Current Challenges and Future Prospects in Engaging China on Intellectual Property Rights (IPR) Protection - Some Personal Observations

Date November 27, 2007
Speaker Mark A. COHEN(Senior IPR Attache, U.S. Embassy, Beijing)
Moderator ITO Banri(Visiting Scholar, RIETI / Research Fellow, the Japan Society for the Promotion of Science)

Summary

China is, in many respects, a very large country in terms of the amount of intellectual property (IP) and the enforcement activity, but a very small one in terms of the quality of the rights and the enforcement of them. China now has one of the five largest patent offices in the world. There is also considerable enforcement activity, with China now having one of the most active patent litigation dockets in the world. While China continues to show a steady rise in patent applications and a rapid increase in granted patents, the numbers are slightly misleading because foreign applicants dominate in granted "invention patents," also known as "utility patents" in the U.S., whereas the Chinese dominate in utility-model and design patents which may not represent a high degree of creativity, as they are not subject to substantive examination at this time. Moreover, the foreign patents are more likely to be in commercially important fields, while Chinese patents are often in areas that are not as commercially significant.

China's trademark office has been the largest in the world in terms of applications for several years. New trademark applications had increased by 15.4% since 2005, with foreign applications accounting for 12.7% of the total amount. However, in order to handle roughly one million annual requests for various office actions in one year, without addressing prior backlogs, China only has 200 examiners, which roughly speaking, amounts to a work volume of 5,000 transactions per employee. This figure represents a burden that is hard to satisfy with any high degree of timeliness or quality. In comparison with China, the U.S. has several times the number of examiners per application.

China is quite possibly the most litigious IP society in the world. Last year, China had approximately 16,000 civil cases pending, a significant docket in itself. In addition, there were approximately 40,000 administrative trademark cases, 10,000 administrative copyright cases, and additional patent and Customs cases. Finally, there were numerous cases which may indirectly or directly implicate IPR rights in related areas such as fake and shoddy goods, illegal business operations, counterfeit pharmaceuticals, etc. The numbers of cases and agencies involved make it difficult to estimate the amount of people involved in IPR protection and enforcement, with official estimates over the years ranging from 250,000 to nearly one million people.

Despite this high quantity of IPR enforcement-related activity, there is little real deterrence in the system. For example, in one year only 0.6% of administrative trademark cases were referred to criminal prosecution.

Finally, a word about the role of foreigners in the IPR system. According to Chinese data, most cases involve Chinese bringing cases against other Chinese; cases brought by foreigners are typically a minority. This is so, despite reports in both the Western and Chinese media that such activity occurs on a regular basis. Surprisingly, despite pervasive counterfeiting in China, a relatively low number of civil trademark cases are brought, perhaps due to the cost of filing an administrative case versus a civil case. However, China is becoming an increasingly important forum for many types of IPR litigation. China ranked fourth among the top 10 countries in regards to the number of invention patent cases based on 2005 calculations. Foreigners' roles are also increasing. However, overall the system remains complicated with multiple avenues of enforcement, including domestic, civil, criminal and administrative enforcement, including Customs, as well as overseas remedies where infringement may arise due to imports from China, as well as significant regional differences within China. Developing a cost-effective strategy in light of the various options is important to all rights holders. In the United States, in particular, there appears to be an increase in civil and "Section 337" cases involving Chinese infringements. Similar increases in civil and criminal enforcement also appear to be occurring in other countries.

The low quality of enforcement imposes a substantial burden worldwide on Customs authorities and foreign governments. Seizure of counterfeit goods from China represented over 80% of the total U.S. Customs seizures in 2007; many other foreign Customs authorities have similar figures. To make matters worse, structural issues, such as local protectionism can make it difficult to deter infringing activities at their source. To address these issues, China may wish to establish national IP courts to provide a right of appeal removed from provincial capitals or big cities, in order to minimize influence from local industry. In addition, statutory damages should be increased, and consideration might be given to providing for a more extended statute of limitations, which is only two years in patent matters. Moreover, as civil litigation continues to grow, procedural burdens strain the system particularly for foreigners, and consideration should be given to reducing, for example, the burdens of notarization and consularization of foreign evidence or introducing systems for the compulsory exchange of information that might lead to evidence, such as a U.S.-based discovery system.

Some other trends: We are seeing increased Chinese patent and trademark filings overseas, an increasing concern over food safety and quality, and increasing Chinese support mechanisms like hotlines and websites to help Chinese as well as foreigners navigate the system. Chinese are also increasingly filing patents in Europe and Japan, as well as using the Patent Cooperation Treaty system, and China is overtaking many developed countries in terms of annual filings.

As one can see from the above, there are certain general misperceptions regarding the IP environment in China. One is based on the flawed assumption that, since enforcement appears so weak, China has little interest or engagement on IPR. The statistics belie that assumption. Another is that there is little enforcement in China. In fact, as indicated previously, there is considerable enforcement, but little of a deterrent quality. Finally, many so-called experts suggest that better enforcement in China will occur when China has more rights of its own protect; in fact the majority of cases are brought by Chinese companies and in some instances, the vast majority of the rights are Chinese owned.

So, looking forward, what can we expect regarding the Chinese market and intellectual property protection in the future?

China has clearly recognized that IP is an integral part of economic growth. The development of the National IPR Strategy was, in part, modeled on Japanese efforts, and there is an 11th Five-Year Plan for China to become an innovative economy. A recently enacted Science Development Law creates a legislative mandate for the National IPR Strategy. For the first time in since WTO accession in 2001, all of China's IP laws are being reformed, including patent, trademark, and copyright laws, as well as consideration of other related laws such as those involving civil procedure and anti-monopoly regulation.

China realizes it cannot remain a low-cost manufacturing center forever. There is clearly pressure to innovate. The increased value of the Chinese renminbi against the U.S. dollar puts further pressure on China to move away from relying solely on low cost manufacturing advantages.

At times, economic development is described in China as being shaped like a "U." The "X" axis represents the time involved in product development and marketing, while the "Y" axis represents value. At the upper left side of the "U" is research and development, where there is considerable value added. At the bottom of the "U" is manufacturing, with relatively low value. At the upper right side of the "U" is branding and marketing, where there is considerable value. Currently, China is at the lowest-value part of the production cycle. China recognizes that it needs to invest more in research and development, and branding.

In addition to this basic economic challenge, there are legacies of China's planned economy that impede the development of China's IPR system. Socialism and private property do not go very well together, and intellectual property is even more vulnerable to government efforts to control property rights. A mature IPR system should ideally rely more extensively on expeditious, deterrent and effective civil remedies that enable private rights holders to protect their own rights, while the criminal system should address widespread social issues, including assuring widespread deterrence. Although the civil system has grown dramatically, it is still relatively weak and under-resourced. Most of the litigation and resources in China are centered in the administrative system. This administrative system is largely oriented toward managing and educating, rather than deterring. China's efforts at managing intellectual property also have led to concerns that China is becoming a "techno-nationalist" country, where the combination of government-funded technology and research with a nationalistic approach could result in discriminatory policies in such areas as procurement, standards and anti-monopoly law, further affecting the ability of private rights holders to protect and enforce their own rights.

Regarding the World Trade Organization (WTO) IPR case that the United States filed against China in April 2007, please consult the actual papers that are available on the WTO website rather than rely solely on media reports. There are three legal issues in the WTO case: China's criminal thresholds, the availability of copyright protection for works that have not passed China's censors, and the disposal of counterfeit goods by Chinese Customs. In my own opinion, those provisions do not significantly address whether China's enforcement system has been adequate or inadequate, and they do not accuse any Chinese official of bad faith in seeking to protect IPR. Naturally, bilateral consultations are preferable to bringing a WTO case. However, WTO remedies are appropriate if those consultations fail. Moreover, in the long run WTO remedies are not a substitute for bilateral discussions and cooperation, at least on issues that are not the direct subject of the WTO case or are not encompassed by relevant WTO agreements.

As China strives to become an innovative economy, cooperation in law enforcement, Customs authorities, among patent and trademark offices, with local and foreign industry, as well as with counterpart agencies in other countries, such as the USPTO become increasingly important. For example, Chinese companies increasingly need to register patents and trademarks overseas. We also must work together to address transnational IPR crime, and trafficking in counterfeit and pirated goods, as well as Internet-based IPR crime. U.S. and foreign investors also view IPR protection as a major factor in decisions to transfer technology or conduct research and development in China. One positive sign: currently, there are representatives of the USPTO, EPO, French Patent Office, Japan Patent Office and Korean Patent Office in China, which further underscore the increasing importance of such engagement.

A recent, limited survey at the recent U.S. Ambassador to China's IPR Roundtable showed a small element of optimism in developments regarding IPR in China, although many areas and regions of concern still remained. Our survey results indicated a need for increased coordination within the U.S. Government and Embassy, an elevated role at the "Minister-Counselor" level for an IPR official at the Embassy, and the posting at the Embassy of an expert, knowledgeable in criminal IPR enforcement. These are important steps that industry believes the U.S. Government should take to improve overall U.S. Embassy operations in protecting IPR in China.

Changes in the way the U.S. Government handles IPR issues, however, will not result in the necessary adjustments that China must make to improve the overall IPR environment. The challenge is this: how can these integral parts - industry, the Chinese government, the U.S. government, and foreign governments - work together more effectively? During the past year, we have seen more cooperation with foreign governments in many technical areas. However, we have also had an overall weakening of cooperation at higher levels with the Chinese, in part due to the WTO case.

At the same time, there are multiple and often inconsistent perspectives from different industrial sectors and enterprises over appropriate strategies to address this situation. For example, many U.S. small and medium enterprises with no investments in China, as well as many copyright-based industries with limited market access, remain among the most vocal advocates for "tough" actions, as they have seen little benefit and frequently much harm from China's current IPR environment. There have also been increasingly vocal elements within Chinese society, including Chinese industry, to support more robust IPR protection. The environment has become progressively more complicated, diverse, and fluid. There is an increased need for cooperation amongst all the parties so that China can finally evolve into a fair and innovative economy.

Questions and Answers

Q: When you mentioned the small number of invention patents, were you referring only to filings made by the domestic Chinese firms, and, if so, was this because the foreign companies are refraining from filing patents? If that is the case, what do you perceive as the reason for that?

A: Let me clarify. In relative terms, Chinese firms are not filing or being granted as many invention patents as they are design and utility-model patents, sectors in which they clearly dominate. In response to your second question, there was a study done which analyzed patent filing trends amongst five or ten top Japanese and U.S. companies and, amongst the U.S. companies, it was evident that China was fast becoming a must-file destination. This also points to the problem where many foreigners are filing for patents in China, but not necessarily enforcing them there.

Q: Could you explain the current threat in China? Like with the Schneider case in France, some Chinese companies filed patents for products that were originally created in foreign companies, and this is a very big problem.

A: I believe the Schneider case involved a 300-million+ RMB judgment for a utility-model patent that was filed by a Chinese company in a court in Wenzhou, Zhejiang Province. The case was brought against Schneider Electric. I believe it is the largest IPR judgment in Chinese history: the equivalent of approximately USD$40 million. Under Chinese government rules, any time a judgment exceeds approximately USD$60,000, you must seek higher level approval. Moreover, a case involving damages of this magnitude should have been heard by the high court, not in the intermediate court. This is a huge judgment by Chinese standards. Foreign companies rarely obtain judgments of more than USD$60,000 for invention patents.

These types of cases may also reveal other weaknesses. I must emphasize here that I am not familiar with all the facts of this case, and I do not wish to take any position on its merits. However, we do hear of cases where Chinese companies try to bring litigation in the judicial jurisdiction of their hometown in order to maximize local influence over the adjudication of the case. They may also use the hometown advantage to extract a global settlement, particularly if there are foreign cases pending against them. I believe that the solution to the various manifestations of local protectionism is not, however, more IPR courts. In fact, it probably should be fewer courts. Currently, if a foreigner is brought in as a defendant in a case in a company's hometown, he will likely be heard by the intermediate court, with a right of appeal to the high court. In such a circumstance, a litigant does not have a mandatory right of appeal to the Supreme People's Court. The only way to secure some measure of enhanced independence is to have a national appellate court that handles cases for the whole country, free of local influence, with direct appeal from the intermediate courts - something like the U.S. Court of Appeals for the Federal Circuit for patent cases.

Another deficiency of the Chinese system is its one-size-fits-all approach toward IP protection. For example, every province and most big cities have an IP court. Every provincial and many local governments have patent, trademark and copyright offices. The national governmental system replicates itself on a local level. However China is a big country and not everything is the same throughout the country. Certain industries are more important in certain areas, and certain regions are more likely to hear different types of cases. Similarly, not all rights are the same and they need not be treated equally. For example, a two-year statute of limitations for patents quite frankly is too short, but may be more acceptable for trademark or copyright cases, which take less time, expense, and technical expertise to adjudicate. In the U.S., there is a six-year statute of limitations for patents, but there are different limitations periods, typically shorter, for other rights. In the U.S., the average length of a patent litigation is about 420 days, and for a trademark case it is about 220 days. There is also a demonstrable difference in the likelihood of success for interim relief, the amount of damages, and a difference in which parts of the country the cases are likely to be concentrated, based on the local economies and other factors. For example, Los Angeles and New York are likely to have more experience in copyright cases because of the copyright-intensive industries located there. China may wish to consider building on its regional strengths as it develops its IPR system, recognizing the differences in adjudication of different rights, and allocate IPR resources where they are most needed. Specialized courts, national prosecutors, and police, as well as the development of a capable world-class cadre of service professions, such as lawyers, patent and trademark agents, can all assist in creating a more effective system.

Q: Do you regard the small number of litigation suits filed by foreign companies as a problem when you consider that in the current situation most of the local courts seem inadequate or easily manipulated? Considering the number of potential applications, is it feasible to have a way to bring those cases up higher to a national level?

A: China has a tradition of recording foreign-related cases, particularly in the civil system. The data may reflect only foreign-based litigants, or it may reflect foreign-invested companies within China. Some Chinese judges have disputed their own data regarding foreign-related cases, as they believe it is closer to 10-15% of the docket rather than 2-3%. The number still remains quite small, although it is increasing.

I still believe a specialized court is needed. In part, the experience of the U.S. and many other countries helps to improve the overall IP system with a minimum of cost. I think many IPR judges also recognize that such a court would be especially useful to China's IPR development.

One challenge is that the general trend in China has been to cut back on specialized courts in other areas. Moreover, there are far more cases in non-IPR areas, such as general civil litigation or family law, and there are no special courts in those areas. Another question would be this: If there were a specialized IP court, what types of cases would make up its docket? One particularly important concern is the role of the courts in adjudicating appeals from the patent and trademark offices. For example, if China started to examine trademarks only on absolute grounds in order to expedite examination, this could result in more filings that are of a low quality. It could affect the overall docket, or it could be a successful approach to address the problem of inadequate human resources to handle the examination. If China conducted substantive examination of utility model and design patents, that may also decrease the burdens of vexatious or meritless litigation. I tend to think, however, that more high quality initial examination is important in trademark and patent matters, while, at the appellate stage you must also have appropriate resources to make sure the final adjudication is also fair. However, further research is likely needed.

Q: We surveyed protection in over 56 countries. A large number of firms implied that real enforcement of IPR is insufficient. What is the most important issue for enforcement in China?

A: China actually made an improvement to the Agreement on Trade Related Aspects of Intellectual Property Rights (the TRIPs Agreement) when they translated it. Article 41 says that China should have deterrent civil remedies. Article 61 says that China should have deterrent criminal remedies. When translating the term "deterrent" in regards to civil remedies, they translated the word in the context of stopping someone from doing something, but, regarding to criminal remedies, they translated the word in the context of stopping society from doing something, in other words, having a broad impact on society, which is really how systems should work. In a mature IP system, the civil remedy should be very important because IP is a private right, so individuals should be able to protect themselves from infringement and secure damages. In an immature system, the criminal system becomes much more important because IP infringements may be causing extensive social harms. The U.S. system is largely civil-based. If you are a trademark owner and your product is being counterfeited, you have a variety of different remedies at your disposal: You can bring civil litigation against the party; you can bring administrative enforcement action in different parts of China; or you can bring criminal action or a Customs seizure in China. You have to decide where you are going to spend your money. However, the only remedy with real deterrence at this time appears to be the criminal one.

You will find that most of the civil cases in the U.S. are, historically, trademark ones. In China, it is mostly copyright cases because there is so much administrative enforcement of trademarks. It takes the burden off the civil system. It is useful to look at this situation as a market for IP rights where rights holders spend their money where they think they can obtain the most cost effective enforcement. As part of this market, people filing cases from overseas is an important indicator of confidence in the Chinese system, while their interest in filing cases outside of China may reflect a lack of confidence in the Chinese system.

Q: What would be the most effective target audience to raise capacity? Should the target be in the supply chain, or the consumers?

A: I see a lot of people doing interesting things and, many times, they simply are repeating what others are doing. Usually, my first response is to look at what China is doing for itself; then, you have to see what we can add to that environment. In terms of either reducing supply or demand, you have to make sure you are having an impact. The Chinese Publishing Science Research Institute released interesting copyright infringement data which show that more educated and prosperous people are more willing to buy pirated products. That data is really not surprising and you have to be very careful about this. Good enforcement is good education, and can serve as a strong deterrent for those kinds of activities. You see a lot of articles in China about programs for school children on IP, but I question their effectiveness in terms of having a durable social impact.

We see examples of companies involved in litigation, reaching out to the media to put a positive spin on their case. Chinese companies are very conscious of how to use the media to try to influence public relations and public decision-making. I found it troubling that both the Western and Chinese media keep on talking about this unbalanced IP system where foreigners are oppressing China. The statistics state otherwise. There is a critical lack of objectivity in the media.

Q: I read some statistics that indicated that the average administrative action in China for 2004-2005 had a penalty of approximately $850. Do you have any updates on that?

A: Generally, you have to separate the enforcement data into different components; one is the amount of the fine. If you have a high fine, but a low level of criminal referrals, you are not accomplishing much. In many Customs IPR cases, fines may not be paid because the importer has disappeared once the goods are seized. If you are dealing with repetitive infringing activity, you want cases that are initiated ex-officio, without a complaint. Even criminal convictions may not be as helpful as desired if sentences are suspended or probation is too easily granted.

Q: It seems that foreign commercial interests are frustrated, which is an effective driving force for improving the situation in China. If more Chinese firms want to sell their products domestically, there will be interest within China to promote the reform. Do you think this will work in the long term?

A: Chinese trade associations, and patent and trademark agents are potentially important multipliers of good messages. There are no non-governmental organizations (NGOs) in China. We call them government-organized NGOs. It is difficult for them to say anything overly critical of the ministries to which they belong. Chinese movie producers, research institutions, and other rights holding organizations have become increasingly vocal in promoting IP rights.

Please note that the views expressed here are Mr. Cohen's personal views and may not represent those of the U.S. government. Feel free to contact his office for further information at usptochina@mail.doc.gov.

*This summary was compiled by RIETI Editorial staff.