Intellectual property piracy rocks China
boat By Jayanthi Iyengar
The
Chinese government has announced several measures in
recent months aimed at strengthening its Intellectual
Property Rights (IPR) regime. Yet, doubts persist about
how serious it is about its intent to check copyright,
patent and trademark infringements.
The Chinese
have been trying to improve their legal system, but the
Chinese IPR regime has remained weak on account of a
pending legal overhaul and a weak implementation system.
"The legal system in China is less than 20 years old.
The People's Republic of China government is committed
to transforming China into a modern economy, and has
undertaken a monumental task of creating a legal system
to support that economy. The result: China's legal
infrastructure - laws, enforcement mechanisms, and
dispute resolution process - are quite new and
undergoing a seemingly endless series of changes since
it first opened out to foreign investment. While this
system has quickly developed, protection of intellectual
property rights has lagged," Frazer Mendel, IPR expert
and senior associate with Morrison & Foerster LLP,
Beijing, told Asia Times Online.
In the absense
of proper laws and an IPR enforcement mechanism, many
foreign companies have been reluctant to invest in
China. And even those that invest in the Middle Kingdom
have opted for the safer joint-venture route. A good
example is franchising. A visit to almost any Chinese
city reflects the extensive presence of the global
franchisers - KFC and McDonald's. Yet, what is not
widely known is that these companies have come in not as
franchisers, but as joint ventures, in anticipation of
the time when the Chinese legal system will provide them
adequate IPR protection - and they can switch back to
franchising.
The United States and US companies
have been openly critical of the Chinese IPR regime.
William H Lash III, assistant secretary of commerce for
market access and compliance, slammed the Chinese
authorities during his four-day visit to Beijing in
August, saying China's economic accomplishments were
marred by handful of "greedy, unscrupulous, soulless
pirates" who threatened the country's reputation and
economic future and caused tremendous trade and
investment frictions.
The US government
estimates that piracy within China costs American
companies $20-24 billion a year in damages. The
assistant secretary said that if one includes European
and Japanese firms, the losses on account of Chinese
piracy is in excess of $50 billion annually. Lash listed
products in which he claimed American interests were
hurt by Chinese piracy. These included recent, new and
unreleased DVD movies, Pfizer pharmaceuticals,
Gorman-Rupp pumps from Ohio, Zippo lighters made in
Pennsylvania, as well as Calloway golf clubs and New
Balance sports shoes.
In keeping with Lash's
claims, US auto maker General Motors is locked in a
dispute with Chery Automobile Co. GM claims Chery has
pirated Spark, a mini-car model. Meanwhile, Pfizer has
charged that the Chinese have replicated a blood
pressure drug and Viagra, the male impotence drug.
Independent assessment of the Chinese (and
Asian) situation, are not flattering to Beijing.Business
Software Alliance (BSA), the international association
of the world's leading software manufacturers that
recently studied piracy, charged that Asian engage in
extensive software piracy. The study found that 53% of
the software installed on computers in the Asia-Pacific
region was pirated in 2003, representing a loss of over
$7.5 billion. It added that while $80 billion in
software was installed on computers worldwide last year,
only $51 billion was legally purchased.
The
study also claimed that the Asia-Pacific is the region
with the fourth highest software piracy rate and the
second highest revenue losses. The piracy rates in the
region range from a high of 92% in Vietnam and China to
a low of 23% in New Zealand. Three of the four countries
with the highest piracy rates are in the region.
Room for violation Lash, the US
commerce official, summarized that piracy was made
possible by:
A weak IPR legal framework;
High rate of returns in IPR infringement;
Weak penalties on violations.
He pointed out
that according to US government intelligence reports
(and common sense) piracy flourished because of the high
returns. He claimed that a $1,000 investment in
counterfeit currency would yield $5,000 and in heroin
trafficking $50,000. Yet, a $1,000 investment in
counterfeit pharmaceuticals yielded $500,000 in profits.
Lash pointed out that given these kinds of returns, the
risk profile had to be enhanced with steeper punishment.
"People have to know you're serious. If you're facing a
5,000% return on your investment and no chance of being
caught, and even in the unlikely chance that you're
caught, you go home the same day - that fuels piracy,"
he said.
Given the open and extensive level of
IPR piracy, Chinese authorities are not contesting these
assessments. In April, vice premier Wu Yi assured a
high-level workshop hosted by the State Intellectual
Property Office in Beijing, "The government is resolute
about improving the IPR system, promoting the social
awareness of IPRs, and properly and effectively
protecting IPRs."
In the next few weeks, the
Middle Kingdom followed up this verbal assurance by
launching a series of measures to reassure foreign
investors of its commitment to IPR protection. These
measures are either in the form of tighter enforcement
measures or changes in relavant laws. China watchers and
international experts have been taking note of these
developments, but maintain the measures would have to be
more direct if China wishes to signal its commitment to
enforce IPR protection.
Tighter
enforcement The most significant step so far is
the government's announcement that it has launched a
year-long campaign to crack down on IPR violators. This
campaign began early this month and will last untill
next August. It is targeted at all groups of products
and cover 15 provinces and municipalities, including
Beijing and Shanghai. "We will focus on all the key
sectors," said Zhang Zhigang, vice minister of commerce
and director of the Office of the National Working Group
for IPR Protection, while announcing the IPR enforcement
drive.
It's not clear why such drives have to be
announced, considering that the message would get around
if implementation were strict, but as is typical of the
Chinese and others, Zhang also explained that these
steps were being taken not because the Chinese IPR
protection was weak, but in order to elevate it to
higher levels. He also announced the law related to IPR
violations would be strengthened later this year, when
the Supreme Court plugs the loopholes in the existing
law, which make it possible for courts to award lower
levels of conviction to IPR violators than to violators
of other laws.
The Supreme Court's intervention
becomes necessary at this juncture because though a law
exists - not an independent act, as foreign investors
demand - to check IPR infringement, it is ambiguously
worded, allowing a judge to award lower punishments and
violators to get away. The Chinese IPR provisions are
contained in the country's criminal code, which contains
an independent chapter to deal with IPR violations
relating to patents, trademarks, copyrights and trade
secrets. This law also provides that IPR violations
could draw up to seven years of imprisonment "when
circumstances are serious".
Arbitrariness creeps
in because of this language since the courts have the
discretion to judge whether violations are serious
enough to mean long imprisonment or none at all. The
Chinese courts have been letting off violators, which is
why the message has not been getting through that the
government means business. It is this loophole that the
Chinese authorities are promising to plug by asking the
Supreme Court to give a standing interpretation of the
clause "when circumstances are serious".
Changes in related laws Legal
assurances and crackdowns on violators apart, the
Chinese government has also tried to tinker with related
laws in recent months to strengthen Iprotection of
intellectual property rights, IPR. Two such laws include
the Foreign Trade Law and the Regulations on the
Management of Foreign Investment in the Commercial
Sector (FICE Regulations). The FICE came into force from
June 1, 2004, while the new Foreign Trade law came into
force from July 1.
"While the revised Foreign
Trade Law strengthened the protection of IPR involved in
foreign trade transactions, more important are FICE
Regulations," said Mendel, the IPR expertwith Morrison
& Foerster LLP in Beijing. "These regulations
provide regulatory enactment of China's WTO commitments
to permit foreign investors to engage in various
domestic commercial activities. The regulations apply to
foreign-invested enterprises in the form of equity joint
ventures, cooperative joint ventures and wholly
foreign-owned enterprises. The FICE regulations define a
foreign-invested commercial enterprise as being engaged
in retail, wholesale, or franchising activities," he
told Asia Times Online.
Added Daniel Rosen,
principal, China Strategic Advisory, and visiting fellow
of the Washington DC-based Institute for International
Economics: "The rules in the Foreign Trade law are not
designed with IPR in mind, rather with trade and
distribution. The provisions are thus not adequate to
protect foreign IPR interests, nor are they expected to
be. IPR must be addressed directly by Beijing through
IPR-specific rules and regulations," he told AToL.
The federal government apart, Chinese provincial
governments too have launched measures to reassure
foreign investors that they are keen to protect their
IPR interests. Shenzhen province recently opened a new
anti-piracy office. In Shanghai, local authorities
signed several memoranda of understanding (MOUs) with
global companies like Pfizer to collaborate on the
detection of pirated pharmaceuticals.
Confidence level Despite all these
measures, foreign investors continue to be skeptical
about China's intent to implement IPR protection. Part
of the reason is that its local industry has been able
to thrive at the cost of global brands. Any changes
would mean upsetting this highly vocal and influential
class of manufacturers and traders. Besides, the state
itself has certain limitations in being able to track
IPR violations, given the rampant level of
infringements. When vice commerce minister Zhang Zhigang
spoke to reporters after his recent announcement about
cracking down on violators, he made it clear that it may
not be possible for the government alone to check
violations.
Jayanthi Iyengar is a
senior business journalist from India who writes on a
range of subjects for several publications in Asia,
Britain and the United States. She may be contacted at
jayanthiiyengar1@hotmail.com.
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