress may have the power to do this, although they really shouldn’t have in this case.

Third, why is this rule so awful? Well, if Obama’s folks followed it, not only would it mean yet another embarrassing bilateral misstep, but it’s extremely shortsighted. The impetus for this is a fear that bilateral exchanges with OSTP and NASA will lead to dangerous, unintended technology transfer to China.

This is rather condescending to the professionals at NASA and OSTP, who have decades of experience in how to handle sensitive technology when it comes to foreign governments and are perfectly aware of intellectual property infringement, government-backed espionage, and other dangers. These guys are the experts; they know more than Frank Wolf about technology transfer and how to compartmentalize information.

I also wonder if Wolf realizes that if current trends continue, perhaps 50 years from now, it might be the U.S. that is desperate to open up these sorts of channels with China, which is spending a lot more on R&D and is moving forward rapidly with its own space program. You’d think that this week’s events, which included an orbital docking between the Shenzhou spacecraft and the Tiangong lab module, would be a wake-up call to U.S. lawmakers, but apparently they are busy with other priorities.

I get the feeling that even after China’s space station has been completed, the U.S. will still be talking about cutting taxes and closing down government agencies, all the while bemoaning the fate of American global competitiveness.

© Stan for China Hearsay, 2011. | Permalink | 6 comments | Add to del.icio.us
Post tags: Frank Wolf, NASA, OSTP, technology transfer, U.S. constitutional law