US-China WTO Dispute III – criminal thresholds

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OK, so we’ve already taken a look at a copyright claim (ruling: insignificant victory for US) and a customs measure (ruling: hollow victory for US). The last one relates to the criminal law as applied to trademark and copyright infringement. This one doesn’t really come out much better for the US either in my opinion, but in some ways it is more positive than with the first two claims.

I. The Issue

The dispute relates to Article 61 of WTO’s Trade-related Aspects of Intellectual Property Rights (TRIPS), which states that:

Members shall provide for criminal procedures and penalties to be applied at least in cases of wilful trademark counterfeiting or copyright piracy on a commercial scale.

China’s Criminal Law and related Judicial Interpretations set thresholds, under which certain kinds of infringing activities will not be considered to be criminal acts. This has been a very big issue for the US government in its negotiations with the PRC for many years, and always on the top ten wish list for legislative change in the IP area. Getting a chance to challenge the law was actually a big deal for the US, so I do not want to minimize the potential of this claim.

In claiming that PRC law was not in conformity with TRIPS Article 61, the US was essentially saying that the thresholds allowed for infringing activity that nevertheless qualified as "wilful trademark counterfeiting or copyright piracy on a commercial scale." In order to determine whether that was an accurate statement, the Panel had to figure out just what the heck that phrase means.

If you like legal opinions, and particularly international treaty construction, this is the part of the Report you will love. Lots of detailed arguments about language and how to define it. It will make your eyes bleed, but if you’re into that sort of thing, go nuts.

II. Limitations

Before we get to those fun definitions, note that the Panel highlighted the limitations of Article 61. As with the other parts of the Panel decision in this case, the opinion is narrower than you might think.

A. Only applies to trademarks and copyrights, not to other IP rights.

B. Only applies to counterfeiting and piracy, not other types of infringement. In other words, those fake "NIKEE" shoes you saw at the market in Shenzhen do not qualify as the trademark is not identical to "NIKE". I could give you other examples, but this is already going to be a long post, so I leave it up to your imaginations. Just keep in mind: for trademark, it has to be the identical mark used without authorization; for copyright, it has to be an unauthorized copy of the work.

C. Only applies to actions that are "wilful". Basically this comes down to the intent of the infringer. Intent is a core concept in criminal law and well understood. Note that the US argument did not involve any defect in PRC law as it relates to determining the requisite intent of infringers.

D. Only applies to activities done "on a commercial scale".

III. Definition of "Commercial Scale"

Of all those limitations above, it was "commercial scale" that was the sticking point on this claim or, as the Panel put it much more formally, "The principal interpretative point in dispute." Very nice language. That’s why they’re working for the WTO and I’m blogging.

Why is this important? Essentially the US was complaining that under Chinese law, a lot of infringers were getting away with significant infringement but not being prosecuted as criminals because their activities failed to meet the minimum thresholds established here. If the US could prove that these thresholds represented levels that were above a "commercial scale" then China law might be considered as being inconsistent with TRIPS Article 61 — pretty simple point here.

Simple overall point perhaps, but a horrible experience for the reader trying to figure out what the Panel thought about "commercial scale". I will not try to take you all through the tortuous meanderings about treaty interpretation, "qualitative vs. quantitative" concepts, or how the term "scale" modified "commercial" in a special nifty way. Really too painful — I’ll just give you the basics. Before getting to the conclusion, however, I would like to share my absolute favorite passage. It’s a classic (when I read it, I wrote ‘wow’ in the margin).

China had submitted a bunch of examples of how "commercial scale" has been used in different contexts. The US responded that these examples merely reflected the particular author’s "own lexicography" and do not represent any dispositive usage. The Panel responded:

The Panel considers that each of the uses on the record, being in the English language, reflects the understanding of the authors as to the ordinary meaning of those words and phrases in that language. That is the reason why a language allows its speakers to render themselves mutually intelligible. (Panel Report, p. 114.)

Is that the best or what? In my opinion, this is the point in the opinion where the US lost the Panel. It kind of goes downhill after that snippy passage.

Anyway, let’s go back to "commercial scale." After all this discussion, the Panel ultimately made this statement:

In the Panel’s view, the combination of the primary definition of "commercial" and the definition of "scale" can be reconciled with the context of Article 61 if it is assessed not solely according to the nature of an activity but also in terms of relative size, as a market benchmark. As there is no other qualifier besides "commercial", that benchmark must be whatever "commercial" typically or usually connotes. In quantitative terms, the benchmark would be the magnitude or extent at which engagement in commerce, or activities pertaining to or bearing on commerce, are typically or usually carried on, in other words, the magnitude or extent of typical or usual commercial activity. Given that the phrase uses the indefinite article "a", it refers to more than one magnitude or extent of typical or usual commercial activity. The magnitude or extent will vary in the different "cases" of counterfeiting and piracy to which the obligation applies. In the Panel’s view, this reflects the fact that what is typical or usual varies according to the type of commerce concerned.

Not to be unnecessarily flippant, but that whole paragraph can really be boiled down to that mainstay of legal phrases, "It depends." I shit you not.

There is a lot of interesting stuff in here. The Panel had to wade through a lot of crap that was ultimately disregarded, such as the consideration of the argument that "commercial scale" was merely a way to distinguish from de minimis activities (I would have said yes, but again (we discussed this above) I’m blogging, they are the professionals). Anyway, that would have been way too easy and, I have to admit, incorrect.

IV. So What?

So if it all depends on the product, the market, etc., what are we left with here? At one point, we get this: "The Panel observes that what is typical or usual in commerce is a flexible concept." Thanks a lot, guys.

Actually, there was more analysis to come. After stating that "it depends," the Panel went back to the US claims to see if it could address the original argument, given the context of the PRC market. Good luck.

This is where the Panel starts to bitch slap the US, and it gets kind of ugly. Note the last sentence in this paragraph — there are a lot of these coming up:

The United States agreed that "commercial scale" must be viewed with reference to the marketplace, and acknowledged that the scale of what is commercial necessarily will vary by product and market. It acknowledged that what is "commercial scale" can vary from situation to situation according to a number of factors. It asserted that China’s criminal thresholds fail to capture commercial scale in certain market situations. Nevertheless, the United States did not provide data regarding products and markets or other factors that would demonstrate what constituted "a commercial scale" in the specific situation of China’s marketplace. (Panel report, p. 121.)

Oops. Not so easy to rule when there is an insufficiency of evidence. To be fair to the US, though, they didn’t necessarily know that the case would end up this way. More on that point later.

Additionally, submitting evidence in this area is a very difficult task. As any IP practitioner, or commercial lawyer, over here knows, transparency is not just an esoteric term thrown around by diplomats. Lack of information is usually the difference between winning and losing a commercial dispute here, and because IP infringment takes place in grey and black markets, good stats are hard to come by. The Panel paraphrased a US statement that the PRC market for these goods is "fragmented and characterized by a profusion of small manufacturers, middlemen, distributors, and small outlets at the retail level." Absolutely true. I feel your pain, USTR lawyers.

However, fun is fun, so I can’t pass up the opportunity to show off the Panel at its snippiest. Sorry for the long quote, but here comes another acid-toned criticism of US evidence by the Panel:

The Panel has reviewed the evidence in support of this assertion. The evidence comprises a quote from a short article from a US newspaper, the San Francisco Chronicle, titled "30,000-Store Wholesale Mall Keeps China Competitive" regarding the number of stores in a particular mall in Yiwu and the physical dimensions of some stalls; a statistic quoted from an extract from a management consultant report titled "The 2005 Global Retail Development Index" that the top ten retailers in China hold less than 2 per cent of the market, and another statistic that the top 100 retailers have less than 6.4 per cent; and a quote from an article in Time magazine titled "In China, There’s Priceless, and for Everything Else, There’s Cash" that a shopping mall in Luohu spans six floors of small stores.

The Panel finds that, even if these sources were suitable for the purpose of demonstration of contested facts in this proceeding, the information that was provided was too little and too random to demonstrate a level that constitutes a commercial scale for any product in China. (Panel report, p. 122.)

Ouch. Gotta be some hurt feelings after that bit of sunshine. The Panel apparently did not appreciate receiving newspaper articles masquerading as evidence. Again, apologies for the length of the extracts here, but it’s all in good fun:

The United States also submitted other press articles to illustrate points in its first written submission, particularly regarding the calculation of certain thresholds. China objected at the outset arguing that "[t]he Panel can afford little or no weight to such anecdotal and potentially misinformed reports". The United States was puzzled by China’s concern at its recourse to newspapers or other media. It recalled its prior attempts to obtain information from China pursuant to Article 63.3 of the TRIPS Agreement. China had declined to provide information and stated instead that its competent domestic IPR authorities had also made relevant information publicly available through their official websites, newspapers, magazines and other proper channels. The United States added that the information in newspapers and magazines is "drawn from a variety of well-established and well regarded sources".

The Panel has reviewed the press articles and notes that none of them are corroborated, nor do they refer to events or statements that would not require corroboration. Whilst the publications are reputable, most of these particular articles are brief and are quoted either for general statements or random pieces of information. Most are anecdotal in tone, some repeating casual remarks about prices of fake goods, anonymous statements or speculation. They have titles including "Fake Pens Write Their Own Ticket", "Chasing copycats in a tiger economy", "Hollywood takes on fake Chinese DVDs", "Film not out yet on DVD? You can find it in China" and "Inside China’s teeming world of fake goods." (Panel report, p. 124.)

What brought all this on? Well, obviously the Panel had a problem with the quality of evidence submitted. However, they also seemed to be a bit miffed at the US for making some sweeping claims and then not backing them up. Case in point: "Hypothetical examples do not qualify as sufficient evidence." Sounds like a law professor I had — real ball-breaker. Maybe they thought the US submission was lazy; at one point, the Panel notes evidence submitted to prove another part of the case and mused as to why the US never referred to it under this part of the claim. Apparently they don’t appreciate lazy:

The information in the exhibits would not necessarily have been sufficient and, even if it were, it would not be appropriate for the Panel to trawl them for evidence to which the United States did not refer to make the United States’ case for it. As the Appellate Body Report in US – Gambling states:

"A prima facie case must be based on ‘evidence and legal argument’ put forward by the complaining party in relation to each of the elements of the claim. A complaining party may not simply submit evidence and expect the panel to divine from it a claim of WTO-inconsistency. Nor may a complaining party simply allege facts without relating them to its legal arguments." (Panel report, p. 125.)

I’m trying to avoid hyperbolic language here, but if I’m one of Tim Stratford’s guys at USTR responsible for the submission in this case, I’m probably not the most popular lawyer around the office these days. On the other hand, I do not know the politics or the greater context here, and there are many reasons that would explain this sort of thing. Either way, though, I would not want to be on the other end of a ruling like that.

For the sake of clarity, the formal ruling was that the US did not provide sufficient evidence to prove their claim with respect to the specific levels at which the criminal thresholds have been set. While the Panel went on to look at a couple of other parts of the claim, this was the big one.

V. The Silver Lining

Of the three claims in this case, why was this one perhaps the most positive, even though the US was unsuccessful? Well, the first two claims were so narrow in their application that I do not consider them to be huge victories in any regard. Additionally, however, the US really only lost this claim because they failed to provide sufficient evidence. The Panel agreed that a challenge to the thresholds could be made on the basis of TRIPS Article 61. Theoretically, if the US could gather sufficient evidence (more than just a few newspaper articles) to bolster its argument, they could end up victorious on this issue.

That’s a big "if" though. A determination that the thresholds are too high will be a complex analysis if the Panel’s suggestions are adopted by a future panel. I do not have a lot of confidence that such information is available or reliable. Moreover, the market is, as the Panel noted, so disjointed and fragmented that I’m not even sure what kind of evidence would be appropriate to submit in the first place.

Well, there you have it. That’s it for Part III. I will wrap this up with a fourth post, which will be blessedly shorter and not technical, on the political and PR side to all this. Short preview: I was amused by the press coverage of the decision in the US and EU, not to mention the US government’s spin, although the latter was certainly predictable.