China’s Special Campaign to Combat IPR Infringement

Now that China’s recent intellectual property rights enforcement campaign has ended and the government has tallied initial results, companies question how long the positive impact will last.

By Brad Williams and Danielle Mihalkanin

PRC Premier Wen Jiabao introduced a campaign to combat intellectual property rights (IPR) infringement in China in fall 2010. Running from October 2010 to June 2011, the Special Campaign to Combat IPR Infringement and the Manufacture and Sales of Counterfeit and Shoddy Commodities aimed to crack down on a broad range of infringing activities, such as producing and distributing counterfeit goods, pirating audio-visual media, and trading infringing goods.

Through the campaign, the PRC government sought to strengthen foreign investors’ confidence in IPR protection and improve the domestic intellectual property environment. Many companies wondered, however, whether the campaign would offer concrete solutions and solve IPR protection problems in the long term, or whether it would only provide short-term results. Despite PRC government reports that cite the benefits of the campaign, time may be the true test of the effectiveness of this latest effort to protect IPR in China.

IPR and innovation plans support science and technology development

As the campaign is part of a larger national IPR plan, the campaign is best understood in the context of that larger plan and other earlier IPR initiatives.

China released its Medium- and Long-Term Plan for Science and Technology Development (MLP) in January 2006. A massive and complicated initiative, the plan focuses on turning China’s economy into a technology powerhouse by 2020 and a global leader in science and technology by 2050. China’s MLP includes long-term policy goals, such as promoting domestic innovation through preferential government procurement and financing schemes, as well as upgrading Chinese firms’ innovative capacity (see Domestic Innovation and Government Procurement Policies). China’s special campaign, indigenous innovation policies, and the National Patent Development Strategy (2011-20, NPDS) are all key initiatives within China’s MLP.

The special IPR campaign and other aspects of China’s MLP seem to have competing interests, however. Through the campaign, the PRC government sought to improve the IPR landscape for foreign and domestic companies. In contrast, many observers believe that other initiatives within China’s MLP either seek to limit foreign companies’ ability to sell products that incorporate intellectual property developed outside of China, or to appropriate that intellectual property from foreign companies in exchange for market access to China. Many aspects of the MLP, when juxtaposed with the special campaign, undermine China’s IPR credibility by calling into question the viability of the special campaign.

Indigenous innovation policies

Central to China’s MLP are its indigenous innovation policies. Through the indigenous innovation policy framework, China seeks to emerge as a technology powerhouse by enacting industrial policies that promote innovation produced in China. Such policies include Chinese technical standards that differ from accepted global industry standards within the information and communications fields, strict technology transfer policies and joint-venture requirements, preferential lending, and antimonopoly laws.

The foreign business community is watching these measures closely. Some US companies believe China’s indigenous innovation policies create new barriers to US foreign direct investment and exports to China. In reports issued in October 2010 and May 2011, the International Trade Commission (ITC) discussed the potential effects of indigenous innovation policies on US firms. According to the ITC, only 3.5 percent of intellectual property-intensive firms with business in China reported material losses in sales or profits due to the country’s indigenous innovation policies during 2007-09. But in 2009, 29 percent of US IPR-intensive firms in China, which made up 67 percent of sales in China, reported concerns with the country’s indigenous innovation policies. Though losses due to indigenous innovation may seem insignificant compared with more quantifiable losses as a result of piracy and counterfeit goods, many foreign entities think that China’s indigenous innovation policies constitute unfair trade practices and retard innovation in China.

National Patent Development Strategy

Since the PRC government initially enacted its first patent law in 1984 and formed China’s State Intellectual Property Office (SIPO) in 1985, many major patent-law developments have occurred. In November 2010, SIPO released the NPDS, a long-term plan for enhancing China’s core competitiveness through the patent system and its resources. The NPDS also seeks to create a favorable international environment for patents and to combine protecting innovation with safeguarding public interests. SIPO plays an important role in promulgating IPR protection rules and participating in IPR infringement litigation, and the office will be integral to the special campaign having a lasting effect in China.

The special campaign

Though the special campaign was originally scheduled to end in March, the State Council extended the campaign until June 2011. The campaign occurred in three phases: mobilization (October 2010); implementation (November 2010-February 2011); and acceptance and inspection (March-June 2011). The special campaign focused on copyright, patent, and trademark protection by targeting products—including audiovisual materials, auto parts, books, mobile phones, pharmaceuticals, software, and seeds—in the agricultural, high-tech, and entertainment industries.

The campaign had several goals that ranged across many sectors. It aimed to

• Increase source control of production by investigating illegal printing and copying of publications, software, and music;

• Enhance market supervision and administration;

• Intensify IPR protection of imports and exports on the Internet;

• Intensify criminal and judicial IPR enforcement;

• Urge governmental bodies nationwide to use genuine software; and

• Enhance promulgation of IP protection by implementing a national strategy and educating the public.

PRC government reports on the special campaign—and foreign response

Official PRC government reports claimed the special campaign was a huge success, though government officials stress that IPR enforcement activities within China will be ongoing. The State Council Information Office (SCIO) states that extraordinary achievements were made during the nine-month special campaign. An online achievement exhibition highlights many of the successes that China proclaimed as a result of the campaign, including protecting IPR, combating the production and sale of fake goods, and implementing legalized software in government offices throughout the country. Regulators have made a few regulatory and judicial changes, including issuing a 2010 State Council notice that requires budget allocation for legitimate software purchases by government agencies. In January 2011, the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security also issued the Opinions on Handling Several Issues in Intellectual Property Criminal Cases, which appear to modify proof requirements in copyright infringement cases involving multiple copies of works. Though foreign corporations and trade associations welcome these developments, many remain skeptical about whether recent activity levels will be maintained now that the campaign has ended.

SCIO reports that during the special campaign administrative agencies across the country investigated 156,000 cases of IPR infringement and the manufacture and sale of pirated goods worth ¥3.4 billion ($532.2 million), closed more than 9,130 illegal plants making pirated and counterfeit goods, and shut down 12,854 underground factories. Reportedly, Chinese police forces arrested 9,031 suspects. Chinese courts adjudicated nearly 80 percent of the cases they received, according to SCIO.

Though these numbers seem spectacular, they are perhaps out of context. Without full details or statistics about prior efforts or a breakdown by region or type of crime, it is unclear whether China has improved its enforcement efforts through the special campaign or whether these results represent the status quo or similar results found in past campaigns.

Nonetheless, it is encouraging to see the PRC government target problematic IPR sectors. For example, counterfeit pharmaceuticals originating from China are a global health concern as infringing products manufactured in China are often low quality. Through the special campaign, China reports that it has made an effort to reduce illegal sales of counterfeit pharmaceuticals, including medicines sold illegally through online websites. Though it seems that China has stepped up its enforcement operations, including conducting raids of criminal manufacturing sites and making arrests, PRC law still requires proof that violations in any counterfeit activity exceed threshold values before any action is taken by authorities beyond arrest. Such criminal thresholds thwart prosecution and may prevent meaningful changes in the long run for all industries that are affected by piracy in China.

With respect to online piracy, SCIO reported that as of June 2011, authorities had disposed of 1,148 cases involving online infringement piracy as a direct result of the special campaign, with 466 of these cases given administrative penalties and 66 cases transferred to judicial authorities. Further, China’s media have reported more than 200 website closures and suspensions of online business licenses due to IPR infringement.

With regard to music piracy in particular, the special campaign has had some positive effects, according to the International Intellectual Property Alliance. During the special campaign, stepped-up enforcement activities by the PRC government shut down some websites offering pirated music or forced them to suspend access to infringing media. Specifically, in November 2011, officials shut down the music portals Qishi.com and 5474.com and subjected the site operators to fines and criminal sentences. One of the Qishi.com operators was sentenced to five years imprisonment and fined ¥1.5 million ($234,750). Though it is unknown whether the crackdown on the websites is permanent or temporary, in December 2010, the PRC Ministry of Culture issued a notice claiming that illegal websites would be shut down if they did not acquire approval or register at provincial cultural departments. And in January 2011, one of the largest perpetrators, VeryCD, reportedly disabled all links to infringing music and movie content, perhaps as a direct response to the government notice. Again, it is unclear whether this is a permanent move, or an action carried out under the pressure of the special campaign.

Despite some successes in music piracy enforcement, the music industry estimates that it has suffered extensive losses in China due to online piracy, market access restrictions, or other discriminatory measures. In tandem with criminal enforcement measures, the music industry has had mixed results in civil infringement suits against Chinese companies. For example, in early 2010, international record companies lost an infringement suit against Baidu, Inc., a NASDAQ-traded Chinese web services company. The music industry estimated it lost $581 million related to Baidu alone in China from 2006-07.

Beyond online and music piracy, pirated goods remain prevalent in China, even after the completion of the special campaign. Recently, Chinese media reported about a fake Apple Inc. store, highlighting the fact that despite China’s recent efforts to eliminate piracy in China, fake goods are still prevalent throughout the country. In response to the publicity surrounding these fake Apple stores, PRC authorities promptly closed two of the five reported outlets that lacked the proper permits and were using the Apple trademark without permission.

According to China’s National Copyright Administration, China also made notable achievements during the special campaign to ensure that government agencies use copyrighted software. As of the end of May, PRC authorities reported that legal software had been implemented in each of its 135 central governmental agencies and that central government agencies spent a total of ¥140.9 million ($22.1 million) to purchase 176,763 legitimate software packages. Reportedly, PRC authorities have also mandated that central and local government agencies list the copyrighted software purchases in the fiscal budget and that authorities audit all of the purchases to verify the software’s authenticity.

Though these reports are promising, it is important to note that PRC authorities have issued other mandates regarding the authenticity of government software in the past. China made a similar commitment in the 2005 and 2006 US-China Joint Commission on Commerce and Trade meetings to complete software legalization within all government agencies by the end of 2005. By 2009, no permanent plan was in place and the commitment had not been met. To date, the rate of illegal software use in China as a whole remains extremely high, at an estimated 78 percent, with an estimated commercial value at $7.8 billion, according to the Business Software Alliance. The 2011 Special 301 Report published by the Office of the US Trade Representative also suggests that China’s reported numbers may be inaccurate. For example, the 301 Report notes that the software industry sees “no discernable increase in legitimate software sales to date.” Furthermore, one company noted in the report that legal software purchases by the PRC government have been focused on “low-end and pirated domestic software.”

Next steps

Though Chinese reports boast significant achievements through the special campaign, the foreign response to these purported successes has been more tepid in questioning the significance of the reported statistics and whether China is truly committed to improving its IPR protection over time. Foreign corporations and trade associations believe that the special campaign has produced some regulatory and judicial changes, as well as strengthened enforcement activities, but many remain skeptical about whether the current changes will continue. As such, looking beyond the special campaign, only time will tell whether China will follow through on its commitments to ensure use of legal software, hold intellectual property violators on the Internet or otherwise accountable, and refrain from implementing indigenous innovation policies that discriminate against foreign products.

The increasing investment opportunities and risks in China highlight the importance of foreign corporations having a comprehensive China IPR strategy. To stay competitive, companies must plan to proactively manage their IPR risks, such as by using the Chinese patent system to procure and enforce their IPR in China.

Promoting IPR Achievements

The PRC government officially launched a new website on July 11 to promote the results of its recent nine-month campaign against intellectual property rights (IPR) infringement and counterfeiting. The website highlights the PRC government’s efforts to crack down on counterfeiting, promote the concept of IPR, and meet recent commitments on software legalization.

Among the touted results:

•     Enforcement agencies filed 156,000 cases related to piracy and IPR infringement involving ¥3.4 billion ($532.2 million);
•     Officials investigated thousands of trademark infringement cases and destroyed fake drug production facilities;
•     Criminal courts heard 2,492 cases, adjudicating 1,985 of these cases; and
•     Government agencies purchased 176,763 sets of legitimate software.

The PRC government says further campaigns will seek out counterfeit agricultural materials, medicine, foods, and famous brands.[/box]

Brad Williams is a partner at Baker Botts LLP in Dallas, Texas. Danielle Mihalkanin is an associate at Baker Botts LLP in Palo Alto, California. They both specialize in intellectual property rights protection.