US WTO IP Case Against China – Part I

April 10, 2007

Well, here goes. I’ll try to do this as succinctly as possible and limit the lawyer techno-babble.

One of the two cases that the US will be filing today (Monday) concerns China’s intellectual property enforcement, or lack thereof according to the US government. The US argument is essentially that China’s IP enforcement does not meet the standards set by the TRIPs agreement, which China agreed to when it joined WTO.

The case against China is outlined in an official fact sheet put out by the US Trade Rep’s office (the doc is here). There are four distinct grounds for the complaint. I’ll tackle the first one in this post:

Thresholds for Criminal Liability – the argument here is that infringers can still do a lot of harm before they become liable for criminal penalties. There are a number of ways that a threshold can be determined, but basically it is either by the number of infringing items or by the proceeds of the infringing activity.

The quantity threshold was addressed in a Supreme People’s Court Judicial Interpretation last week (Chinese version here), in which the number was reduced from 1,000 copies to 500. Not good enough, says USTR, which responded to the new rule in its fact sheet. Even 500 provides a very large “safe harbor” for infringers, who could simply make sure that they keep inventory at no greater than 499 copies.

The proceeds-based approach was not addressed in last week’s SPC rule (under a December 2004 SPC interpretation, it is RMB 30,000), but the USTR expressed their dissatisfaction, noting that since value is calculated on the (low) price of the counterfeit, as opposed to the price of the genuine product, it can be difficult to meet that minimum amount. I’m not sure either approach is reasonable, but that issue is for another day and another post.

OK, so what’s the violation here? Two articles of TRIPs were cited by USTR under this subject. The first is Article 41:

Article 41(1): Members shall ensure that enforcement procedures as specified in this Part are available under their law so as to permit effective action against any act of infringement of intellectual property rights covered by this Agreement, including expeditious remedies to prevent infringements and remedies which constitute a deterrent to further infringements. These procedures shall be applied in such a manner as to avoid the creation of barriers to legitimate trade and to provide for safeguards against their abuse.

Note the language that will be important if this case ever gets anywhere (I still doubt it). The most important word in Article 41 is the one that is not even present, a qualifier before “deterrent”.  One word that could have been in there is “effective,” which is the word used in the USTR fact sheet: “China thus seems to lack an effective criminal deterrent . . .”  [my emphasis]

TRIPs doesn’t say “effective deterrent” in Article 41(1), it just says that remedies must constitute a deterrent, no qualifier before that word at all. Why am I parsing this stuff so carefully? Well, aside from the fact that this is what would happen during the dispute itself, I want to highlight the point that winning a TRIPs case would be tough. How can you demonstrate that China’s criminal remedies do not provide a deterrent? Not so easy, I would say.

The other part of TRIPs cited is Article 61:

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. Remedies available shall include imprisonment and/or monetary fines sufficient to provide a deterrent, consistently with the level of penalties applied for crimes of a corresponding gravity. In appropriate cases, remedies available shall also include the seizure, forfeiture and destruction of the infringing goods and of any materials and implements the predominant use of which has been in the commission of the offence. Members may provide for criminal procedures and penalties to be applied in other cases of infringement of intellectual property rights, in particular where they are committed wilfully and on a commercial scale.

Again, note the lack of a qualifier before “deterrent” and how difficult it might be to prove this. Essentially, this article just says that the law should provide remedies to deter such activity, but does not contain any specificity whatsoever on judging effectiveness or any sort of minimum standards.

Key point: Keep in mind that the major difficulty with criminal enforcement of IP infringement in China is not even mentioned in any of the USTR documentation, in any speeches, and not in any of the press reports I have read. Seriously.

And what is that dirty little secret (that everyone knows)? The big problem is that the police have a great deal of discretion, have other priorities, and simply do not pursue these cases. This is a policy issue, therefore, and not entirely a law issue, and the US cannot cite this in a WTO/TRIPs case. Nowhere in TRIPs does it say that the police must follow the law and that sufficient resources must be placed at their disposal to handle all IP cases. In fact, just the opposite.  Article 41(5) of TRIPs states the following:

Nothing in this Part creates any obligation with respect to the distribution of resources as between enforcement of intellectual property rights and the enforcement of law in general.

In other words, TRIPs does not mandate that a country must spend a certain amount of money in IP enforcement. That being the case, doesn’t it seem a little strange that we have a WTO dispute that doesn’t really get to the heart of the matter? Of course, but don’t let that bother you. This case is all about USTR proving to Congress and the business community that they are tough on China – keep this in mind.

Part II (probably tomorrow) will discuss Customs disposal of infringing goods. A much narrower issue than criminal thresholds. Hopefully I can get through the rest of this and move on to the second case.