US – China (Enforcement of IPR)
DS 362 (Panel 2009)
Emil Kogan | Andres Lahiguera | Lindsey Lowenberg
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US & China Economies
US initiated its IPR trade dispute against China in April 2007
Country statistics from 2007:
United States
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Average GDP growth:1.8%
Per capita GDP (PPP): $43,800
Unemployment rate: 4.8%
China
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Average GDP growth: 14.2%
Per capita GDP (PPP): $7,800
Unemployment rate: 4.2%
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US & China Interdependency
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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.
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How Big is this Issue?
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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’s
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IPR Infringement of KFC
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IPR Infringement of Starbucks Coffee
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US Request for Consultation v. China
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US asserted Chinese law and IPR enforcement was
inadequate. 4 matters in question:
◦ Thresholds for criminal procedures and penalties
◦ Disposal of infringing goods confiscated by Customs authorities
◦ Denial of copyright protection and enforcement to works that have
not been authorized for publication or distribution in China
◦ Unavailability of criminal procedures and penalties for unauthorized
reproduction or unauthorized distribution of copyrighted works
 Matter was withdrawn after for Request for Consultation
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Inconsistencies with TRIPS Articles
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Thresholds
◦ (Article 41.1) Enforcement & remedies are present in Member law
◦ (Article 61) Laws provide for criminal procedures and penalties
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Disposal of Goods
◦ (Article 46) Hierarchy of disposal options for infringing goods
◦ (Article 59) Competent authorities have authority to enact Art. 46
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Protection 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 US
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Overall
◦ 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
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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.
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Position of the US cont.
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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 destroyed
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Protections 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 China
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Documented 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 Copyright
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China’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 TRIPS
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Article 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 Customs
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With 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
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Implementation of Panel Recommendations
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Revision 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 Recommendations cont.
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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.”
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US and China filed an understanding ~3 years after
Request for Consultation
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Who Won?
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US won on issue of Chinese Copyright Law
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China won on issue of thresholds of criminal procedures
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Tie on Customs Law and IPR
◦ Copyright must be recognized even if domestic Chinese law does
not permit its publication. But is this a hollow victory?
◦ US unable to define “Commercial Scale”
◦ Chinese system includes both administrative and criminal systems
◦ Both systems working together cover all aspects of IPR litigation
◦ 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 Context
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Victory for the Chinese IPR system
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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.
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Is it beneficial for China to strengthen IP protection?
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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 countries
Could IPR laws foster better Government?
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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
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Statistics
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China is Doing More!
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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
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But is this enough?
◦ Very few cases involved foreign companies - why?
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International Perspectives
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Implementation brings China closer to “Western” models
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Examples set for developing countries
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What else can be done?
◦ Sets in motion process for increasing IP rights
◦ 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 effective
◦ 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 Rights
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