Special 301 Report Out — China Still on Priority Watch List

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Today is Labor Day, the first day of a three-day holiday in China. I wasn’t planning on doing much blogging, but if I wait until Monday to report on this, I may just blow it off entirely, and it’s too important. This is perhaps the most important government document of the year with respect to U.S.-China bilateral IP policy, so it’s worth a holiday post.

We go through this every year, with the US Trade Rep’s office sending a report on the status of IP protection around the world. Here’s the legislative background on the Special 301 Report (link is to the 2009 full PDF):

The “Special 301” Report is an annual review of the global state of intellectual property rights (IPR) protection and enforcement, conducted by the Office of the United States Trade Representative (USTR) pursuant to Section 182 of the Trade Act of 1974, as amended by the Omnibus Trade and Competitiveness Act of 1988 and the Uruguay Round Agreements Act (enacted in 1994).

The following are some of the significant issues I spotted in my read today.

1.Priority Watch List

One of the main things to look for in the Special 301 Report is the Priority Watch List, also known as the list of Bad Guys. This year’s winners are:

China, Russia, Algeria, Argentina, Canada, Chile, India, Indonesia, Israel, Pakistan, Thailand, Venezuela

Not sure why China is listed first — maybe this was intentional (i.e. China is a really bad guy with respect to IP protection). Note that China’s inclusion on the list is definitely not a surprise, so this is not exactly breaking news.

2. Effects of Heightened Olympics Protection

Interesting how I wrote about this very topic only a few days ago — my take was that the Chinese government, in protecting Olympic IP at a heightened level during the Games, ran the risk of raising the bar on IP protection here and elevating expectations of governments and IP owners.

The following passage was included in the report as a recent positive development:

During the Beijing Olympics, the Chinese Government went to unprecedented lengths to launch a coordinated crackdown on the unauthorized retransmission of sporting events as well as online activities related to the Olympic Games. These efforts reportedly resulted in 453 online infringement cases, through which 192 sites were shut down, 173 sites were required to remove infringing content, 88 sites received administrative punishment, and infringing activities related to 10 sites were transferred 11 for criminal prosecution.

This experience shows that when the Chinese Government chooses to exercise its political will to deal with an IPR problem, it can yield results.

Yikes. I think that last sentence is exactly what I was worried about. Don’t get me wrong, I appreciate being proven right about things, but this could spell trouble for the future for bilateral relations. This sentiment is repeated in the China country report section later in the document (see below) which continues the theme about the Olympics, specifically with respect to online piracy:

We urge the Chinese Government to demonstrate this resolve generally when fighting piracy and counterfeiting on the Internet.

3. China Country Report

The country reports take up most of the 44-page document, with the China report being three pages in length.

The basic message of the China report has remained the same for years now: the country is making progress, but IP protection continues to remain a big problem, and many enforcement measures are ineffective. Same goes for the 2009 language.

One new passage relates to the financial crisis and recession. During normal times, IP enforcement can become complicated when an infringer is a large employer. When an infringer, particularly one in a suburban or rural location, can lobby the local government on the unemployment effects of an enforcement decision, this can sometimes prove successful, blocking the IP owner’s enforcement efforts. No surprise that this problem might be getting worse with the economic downturn:

The United States also remains concerned by reports that officials, apparently motivated by the financial crisis and the need to maintain jobs, are urging more lenient enforcement of IPR laws. The United States believes that, consistent with the rule of law, IPR enforcement actions should be initiated, cases should be decided, and remedies should be granted based on the merits of the case and in accordance with the law. Moreover, a strengthened approach to IPR protection and enforcement in China would contribute to a more robust and innovative economy in the longer term.

Fair enough, and no great surprises here.

The report singles out in particular online piracy, trademark problems for retailers, the failure to enforce the Beijing Silk Market settlement, and the general problem of high infringement rates in the entertainment industry.

As usual, lack of tough criminal enforcement, low administrative penalties and civil damage awards, government procurement problems, and market access barriers were highlighted. The country report also cited new and upcoming laws and regulations (including the new patent law and the anti-monopoly law) that will effect IP, including compulsory licensing and standards setting.

The country report ends with the following on bilateral negotiations:

The United States believes that continued bilateral dialogue and cooperation can lead to further progress in these and other areas. The United States will continue to put serious efforts into its joint work with China on IPR enforcement and protection strategies, innovation policies, and the range of other important IPR-related matters in our bilateral economic relationship, including through the Joint Commission on Commerce and Trade (JCCT) and other fora.

What is unclear, however, is the role of the new Strategic Economic Dialogue and folks like Commerce Secretary Gary Locke (whom I assume knows a thing or two about China IP problems from his international legal practice) and Treasury Secretary Tim Geithner as we move forward.

You can take the report as being a snapshot of what the U.S. care about at the moment and on what issues near-term negotiations may focus.

OK, back to the holiday weekend.

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