WTO Rules China Needs to Tightened IPR Enforcement

Friday, March 20, 2009

The World Trade Organization (WTO) announced this week it had ruled that China had violated various intellectual property rights (IPR) provisions of the WTO and that China had 30 days to announce its plans to bring it IPR regulations into compliance with WTO requirements.

Various textile interests in the U.S. and elsewhere were closely following this matter as a number of firms had complained that Chinese IPR rules were not adequately enforced and were not in compliance with WTO guidelines.

The Office of the U.S. Trade Representative made an announcement about the ruling today, March 20th that the WTO had formally ruled that several aspects of China’s legal regime for protecting and enforcing intellectual property rights are inconsistent with China’s obligations under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). The U.S. brought this dispute against China because of concerns that Chinese law does not adequately provide for the protection and enforcement of copyrights and trademarks on a wide range of products.

The U.S. initiated this WTO dispute in April 2007, after bilateral discussions spanning several years failed to resolve U.S. concerns. A panel was established to examine the matter in September 2007. The panel circulated its report on January 26, 2009.

In this dispute, the U.S. sought to eliminate three significant structural barriers in China’s IPR enforcement laws. The WTO agreed with the U.S. on two of these, but found there was not enough evidence concerning the third.

First, the WTO ruled that the Chinese Copyright Law does not protect copyrighted works that do not meet China’s “content review” standards. This blanket denial of protection deprives certain copyright owners of vital enforcement tools to prevent unauthorized copies from being produced in China and distributed there or exported to other markets. This denial of protection is inconsistent with TRIPS Agreement rules requiring copyright protection to be afforded to these works and enforcement procedures to be available to permit effective action against their infringement.

Second, China’s rules for disposing of IPR-infringing goods seized at the border provide for counterfeit goods to be auctioned subject only to the condition that the infringing trademark be removed. Returning these goods to the marketplace with only the infringing mark removed, however, could confuse consumers and harm the reputation of the legitimate product, facilitating – rather than deterring – further acts of infringement involving these goods. The WTO ruled that China’s disposal rules are inconsistent with the TRIPS Agreement, which does not normally permit trademark-infringing imports seized at the border to be released into the channels of commerce after simply removing the infringing trademark.

Third, China’s laws provide for criminal prosecution of counterfeiting and piracy only when the trademark counterfeiting or copyright piracy exceeds specified legal thresholds (expressed in terms of the volume or value of infringing goods, e.g., 500 copies of a pirated DVD or approximately $7,000 worth of counterfeit goods). The TRIPS Agreement requires criminal penalties and procedures to be available for all “commercial scale” copyright piracy and trademark counterfeiting. The U.S. pointed out that this provision means China has an obligation to establish standards for prosecution and conviction that capture all commercial-scale activity, and it cannot create thresholds so high as to be divorced from market realities. The U.S. also argued that China’s specific thresholds fall short of these standards. (Immediately before this case was filed, China dropped its criminal copyright threshold from 1000 to 500 infringing copies.)

The WTO largely accepted the U.S. arguments concerning the appropriate construction of TRIPS Agreement provisions concerning WTO Members’ criminal enforcement obligations. The WTO agreed with the U.S. that the term “commercial scale” in one key provision means that China cannot set its thresholds for prosecution of piracy and counterfeiting so high as to ignore the realities of the commercial marketplace. Importantly, the WTO also clarified that whether acts of counterfeiting or piracy are “on a commercial scale” depends on factors such as the product at issue – whether it is a designer watch, DVD, or a software title – and the particular market in which the product is sold. The WTO also made clear that determining what constitutes “commercial scale” must take into account the impact of technological developments. These include the Internet, as well as the evolution of marketing practices that can enable pirates and counterfeiters to flourish with lower costs and in more pervasive ways. However, the WTO found that it would need additional evidence to determine whether China’s particular thresholds are set too high under these standards.

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