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China aims to strengthen IP rights enforcement

U.S. officials question new initiatives' effectiveness

Likely bolstered by government incentives, China surpassed the U.S. and Japan to file more patents in 2011 than any other country, according to a Dec. 21, 2011, Thomson Reuters report. From 2006 to 2010, filings rose by an average of 16.7 percent annually.

That’s not bad for a country that only adopted its first IP law in 1984—a couple centuries after the first U.S. Patent Act became law. But China still has a long way to go before patent owners feel confident that their rights will be adequately protected in the country.

“China is really an intellectual property miracle,” says Thomas Chan, a partner at Fox Rothschild. “They’re an economic miracle. But is it enough? No, they have to continue to improve, to work hard, to enforce and to educate.”

While Chinese IP filings from both Chinese and foreign companies have skyrocketed, enforcement of IP rights is still lacking. In 2009, U.S. businesses lost $48 billion in sales, royalties and licensing fees due to infringement in China, according to a May 2011 U.S. International Trade Commission study.

China’s Ministry of Public Security says enforcement has radically improved. In the first 10 months of 2011, it said, the number of IP investigations, the number of infringement-related arrests and the retail value of seized illegal goods were five times what they were during the same period in 2010. (Some lawyers, however, question those numbers.)

Still, U.S. officials’ recent complaints about the enforcement of IP rights in China seem to have reached a fever pitch (see “Constructive Criticisms”).

And the Chinese government may be listening. In November and December 2011, it announced measures aimed at strengthening IP rights enforcement.

“The government is taking IP dead seriously,” says Danny Friedmann, an IP rights consultant in China and founder of the popular blog IP Dragon. “In fact their fate is connected to it.”

Task Force

At a session of the U.S.-China Joint Commission on Commerce and Trade (JCCT) in November 2011, Chinese officials said a special IP task force the government launched in 2010 will become a permanent “high-level central government enforcement structure,” according to the U.S. Commerce Department.

The National Leading Group for Combating IPR (Intellectual Property Rights) Infringement and Counterfeits, comprising Chinese politicians, marks the country’s first permanent group dedicated to IP enforcement since 2003. China’s Vice Minister of Commerce Jiang Zengwei, a well-respected premier, is to head the group.

Jiang told the Financial Times in December that the group intends to undertake short- and long-term measures such as rooting out online sales of counterfeit goods, inspecting software pre-installed on computers and informing banks of repeat-infringer companies, which, in theory, would eliminate their funding.

He also conceded that eliminating infringement and counterfeiting will be difficult in the short term.

“There’s a high-level vice premier heading this agency,” Chan says, “but if you talk to lawyers in China, the consensus is unanimous: It’s a great showing to do something, and it will help, but it won’t have the dramatic effect that Americans expect.”

Friedmann takes a similar view of the group, saying its impact will be cosmetic because China’s biggest problems lie outside its scope.

Fines in China

In a Dec. 13, 2011, press conference, Jiang announced that China would begin imposing flexible fines for infringements, moving away from a fixed-fine, statutory-damages system. Under the new system, judges could order infringers to pay multiples of the value of the infringed goods—higher figures that China hopes will deter infringers.

But experts say that what’s really needed is for the courts to issue clear, timely rulings and to enforce the punishments.

“Flexible fines seems like a bad idea for deterrence because research has shown that punishment certainty is far more effective to deter crime than punishment severity,” Friedmann says. “The Chinese government executes people that bring lethal counterfeit foods and drugs on the market, yet it is still a very big problem in China.”

Also at the press conference, Jiang said China will amend criminal laws so that evidence rules aren’t so hard on IP owners. Some observers say an updated evidentiary system would be a more effective way to make damages for infringements fairer and more effective. Because China has no discovery system, it can be difficult for patentees to obtain the evidence sufficient to prove the extent of their losses and of an infringer’s profit.

“China is trying to increase liability and the burden of proof on the infringer, and that’s a great step,” says Alex Zhang, an IP partner at King & Wood. “The infringer would have to demonstrate how much money they’re making or the patentee lost.”

Navigating the System

It’s unclear what other evidentiary rule changes China has planned, and Friedmann says the devil is in the details.

“If improving evidence rules [means] China is lowering its criminal thresholds to counterfeiters, this would be good news,” he says. “Smart counterfeiters divide the production or distribution of their products in lower numbers so that they stay under the commercial-scale threshold.”

That would be a start. But Friedmann notes that China still lacks a rule of law, transparency, an independent judiciary and uniform application of laws. A lack of enforced judgments remains a huge obstacle. It faces problems with local protectionism and corruption. It has significantly improved over the years in terms of respect for and expertise in IP, Friedmann says, but he has doubts about the effectiveness of this new Chinese IP rights campaign.

“I have complained many times about China’s proclivity toward mass campaigns,” he says. “These are temporary crackdowns that have been announced. These mass campaigns have colorful names, but are not really working. They keep doing it because Western media seem to parrot the numbers, which do not mean much.”

Chan says he’s heard from major Fortune 100 companies that things are improving and they are seeing good results, but he cautions that for now, success means knowing and respecting the system.

“You wouldn’t come into the U.S. and do it the Chinese way, and it’s the same there,” he says. 

Associate Editor

Melissa Maleske

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