US – China (Enforcement of IPR)US – China (Enforcement of IPR)DS 362 (Panel 2009)DS 362 (Panel 2009)

Emil Kogan | Andres Lahiguera | Lindsey Lowenberg

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US & China EconomiesUS & China EconomiesUS initiated its IPR trade dispute against China in April 2007Country statistics from 2007:

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United StatesAverage GDP growth:1.8%Per capita GDP (PPP): $43,800Unemployment rate: 4.8%

ChinaAverage GDP growth: 14.2%Per capita GDP (PPP): $7,800Unemployment rate: 4.2%

US & China InterdependencyUS & China Interdependency In 2007, the US trade deficit with China was $256.3 billion

In 2012, it was $315 billion A cycle was created where China would sell goods to the

US, take profits, and loan money back to the US ◦ Even more of its goods could be sold to Americans

With the growing amount of capital that it had been accumulating from exports, China placed $2.5 trillion dollars in foreign reserves, 70% of which is in the US, making it the largest holder of US debt◦ If you owe the bank $1 million, the bank has you, but if

you owe $1 billion, you have the bank Neither country wants the other to fail. It’s either win-win

or lose-lose. 3

How Big is this Issue?How Big is this Issue? From 2008 to 2010 almost 70% of all counterfeits seized

globally came from China For the US, the figure is higher

◦ US Customs say that in the same period, 87% of the value of counterfeits seized originated in China

◦ Since the WTO estimates that 2% of all world trade is in counterfeit goods, the value of counterfeit goods imported into the US and EU from East Asia (the bulk of which come from China) is thought to be $25 billion annually

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IPR Infringement of McDonald’sIPR Infringement of McDonald’s

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IPR Infringement of KFCIPR Infringement of KFC

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IPR Infringement of Starbucks IPR Infringement of Starbucks CoffeeCoffee

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US Request for Consultation v. US Request for Consultation v. ChinaChina

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Inconsistencies with TRIPS Inconsistencies with TRIPS ArticlesArticlesThresholds

◦ (Article 41.1) Enforcement & remedies are present in Member law

◦ (Article 61) Laws provide for criminal procedures and penaltiesDisposal of Goods

◦ (Article 46) Hierarchy of disposal options for infringing goods◦ (Article 59) Competent authorities have authority to enact

Art. 46Protection and Enforcement

◦ (Article 3.1) National treatment ◦ (Article 9.1) Compliance with Berne Convention◦ (Article 14) Right to authorize or prohibit reproductions and

acts

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Position of the USPosition of the USOverall

◦ Recognizes that China undertook revisions to its laws to create a modern IPR system with WTO accession but feels efforts have fallen short in certain areas

Thresholds◦ Criminal Law uses terms such as serious, especially

serious, relatively large, and huge. These terms refer to illegal business volume (value of products), illegal gains (profit), or number of illegal copies.

◦ The price of the infringing good determines illegal business volume. The lower the price, the more an infringer can sell without reaching the threshold in Criminal Law. 10

Position of the US cont.Position of the US cont.Disposal of Goods

◦ Authorities give priority to disposal options that allow goods to enter channels of commerce after infringing features are removed

◦ Only if infringing features cannot be removed are they destroyedProtections and Enforcement

◦ Authors of works whose publication or distribution has not been authorized [in China] do not have minimum standards of protection

◦ The Law denies protection to performers and producers during the period of pre-publication or pre-distribution

◦ The measures pre-distribution and pre-authorization review processes differ for Chinese nationals than foreign nationals

Results in favorable protection of Chinese nationals

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Position of ChinaPosition of ChinaDocumented that the US:

◦ Falls far short of meeting its burden of showing that China is noncompliant with obligations

◦ Consistently mischaracterized Chinese law and practice

◦ Sought to expand significantly the scope of Members' obligations

◦ Disregarded the first paragraph of the TRIPS Agreement: Members shall be free to determine the appropriate

method of implementing the provisions of this Agreement within their own legal systems

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Decision of the Panel on Decision of the Panel on CopyrightCopyrightChina’s Copyright Law, specifically Article 4, is

inconsistent with China’s obligation under:◦ Article 5(1) of the Berne Convention as incorporated

by Article 9.1 of TRIPS; and

◦ Article 41.1 of TRIPSArticle 4 of China’s Copyright Law notes

◦ Works the publication or distribution of which is prohibited by law shall not be protected by this Law

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Decision of the Panel on Decision of the Panel on CustomsCustomsWith respect to customs measures

◦ Article 59 of TRIPS is not applicable to the Customs measures in regard to goods destined for exportation

◦ The US has not established that the Customs measures are inconsistent with Article 59 of TRIPS in regard to the principles set out in the first sentence of Article 46 of TRIPS

Authorities shall have the authority to order that infringing goods be… disposed of outside the channels of commerce

◦ Customs measures are inconsistent with Article 59 of TRIPS in regard to the principle set out in the fourth sentence of Article 46

The simple removal of the trademark unlawfully affixed shall not be sufficient…to permit release of goods into the channels of commerce 14

Implementation of Panel Implementation of Panel RecommendationsRecommendationsRevision of Copyright Law

◦ Article 4 is amended to read, Copyright holders shall not violate the Constitution

or laws or jeopardize public interests when exercising their copyright. The State shall supervise and administrate the publication and dissemination of works in accordance with the law.

◦ Article 26 (added) reads Where a copyright is pledged, both the pledger

and pledgee shall undergo the formalities for registration with the copyright administration department under the State Council.

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Implementation of Implementation of Recommendations cont.Recommendations cont.Revision of Customs Protection of IPR

◦ Article 27 is amended to read, “…for imported goods with counterfeited trademarks, except for special circumstances, such goods shall not be permitted to be traded only by clearing off the trademarks; and in case the infringement features are unable to be eliminated, the customs shall destroy such goods.”

US and China filed an understanding ~3 years after Request for Consultation

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Who Won?Who Won?US won on issue of Chinese Copyright Law

◦ Copyright must be recognized even if domestic Chinese law does not permit its publication. But is this a hollow victory?

China won on issue of thresholds of criminal procedures◦ US unable to define “Commercial Scale”◦ Chinese system includes both administrative and criminal

systems◦ Both systems working together cover all aspects of IPR litigation

Tie on Customs Law and IPR◦ Chinese customs must remove all infringing features prior to

auction. ◦ However some drawbacks for the US:

China can use seized materials for Government purposes after removing trademark

Amended Chinese law makes a distinction between domestic and import protections

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Political ContextPolitical Context Victory for the Chinese IPR system

◦ Can utilize seized goods for social means - agrees with socialist policies

◦ Government can still auction goods - extra income for the government

◦ Keeps domestic legal IPR system intact - distinct from “imports”◦ Confirms no requirement to prosecute outside “commercial scale”

China can levy fines and utilize other administrative measures Indicates that the WTO will accept various systems of control Confirmation that “Commercial Scale” must be specific to

each individual country Why didn’t the US pursue an appeal?

◦ Chinese legal system very different than US legal system Civil Law vs. Common Law, Socialist Law

◦ More important issues to spend political capital on?◦ General goals of the US accomplished?

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Political Context Cont.Political Context Cont. Is it beneficial for China to strengthen IP protection?

    ◦ Domestic high-tech manufacturing capacity growing◦ China need to foster IP development - not simply copy it◦ Stronger IP protection will benefit the growing Chinese

market◦ Better IP protection laws may result in greater high-tech

investment◦ Demonstrates good governance to other developing

countriesCould IPR laws foster better Government?

◦ China already publishes criminal statistics ◦ Publications of administrative decisions will begin in 2014◦ Demonstrates effectiveness of judicial system◦ Demonstrates that citizens can trust the judiciary 19

StatisticsStatistics

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China China isis Doing More! Doing More!Statistics

◦ 32.96% growth in IPR rulings between 2010 - 2011◦ 14.1% increase in prosecutions between 2010 - 2011◦ 83,850 total lawsuits in 2012

Only 1.7% involved foreign parties! ◦ 24,544 total lawsuits between Jan-May of 2013

Only about 2% involved foreign parties!◦ Over 19,000 criminal cases filed in 2013◦ 2,176 criminal arrests in 2013◦ 3,805 criminal prosecutions in 2013

But is this enough?◦ Very few cases involved foreign companies - why?

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International PerspectivesInternational Perspectives Implementation brings China closer to “Western”

models◦ Sets in motion process for increasing IP rights

Examples set for developing countries◦ Possible to develop an IPR regime that meets domestic

requirements while still complying with international obligations◦ Also possible to adapt an IPR regime that fits with domestic

social, economic and political systems◦ WTO dispute resolution method demonstrated as fair and

effectiveWhat else can be done?

◦ China should lower market barriers for imports◦ Joint cooperation between the US and China on intellectual

property Follow the EU’s example under the EU-China Project for the

Protection of Intellectual Property Rights22