Ruling in US-China Piracy Dispute Raises Controversy

28 January 2009

A highly anticipated ruling by a WTO dispute settlement panel brought by the US against China has been issued this week, concluding that some of Beijing’s copyright and trademark policies contravene multilateral trade-related rules protecting intellectual property.

The panel also did not agree with one of Washington’s most serious allegations: that Chinese law is lax on commercial-scale counterfeiting because it sets too high a bar for the criminal prosecution of copyright violations. This finding has prompted some analysts to argue that, contrary to some immediate reactions, the ruling is in fact anything but a clear-cut win for the US.

US motion picture, music, publishing, and software companies claim that they lose billions each year to piracy in China. Washington initiated the WTO case in April 2007, claiming that bilateral talks had been unsuccessful at getting China to do enough to enforce copyright and trademark protection.

The panel’s final report, dated 26 January, largely corresponds to the conclusions of an interim ruling it released last October (see BRIDGES Weekly, 16 October 2008, http://ictsd.net/i/news/bridgesweekly/31205/).

According to the dispute panel, a provision in China’s copyright law denying protection to work that failed official censorship review contravened the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS), as the US had charged.

Also at fault, according to the panel, were some – but not all – of the Chinese government’s practices for dealing with counterfeit or trademark-infringing goods confiscated by its customs authorities. Existing Chinese policy allows customs authorities to destroy confiscated goods, donate them to charity, to sell them back to the rights holder, or to auction them once the trademark infringing characteristics (say, a fake Nike swoosh) have been removed. The panel ruled that the last of these – returning goods to standard commercial channels, albeit without trademark infringing characteristics – was insufficient for WTO requirements. The US had argued that the TRIPS agreement required Chinese law to do more to empower customs authorities to destroy confiscated goods.

Crucially, the panel found that Washington failed to provide adequate evidence that China’s thresholds for the criminal prosecution of producers and sellers of counterfeit goods are so high as to be WTO-inconsistent.

The TRIPS Agreement (Article 61) specifies that countries must provide for criminal penalties for counterfeiting or copyright piracy “on a commercial scale” – but does not define what this entails.

Chinese law stipulates that the unauthorised reproduction or distribution for profit of 500 or more copies of books, CDs, movies, software programmes, or other works qualifies for criminal prosecution, including the possibility of jail time.

Acting US Trade Representative Peter Allgeier described the ruling as “an important victory” that confirmed the importance of the protection and enforcement of intellectual property rights. While describing the decision about China’s thresholds for prosecution as “disappointing,” he said that “the United States is encouraged that the panel… set forth a market-based analytical approach that should help WTO Members and panels avoid or resolve future disputes concerning obstacles to criminal enforcement against counterfeiting and piracy.”

"We will engage vigorously with China on appropriate corrective actions to ensure that US rights holders obtain the benefits of this decision,” Allgeier added.

Chinese commerce ministry spokesperson Yao Jian "welcomed" the verdict on criminal thresholds, reports Xinhua, the state news agency. Yao expressed “regret" about the unfavourable aspects of the ruling, and said that the government was “making a further assessment of the Dispute Settlement Body panel report."

It is not uncommon for both sides to claim victory in response to the WTO’s often-complex, nuanced rulings. But Michael Geist, a professor at the University of Ottawa, says that Washington’s victories were restricted to the least important aspects of the case. “The US did not win this case, but rather lost badly,” he wrote on his blog. “China is required to amend elements of its copyright law, but on the big issues of this case – border measures and [intellectual property] enforcement – almost all of the contested laws were upheld as valid.”

Describing the Chinese system for enforcing intellectual property rights as “a huge issue for the US,” Geist argued that the panel’s rejection of Washington’s arguments about China’s thresholds for criminal prosecution constituted a “major loss.”

Peter Yu, a professor of intellectual property law at Drake University in Des Moines, Iowa, said that “this panel report is important not for its conclusions, but for the reasoning behind those conclusions.”

A more practical question than who won or lost, he said, is “How can the resolution of this dispute be translated into substantive improvements in intellectual property protection and enforcement in China? Unfortunately, the panel won’t give you an answer.”

For his part, Professor Frederick Abbott of Florida State University added in a comment to BRIDGES: “It was foreseeable that WTO dispute settlement would be a problematic way for the United States to accomplish the enforcement objectives its industry groups laid out. There is doubtless some value that everybody thought about TRIPS enforcement rules a bit.” Ultimately, in his view “there is no country in the world that can claim a mantle to purity of TRIPS implementation. Inconsistencies can be found in all WTO Members.”

WTO dispute settlement rules allows for appeal of such a ruling but at this time is not yet clear whether any parties will consider such course of action.

ICTSD reporting; “China expresses mixed feelings over WTO ruling on IPR protection,” XINHUA, 27 January 2009.

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