Douglas Clark
Issue:
Cover by JHDesign
WTO membership should facilitate a stronger IP rights regime over the long term, but will cause a surge in fakes first
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China's Legal Development
Prior to the implementation of China's reform program in the late 1970s, the country had no legal system that would be recognized as such by Westerners. The only effective laws on the books were criminal laws. Disputes between enterprises were resolved administratively, as part of the state planning system. Similarly, the lack of a free market in which to sell goods eliminated the need for intellectual property laws to protect inventions or brands.
After the reforms began, it became necessary to develop economic and commercial laws, including laws providing for registration and enforcement of intellectual property (IP) rights, to regulate the parts of the economy no longer subject to state planning. Initially, these laws were of little value, as they were implemented by a poorly trained and understaffed judiciary (many judges are demobilized soldiers with no legal training), and were further weakened by political interference in decisionmaking, protection of local interests, and widespread corruption. In the past few years, the quality of the courts and legal system has markedly improved, at least in larger cities, through better training of judges and the appointment of legally trained judges. In the early 1980s, China reintroduced the concept of intellectual property, promulgated laws protecting various forms of IP, and established special departments within administrative bodies to enforce the new IP laws. The State Administration for Industry and Commerce enforces the Trademark Law and Unfair Competition Law; the Patent Administration Office enforces the Patent Law; and the State Copyright Administration enforces the Copyright Law. The State Bureau of Quality and Technical Supervision is also empowered to enforce the Trademark Law as part of its duty to enforce the Product Quality Law. In addition, most major Chinese cities established intellectual property chambers in the People's Courts in 1993 to help enforce intellectual property rights. --Douglas Clark |
| Douglas Clark is a Hong Kong-based solicitor with the international law firm Lovells. His main area of practice is intellectual property enforcement, and he has handled numerous patent, trademark, copyright, and unfair competition cases in Hong Kong and mainland China. |
Within the first five years of China's WTO membership, the production and sale--both domestic and international--of counterfeit and pirate products will rise. But more than five years out, China's WTO accession should lead to a decrease in the infringement of IP rights. This trajectory is likely because the growth of IP infringement in China has paralleled the growth of China's economy and Chinese companies' greater access to domestic and international markets--both of which will grow even further with WTO membership. China's accession will require the government to implement more extensive reforms to further liberalize its domestic market and allow PRC and foreign companies to import and export products freely.
In the short term, what will assist the production, distribution, export, and sale of genuine products will equally assist the production, distribution, export, and sale of counterfeit products. But over the long term, economic growth should provide opportunities for domestic companies to profit from legitimate activities, thereby reducing the number of companies churning out counterfeit products. Further, as the legal system develops, China's IP rights enforcement efforts should improve.
The PRC legal system and IPR
China's wide-ranging economic and legal reforms over the past two decades have brought renewed recognition for IP rights--the Trademark Law was enacted in 1982, the Patent Law in 1984, the Copyright Law in 1992, and the Anti-Unfair Competition Law in 1993 (see p.28). Other non-IP specific laws have provisions that touch on IP issues as far as they relate to the imposition of those laws. However, the enforcement of IP rights is governed by specific IP laws.
Intellectual property developments in the last three years include amendments to the trademark and patent laws and the empowerment of the Public Security Bureaus to receive complaints and investigate allegations of counterfeiting activities. According to State Administration for Industry and Commerce (SAIC) statistics, raids and seizures of counterfeit goods have increased nearly 50 percent from 1997, with over 400 million units of infringing goods seized in 1998.
There remain two fundamental shortcomings in the enforcement regime, however. First, penalties remain weak. Fines and compensation orders are generally low--the average fine in 1998 was RMB 5,805 ($701)--and almost no IP infringers are imprisoned. Large fines, even when levied, are rarely collected. The second is the poor funding of, and other support for, China's administrative IP enforcement bodies, which have been criticized both in China and abroad. Some enforcement bodies, such as SAIC and the State Copyright Administration, have seen cutbacks in staff and resources in recent years, due to government restructuring. Enforcement agencies also find it difficult to finalize a case. They must obtain confirmation from rights holders that goods are counterfeit, but such confirmation is often not easy to secure because enforcement agencies cannot reach rights holders or do not have the budget for onsite inspections.
The birth of a problem
In the mid-1980s, there were virtually no counterfeit products on sale in China. Even in 1990 counterfeiting was not a major problem, although small quantities of counterfeit products (especially cigarettes) could be found in some markets. In the early 1990s, the production, export, and domestic sale of counterfeit products started to increase dramatically. This trend can be attributed to a number of factors, including:
- The continued liberalization of China's economy, which allowed domestic companies to produce goods of their choice and to distribute them where they chose;
- The establishment of manufacturing facilities in China by Hong Kong and Taiwan companies (including counterfeiters); and
- The growing appreciation within China of the value of IP rights, particularly an appreciation of the money that could be made from the ingenuity of others.
At this time, however, most Chinese counterfeit products were of low quality. While they obviously attempted to copy foreign brands, the products often suffered from misspellings and poor finishing.
The 1990s--a turning point
In the mid-1990s things started to change. Manufacturers worldwide simplified production techniques to cut costs, and merchandising rapidly grew beyond core products. To compete with increased world competition, Western and Japanese companies have aggressively reviewed their manufacturing processes to cut costs wherever possible by reducing unnecessary steps and parts. This has simplified the processes for production of genuine products but also made the job of a counterfeiter copying the product much easier. The following equation describes these developments:
Fewer parts + simplified production technique = easily copied product
Chinese companies, meanwhile, grew to benefit from a better-trained skill base and sophisticated machinery. It is now not uncommon for Chinese factories to have computer-aided design (CAD) machines for manufacturing molds, and staff who have been trained overseas or in foreign enterprises in China.
Many brand-owners now license the manufacture of a range of products. For example, The Walt Disney Co. sells products including, toys, clothing, bed linen, and stationery. Manchester United, the English soccer club, even has a licensed beer for sale in Hong Kong. Such large-scale licensing can result in licensors effectively losing control of the quality of their products, making it easy for counterfeiters to offer goods that are indistinguishable from the genuine item.
Counterfeiters capitalized on these trends by either improving the quality of their goods, making it more difficult to identify genuine from fake products, or purposely producing similar products that were not "dead copies" but designed to look like famous brands, thereby avoiding IP-law violations. A large market has developed for these "look-alike" goods. This, coupled with the dramatic increase in the quality of counterfeit products and sophistication of counterfeiters, is of serious concern to IP rights holders.
Fakes take off
Several additional trends have fueled the increase in supply and demand for counterfeit products:
- Further freeing of China's internal market and semi-privatization of companies;
- The increased spending power of domestic Chinese consumers;
- The continued shift of manufacturing from Hong Kong and Taiwan to China;
- The greater access of Chinese manufacturers to world markets through the loosening of export controls; and
- Improvements in China's domestic distribution networks, particularly in communication and transport infrastructure.
TRIPS and TRIMS
The November 1999 US-China negotiations over the WTO did not touch on IP issues, and accession to the WTO in itself will not result in a sudden improvement in IP protection in China, principally because Chinese IP laws are already essentially TRIPS compliant (see Table). Nevertheless, in addition to adhering to TRIPs, upon joining the WTO China must remove import and export license barriers, free up distribution networks, and--if Taiwan also joins--institute direct trade with the island.
Article 3 of TRIPS requires members to give nationals of other members "treatment no less favorable" than treatment they give their own nationals. Article 4, the often-quoted "Most Favored Nation Treatment" clause, ensures that any favorable treatment a member extends to another member is reciprocally extended to all members. Article 64 applies WTO dispute resolution procedures to TRIPS.
China complies, at least on paper, to most of the requirements of TRIPS. The areas where substantial non-compliance remains are the protection of the layout design of integrated circuits and protection of geographical indications. Where Chinese laws are not compliant, member countries can bring complaints under the WTO dispute resolution procedures. China is currently reviewing all of its laws, including IP laws, to ensure compliance with GATT when it joins the WTO. The Trademark law and Copyright Law are currently being re-drafted and, as far as they are not currently compliant, will be brought into compliance with TRIPS.
Some of China's rules of civil litigation procedure are also not compliant, or not explicitly compliant. However, Article 238 of the PRC Civil Procedure Law provides a catch-all clause stating that where an international treaty concluded or acceded to by China contains provisions that differ from those of the Civil Procedure Law, the provisions of the international treaty shall apply, except treaties for which China has made reservations.
Thus, the main barrier to the effective implementation of TRIPS in China will not be the lack of appropriate laws, but rather, the weakness of the enforcement regime. Administrative penalties are often low, local protectionism can make enforcement actions difficult, and court decisions can go unenforced, especially outside the major cities.
The WTO's dispute resolution mechanisms will allow members to address these problems with China and, if necessary, file complaints with the WTO. This will not affect the outcome of individual cases, but may help improve the enforcement system within China. The United States has, for example, in the past three years instituted WTO dispute settlement proceedings against Sweden (claiming that its laws did not provide provisional remedies in civil enforcement proceedings), Ireland (claiming its copyright law was deficient), Denmark (claiming its provisional remedies were weak), and Greece and the European Union (claiming rampant television copyright piracy in Greece).
According to the US Trade Representative (USTR), in late 1999, Sweden amended its intellectual property laws to provide provisional remedies in civil-enforcement proceedings. The cases against Ireland, Denmark, Greece, and the European Union are still pending, although some progress has been achieved over the past few years. In February 1998, Ireland committed to accelerate its work on a new comprehensive copyright law, and in July 1998 passed expedited legislation addressing two pressing enforcement issues. Denmark is presently considering options for amending its law to strengthen provisional remedies available to IP rights holders. In Greece, the rate of television piracy declined in 1998, and in September, 1999, Greece enacted legislation that provides an additional administrative enforcement procedure against copyright infringement by television stations. Similar results could be expected from WTO member complaints about China's enforcement of IP laws under the WTO dispute resolution procedures after China joins the WTO.
USTR also expressed satisfaction with the recent conclusion of the United States' dispute settlement proceedings against India. In December 1997, the WTO Appellate Body upheld a panel ruling in favor of the United States in this pharmaceutical and agricultural chemicals patent protection case. India's deadline for compliance was April 19, 1999. In 1999, India promulgated a temporary ordinance to meet its obligations, and in January, enacted permanent legislation entitled the Patents (Amendment) Act 1999. These laws establish a mechanism for the filing of so-called "mailbox" patent applications, and a system for granting exclusive marketing rights for pharmaceutical and agricultural chemical products. While some parts of the new Indian law regarding exclusive marketing rights are problematic, the discretionary nature of some of these provisions, as well as the significant steps that India has taken to mitigate the impact of others, has led USTR to announce that it will take no further action at this time. Should any of the problematic provisions in the Indian law be invoked to the detriment of US rights holders in the future, the United States reserves its right to take further action.
The Agreement on Trade-Related Investment Measures (TRIMS) prohibits members from imposing measures that violate national treatment standards or constitute import or export restrictions, such as local-content requirements, import restrictions based on volume or value of exports, or restrictions on access to foreign exchange based on foreign-exchange earnings. China has agreed to implement TRIMS upon accession, but will have three years to remove its current export- and import-licensing scheme.
Export rights for all firms will result in greater participation in the export business for companies that previously had to work through a state-licensed trading company. However, it will also result in diminished control over what leaves China's borders. For counterfeit goods, this means that more counterfeiters will be able to export their fakes directly.
Distribution and IPR
In order to join the WTO, China will be required to phase out all restrictions on distribution services for most products within three years. This will encourage further growth of China's wholesale markets, which have already seen phenomenal expansion over the past five years. These wholesale markets are replacing the old centrally planned distribution system--a system that created regional markets and impeded the formation of a national market. The WTO will bring greater availability of freight forwarding, warehousing, and other aspects of a distribution network, along with the resulting growth in regional wholesale markets.
It is through this vast network of wholesale markets that most of the country's counterfeit products find their way around the country. There are now over 1,000 wholesale markets with an annual turnover of more than RMB 100 million ($12.1 million) each. Greater access to these markets will undoubtedly result in increased flow of counterfeit goods. With a decentralized distribution system and open access to export channels, these goods will invariably end up on foreign shores.
Direct trade with Taiwan
With most of Taiwan's bilateral trade agreements completed, it should join the WTO soon after China. At present, under the Taiwan government's prohibition of direct trade with mainland China, almost all cross-Strait trade goes through Hong Kong. There are no truly direct shipping links or flights between Taiwan and China (see The CBR, March-April 1999, p.8). But this obstacle has not stopped Taiwan counterfeiters from establishing manufacturing facilities in China. Once China and Taiwan join the WTO, Taiwan must allow direct trade with the mainland. Taiwan is itself a hotbed of counterfeiting, and direct trade will open up further the current trade in counterfeit goods between the two areas.
Long-term benefits
There is little doubt that freer trade will result in greater counterfeiting in the short term. But greater counterfeiting in China would have occurred with or without China's accession to WTO, as long as China's economic growth continued.
Moreover, the counterfeiting problems in China today are not unique to China. All developing countries pass through a stage of development where copying of products is widespread. Both the United States and Japan have passed through similar stages. The difference in China's case is that a country with one-fifth of the world's population will soon join the world's trading regime at the very time that international trade is freer than ever before. This has unleashed a flood of products--both genuine and counterfeit--onto the world market.
As China's economy develops, companies demand protection for their rights, and international pressure encourages China to improve enforcement of its IP laws, the problems should eventually subside. Domestic pressure is, to a small extent, driving China to improve its IP rights enforcement, with large companies such as Haier pushing for improvement in the law. Most cases in the courts are being brought by domestic companies, a situation which is developing China's jurisprudence. Overseas pressure on China to improve its IP protection has also forced central authorities to bring the worst cases of local protectionism to heel. Economic development in underdeveloped areas tends to reduce local protectionism by decreasing the importance of the counterfeiting industry to the local economy.
Until these trends bring about better IP protection, however, IP rights holders must be prepared to invest resources to control the production of counterfeits in China and the distribution of such products both within China and overseas, lest (at least in the short term) they lose their market to counterfeiters altogether.
TRIPS and China's Intellectual Property Laws Compared |
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| TRIPS AGREEMENT | CHINESE LAWS | ||
| Article of TRIPS | Requirement | Degree of compliance | Relevant provision of Chinese law/Comment |
| Part I: General Provisions and Basic Principles | |||
| 2(1) | Members to comply with Arts. 1-12 and Art. 19 of Paris Convention | Compliant | China is a party to the Paris Convention |
| 3 | National Treatment required | Compliant | Law does not discriminate between Chinese and foreigners |
| 4 | Most-favored-nation treatment forbids discrimination between the nationals of Members (Art. 4) | Compliant | Law does not discriminate between nationals of Members |
| Part II Section 1: Copyright and Related Rights | |||
| 10(1) | Computer programs, whether in source or object code, to be protected as literary works under the Berne Convention (1971) | Compliant | Art. 7 Provisions Implementing International Copyright Treaties |
| 10(2) | Compilations of data to be protected | Compliant | Art. 14 Copyright Law Art. 8 Provisions Implementing International Copyright Treaties |
| 11 | Rental Rights: Authors of computer programs and certain cinematographic works have the right to authorize or prohibit the commercial rental of their copyright | Compliant | Art. 14 Provisions Implementing International Copyright Treaties |
| 12 | Term of protection of a work, other than a photographic work or a work of applied art, is not less than 50 years | Compliant | Art. 21 Copyright Law |
| 14(1) | Performers to have fixation rights for performance on phonograms and to prevent broadcast of live performance | Compliant | Art. 36 Copyright Law |
| 14(2) | Producers of phonograms have the right to prohibit direct or indirect reproduction | Compliant | Art. 39 Copyright Law |
| 14(3) | Broadcasting organizations have the right to prohibit copying of broadcasts; alternatively copyright owner to have such rights | Compliant | Art. 42 (producers) Art. 36 (performers) and Art. 10(v) Copyright Law (copyright owner) |
| 14(4) | Producers or other rights holders in phonograms have the right to authorize or prohibit commercial rental of their copyright | Compliant | Art. 14 Provisions Implementing International Copyright Treaties |
| 14(5) | Term of protection for phonograms to be at least 50 years except for broadcast rights, which shall be at least 20 years | Compliant | Art. 39 Copyright Law Art. 42 Copyright Law |
| Part II Section 2: Trademarks | |||
| 15 | Signs or combinations of signs capable of distinguishing goods shall be capable of being registered as a trademark | Compliant | Art. 7 Trademark Law |
| 16 | Owners of registered trademarks have right to prevent third parties from using identical or similar signs | Compliant | Art. 38 Trademark Law |
| 18 | A trademark is to be registrable for a term of no less than seven years and renewable indefinitely | Compliant | Art. 23 Trademark Law (10 year validity) and Art. 24 Trademark Law (renewable) |
| 19 | Minimum three-year period before cancellation for non-use | Compliant | Art. 30(iv) Trademark Law (three-year non-use period) |
| 20 | Use of trademark should not be unjustifiably encumbered | Compliant | No provisions in Trademark Law breach this requirement |
| 21 | No compulsory licensing of trademarks; assignment of trademark with or without goodwill allowed | Compliant | No requirement for compulsory licensing; trademarks may be assigned with or without goodwill |
| Part II Section 3: Geographical Indications | |||
| 22 | Protection of geographical indications | Not compliant | No legislation to protect geographical indications |
| 23 | Additional protection for geographical indications for wines | Not compliant | No legislation to protect geographical indications and spirits |
| Part II Section 4 : Industrial Designs | |||
| 25 | Member must provide for the protection of independently created industrial designs that are new or original | Compliant | Art. 23 Patent Law |
| 26 | Protects against the making, selling or importing of industrial designs by unauthorized third party | Compliant | Art. 60 Patent Law |
| Part II Section 5: Patents | |||
| 27 | Patentable subject matter: Patents available for any inventions, whether products or processes, in all fields of technology provided that they are new, involve an inventive step, and are capable of industrial application | Essentially compliant | Art. 22 Patent Law Art. 25 excludes scientific discoveries, rules and methods for mental activities and substances obtained by means of nuclear transformation. Exclusions not covered by TRIPS. |
| 28 | Rights conferred to patents' owners: Patent owner to have | Compliant | Art. 60 Patent Law exclusive right to work patent |
| 29 | Conditions on patent applicants: Patent shall disclose invention sufficiently clearly so that person skilled in the art can work | Compliant | Art. 26 Patent Law the patent |
| 31 | Compulsory licensing and government use without authorization of the rights holder are allowed | Compliant | Art. 51-58 Patent Law |
| 32 | Opportunity for judicial review of any revocation or forfeiture of a patent available | Compliant | Art. 49 Patent Law |
| 33 | Term of protection: Minimum 20 years from filing date | Compliant | Art. 45 Patent Law |
| 34 | Process patents: Burden of proof may be placed on defendant to show different process used in civil infringement proceedings | Compliant | Art. 60 Patent Law |
| Part II Section 6: Layout Designs (Topographies) of Integrated Circuits | |||
| 35-38 | Protects layout designs (topographies) of integrated circuits | Not compliant | No legislation to protect layout designs of integrated circuits |
| Part II Section 7: Protection of Undisclosed Information | |||
| 39 | Parties to be able to protect undisclosed information | Compliant | Art. 10 Anti-Unfair Competition Law |
| Part II Section 8: Control of Anti-Competitive Practices in Contractual Licenses | |||
| 40 | Control of anti-competitive practices in contractual licenses: A mechanism whereby a country seeking to take action against anti-competitive practices in contractual licenses can enter into consultations with that other Member | Not compliant | Will become bound upon joining WTO |
| Part III Section 1: General Obligations | |||
| 41 | General obligations in enforcement of IP rights: Effective enforcement procedures and judicial review shall be available. However, does not require special intellectual property judicial system | Compliant | Laws are compliant, but practice not always compliant. (See main text) |
| Part III Section 2: Civil and Administrative Procedures and Remedies | |||
| 42 | Civil and administrative procedure and remedies: Requires fair and equitable procedures (See main text) | Compliant | Laws are compliant, but practice not always compliant. |
| 43 | Evidence: Availability of disclosure/discovery of other side's evidence | Not compliant | No discovery or disclosure obligation, but People's Court has power to collect evidence from defendant and others. Arts. 64 & 65 Civil Procedure Law. (But see note below) |
| 44 | Injunctions to be available | Compliant | Arts. 118 and 134 General Principles of Civil Law Art. 50 Copyright Law Implementing Rules Art. 39 Trademark Law and Art. 43 Implementing Rules Art. 60 Patent Law Art. 25 Anti-Unfair Competition Law |
| 45 | Damages to be available | Compliant | Arts. 118 and 134 General Principles of Civil Law Art. 53 Copyright Law Implementing Rules Art. 39 Trademark Law and Art. 43 Implementing Rules Art. 60 Patent Law Art. 20 Anti-Unfair Competition Law |
| 46 | Other remedies: Destruction and disposition of infringing products to be available | Compliant | Arts. 118 and 134 General Principles of Civil Law Art. 50 Copyright Law Implementing Rules Art. 39 Trademark Law and Art. 43 Implementing Rules Art. 60 Patent Law Art. 25 Anti-Unfair Competition Law |
| 47 | Right of information: Court to have power to order disclosure to plaintiff of third-party infringer | Arguably compliant | No specific provision, but Art. 118 of General Principles of Civil Law provides plaintiff has rights to have ill effects of infringement eliminated. This should include disclosure of third-party infringer. (See also note below) |
| 48 | Indemnification of the defendant: Courts to have power to order damages to be paid by plaintiff to defendant if enforcement compliant procedures are abused | Arguably | Art. 98 Civil Procedure Law requires compensation be paid if interim preservation obtained and plaintiff loses lawsuit. Except for this, no specific provision, but defendant would have right to make claim. (See also note below) |
| 49 | Administrative procedures: Remedies under administrative procedures to conform with judicial remedies | Compliant | Remedies essentially the same |
| Part III Section 3: Provisional Measures | |||
| 50 | Provisional measures: Judicial authorities to have power to order provisional measures to preserve property and evidence | Compliant | Art. 92/251 (property) and Art. 74 (evidence) Civil Procedure Law |
| Part III Section 4: Special Requirements Related to Border Measures | |||
| 51-60 | Special requirements related to border measures: Power for Customs to seize on a complaint or ex officio | Compliant | Customs Protection of Intellectual Property Rights Regulations |
| Part III Section 5: Criminal Procedures | |||
| 61 | Criminal procedures and penalties to be applied at least in the case of willful trademark counterfeiting and copyright piracy | Compliant | Arts. 213-215 (trademark) and 217-218 (copyright) Criminal Law |
| Part IV: Acquisition and Maintenance of Intellectual Property Rights and Related Interparties Procedures | |||
| 62(1-4) | Formalities may be required for acquisition and maintenance of rights | Compliant | Required formalities are not overly onerous |
| 62(5) | Final administrative decisions should be subject to review by a judicial or quasi-judicial body | Compliant | Laws make provision for appeal from Administrative decisions to People's Court |
| Part V: Dispute Prevention and Settlement | |||
| 63 | Transparency: Laws required to be publicly available | Essentially compliant | Some internal regulations still not published |
| 64 | Dispute Settlement: Under GATT Rules | Not compliant | Will be required to comply when joins the WTO |
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Source: Douglas Clark NOTE: Part IV of the Civil Procedure Law contains special provisions for civil procedure for cases involving foreign elements. According to Article 238: If an international treaty concluded or acceded to by the People's Republic of China contains provisions that differ from provisions of this Law, the provisions of the international treaty shall apply, except those on which China has made reservations. Accordingly, as far as the Civil Procedure Law is not compliant with TRIPS, Article 238 will bring China into compliance upon accession. * General Agreement on Tariffs and Trade (GATT) Agreement on Trade-Related Aspects of Intellectual Property (TRIPs) Back |
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