February 10, 2005
Ms. Sybia Harrison
Special Assistant to the Section 301
Committee
Attn:
Special 301 Out-of-Cycle Review Written Comments
Section 301 Committee
Office of the U.S. Trade Representative
1724 F Street, N.W.
Washington, D.C. 20508
FR0446@ustr.eop.gov
RE: Special 301 Out-of-Cycle Review
Dear Ms.
Harrison:
This is in response to the
United States Trade Representative’s Federal Register notice of December 14,
soliciting comments in connection with a “Special 301” Out-of-Cycle Review to
assess China’s actions to implement effectively the commitments it made
regarding intellectual property in connection with (1) the Joint Commission on
Commerce and Trade, (2) its accession to the World Trade Organization (WTO),
and (3) the 1995 bilateral intellectual property agreement with the United
States (including additional commitments made in 1996). The United States Council for International
Business (USCIB) is pleased to offer its comments on this important subject. USCIB represents over 300 U.S. corporations,
professional firms, and business associations, many with substantial trade and
investment interests in China.
USCIB believes strongly that improved protection for
intellectual property in China will have positive benefits for American
companies. It is in this context that
USCIB welcomes Administration efforts to help China meet its important
obligations in connection with the protection of intellectual property
rights. Since acceding to the WTO and
taking on obligations in the area of intellectual property rights (IPR)
protection, China has made some limited progress in combating copyright piracy
and trademark counterfeiting, especially through legislation. However, despite these improvements, piracy
and counterfeiting at the wholesale and retail level, and over the Internet,
remain rampant due to inadequate penalties, uncoordinated enforcement among
local, provincial and national authorities, and the lack of transparency in
China’s administrative and criminal enforcement system. The patent law has also improved
significantly over the past few years, but much work remains concerning
implementation.
USCIB notes that Rules on the Determination and Protection
of Well-Known Trademarks, Measures on the Implementation of the Madrid
Agreement on Trademark International Registration, Measures on the Registration
and Administration of Collective Trademarks and Certification Marks, Measures
on the Implementation of Administrative Penalties in Copyright cases, and
Regulations on the Customs Protection of IPR have been issued recently, which
are generally positive developments.
USCIB also notes that at the Joint Commission on Commerce
and Trade (JCCT) meetings in the spring of 2004, China made many commitments
intended to address U.S. concerns with respect to IPR including: giving new
judicial interpretations before the end of the year in an attempt to have
strong criminal enforcement of IPR infringements; intensifying a national
campaign against IPR infringement; implementing new customs regulations, which
came into effect on April 1, 2004, which would increase customs authorities’
criminal enforcement actions; accelerating efforts to ratify and join the WIPO
Internet treaties; continuing audits to implement the use of legitimate
software by government institutions; and conducting public education campaigns
on the importance of IPR. We urge USTR
and other U.S. government officials to stay closely engaged with the Chinese
government to ensure timely action on these important commitments.
We recognize that this discussion is not exhaustive, and
that there may be significant issues that our members have not raised with us
for various reasons. Similarly, the
differences in length and detail provided in the following discussion of
specific issues should not suggest that shorter entries are less important than
longer entries with more details.
● Audio
Visual Services Concerns
In
the area of audio visual services, China has, per its WTO accession agreement,
allowed for minority foreign participation in cinema operations (subsequently
revised to allow 75% foreign investment).
It has also increased to 20 the number of foreign revenue-sharing films
allowed into the market each year.
However, the existence of any such quota, along with the lengthy
approval process required for each film, only serves to promote the spread of
illegal pirated content, as is discussed in greater detail below.
Despite
these developments, intellectual property rights violations and the limitations
on market access for providing legitimate product into the market constitute
the single greatest impediment to the development of a healthy Chinese media
and entertainment industry. The
situation has hurt not only foreign businesses, but has also left many areas of
the domestic industry in a state of general crisis. Without a proper, functioning market where intellectual property
rights are respected and laws are enforced, investment will remain depressed,
content quality will continue to suffer, and the general population will be
left to turn to the black market.
Piracy
is worsening in China, whose cities have become open markets for illicit DVDs,
VCDs, music CDs, and video games.
Although an inefficient enforcement system and low penalties for
violators are significant contributing factors, this problem is also partly the
result of limits on market access which place legitimate supply far below
consumer demand.
Internet piracy has recently emerged as yet another major
challenge. Online infringers have used
the Internet to distribute a wide range of illegal products that violate
copyright protections, particularly those for films. Additionally, the emergence of China as an export country for
pirated DVDS has resulted in thousands of illicit copies of the latest American
movies being exported globally, usually via courier companies or express post.
In newspaper and
magazine publishing, copyright and trademark protection remains lax, although
recently the situation has improved somewhat in the form of successfully
prosecuted legal cases. Content is
still regularly pilfered from competing sources with impunity, making it both
impractical and unprofitable for publications to invest in high-quality
editorial content. This, in turn,
yields many virtually identical publications, thereby depriving consumers of
meaningful choice.
Without
a comprehensive approach to this problem, both domestic and foreign producers
of media content will continue to perceive China as an unattractive place to
make investments. The commitments given
by Vice Premier Wu Yi in recent meetings in Washington to take a number of
measures to address piracy in China are welcome, but real progress will depend
on the successful implementation of these commitments by government agencies
and the establishment of an effective interagency coordinating mechanism.
In
addition to lax enforcement of intellectual property rights, market access
restrictions inhibit the ability of content providers to build a legitimate
market and satisfy consumer demand. And
although these restrictions affect each sector differently, the situation is
most acute in the film and TV markets.
Film
import quotas and the tardy distribution of approved film and video products
create a vacuum being filled by copyright violators. The failure of China to implement it WTO commitments with respect
to customs valuation on entertainment products being shipped to China (basing
valuation on subjective criteria of projected revenues or others instead of on
the basis of the value of the carrier medium) also increase the costs of
getting legitimate product into the country. This negatively impacts the entire
value chain of the industry in China, from importation to distribution to
exhibition. While total box office
receipts in China have declined by 40 percent since the advent of VCD’s and
DVD’s (from 1996 to 2003), the box office in countries with much smaller
populations and numbers of screens is far more valuable on a per capita basis
than China's, simply because there are few if any restrictions on the number of
films that can be imported. The
Republic of Korea, with just 40 million people and a third the number of
screens in China, has box office revenues more than five times higher than
China’s in absolute terms and approximately 150 times more valuable per
capita. Hong Kong, with a population of
just over 7 million, generates almost as much box office revenue as all of
mainland China.
A
number of actions are needed to build a viable market and to improve market
access in the entertainment industry.
First, the cap on the number of foreign-revenue-sharing films allowed
for exhibition in China each year, which is set at a maximum of 20, should be
eliminated, given that an exhibition quota of two Chinese films for each
foreign film already exists. China’s
entertainment market is starved for content and this artificial limit simply
drives consumers to the black market to satisfy their desire to see the latest
films.
Second,
limits on foreign content in television programming in China (25 percent of
total dramatic programming, a de facto ban on foreign content during prime
time, and restrictions on the availability of foreign channels) should be
eased. Chinese broadcasters are working
hard to develop a commercially viable industry free of state subsidies, and
existing restrictions deprive broadcasters of access to content with which they
could build their business. As China
rolls out digital broadcasting and pay-TV channels, there will be a huge
increase in the demand for content. Shortsighted policies that limit access to
content, handicap the development of the local broadcasting industry.
Third, censorship clearance procedures for optical media
should be streamlined. These procedures
severely restrict the ability to distribute timely and legitimate CD, VCD and DVD products in China, and provide
yet another unfair and unnecessary advantage to pirate producers, who are able
to bring their products to market long before legitimate copies are available
for sale. This, combined with
restrictive licensing policies on retail outlets, which at present require separate
licenses in each jurisdiction rather than providing retail chain stores with a
national license, severely inhibits the industry’s ability to provide consumers
with timely access to legitimate products, an important element in the fight
against piracy.
With respect to sound
recordings, the current investment regime greatly restricts the ability
of foreign record companies to enter the Chinese market, and USCIB requests
that the Chinese Government reforms its investment and censorship provisions in
the music market to facilitate the growth of a healthy record industry in
China. While current regulations permit foreign partners 49% ownership in
certain joint ventures (JVs), these JVs do not have the right to publish
recordings in China, greatly limiting their vitality and resulting in a number
of releases that is greatly limited compared to other markets around the
world. This seriously inhibits the
emergence of a prosperous retail environment and promotes the sale of pirated
goods.
In addition, every release in China has to go through a
complicated and time-consuming censorship process, which often is an
operational nightmare. As with optical
media, it effectively limits the number of releases and it gives a further
unintentional advantage to the pirates, who are not subject to this process. As a result, the pirates can come to the
marketplace before the legitimate industry can, and offer products that were
partly or completely banned for distribution by the censorship authorities. If censorship is to be maintained, it must
be made more efficient so that it doesn’t impair the marketing of legitimate
materials and create unintended advantages for the distribution of pirated
materials.
·
Copyright Concerns
Pirated optical media products, CD, VCD and DVD, and
counterfeit goods continue to be a major problem, and the piracy rate for
optical media products and business software is well in excess of 90
percent. While recent copyright law
amendments and regulations made significant progress toward bringing Chinese
law into compliance with TRIPS, the law remains deficient in several important
respects, including wholly inadequate criminal liability for copyright offenses
and overly broad exceptions to protection for computer software.
There is still great need for better coordination between agencies,
as well as better coordination between administrative and criminal
measures. There have been some
successes in bringing civil actions, but deterrent sentencing in criminal
courts continues to be ineffective. China’s criminal law has rarely been used
to prosecute piracy because of the high thresholds for criminal liability
established by the People’s Supreme Court in its interpretations of the
criminal copyright provisions, but USCIB notes that China promulgated a new
judicial interpretation on Dec. 21 that lowered the criminal thresholds for IPR
offense punishments. For example, if an
individual brings in a minimum of RMB30,000 (USD3,600) in illegal gains [down
from RMB50,000] or RMB50,000 (USD6,024) in illegal business volume [down from
RMB200,000] from infringing on copyrighted works or reproduces more than 1,000
illegal copies, the individual is eligible for a prison term of no more than
three years, while reproduction of more than 5,000 copies calls for a mandatory
three-year minimum prison term.
However, such thresholds still place a heavy burden on enforcers and, in
a seeming oversight, sound recordings are not included in reproduction
thresholds. Moreover, illegal business volume is calculated using
the price of the infringing work instead of the price of the genuine work. It is unclear how to prosecute repeat
offenders and how the thresholds apply to online piracy. Even with the lowering of the criminal thresholds,
effective enforcement will not become a reality if there is inadequate attention,
investment and training by the Public Security Bureaux (PSB). The PSB needs to treat criminal enforcement
of IPR offenses as a top priority.
Enforcement remains slow, cumbersome and rarely results in deterrent
fines. Although Chinese authorities
have undertaken some administrative enforcement actions against pirates, the
government’s refusal to share information about the activities of CD plants or
the ultimate outcomes of these actions makes it very difficult for rightholders
to assess the deterrent impact of China’s enforcement efforts.
With respect to software, the Copyright Administration
(CA) has administrative authority to do surprise audits of companies suspected
of using illegal software, but CA offices are reluctant to exercise their
authority and are plagued by inadequate manpower, training and resources. Moreover, when they do take action, most of
the CA offices have been unwilling to issue a formal punishment with deterrent
penalties. In the case of civil
enforcement, courts are also reluctant to issue decisions in corporate end user
infringement cases, instead urging the parties to settle. Civil enforcement is also far from
predictable, due to an uncertain evidentiary standard to support an evidence
preservation order. To date, there have
been very few instances of an evidence preservation order executed against a
corporate end user. Finally,
organizational end user piracy should be clarified as a criminal offense to
allow for prosecutions against software piracy on a commercial scale and
penalties must be high enough to actually deter further infringement.
With respect to online piracy, there need to be express
limitations on liability protecting
ISPs, including for network conduit functions, caching, hosting, storage
and information location tools, as are found in the Digital Millenium Copyright
Act of 1998, as rightholders adopt new business models for online distribution
of music, movies, software and other copyrighted content. The manufacture and trade in circumvention
devices, components, and service should be expressly prohibited and there
should be adequate protection against unlawful circumvention of “copy controls”
and “access control.” China urgently
needs to update its Copyright Law by speeding up the drafting process of the
Internet regulations by the State Council to bring China in adherence with the
WIPO Internet treaties in order to effectively deal with online piracy and
create a safe online environment for electronic commerce.
·
Trademark and Counterfeiting Concerns
For branded products, trademark protection is crucial to maintaining
high-quality goods and services in order to build and strengthen customer
loyalty. Counterfeiting damages the
reputation of companies; compromises the safety and quality of products (which
affects Chinese as well as foreign consumers); results in the loss of tax
revenue to the government; and harms China’s reputation among foreign companies
as a desirable place to do business.
Another challenge faced by major U.S. brand holders is that China only
very rarely grants "Well Known" or "Famous Mark" status
under Article 6bis of the Paris Convention to non-Chinese
trademarks/brands. (This article
provides that contracting countries agree to refuse or invalidate a trademark
that creates confusion with a mark considered by the competent authority of the
country of registration to be well known as a mark of a national of another
contracting country.)
In
addition to an appropriate legal regime that guarantees trademark integrity, an
adequate IPR system must include an effective enforcement mechanism. Transparency is a vital component of this
mechanism. Transparency not only
increases the confidence that U.S. business has in the viability of the Chinese
market, it also decreases the opportunities for corruption.
The
following are examples of lack of transparency in the area of trademarks:
·
Bond Requirements:
When Chinese Customs authorities seize
counterfeit goods, the U.S. trademark holder is obligated to pay a bond. It is unclear how government officials
determine the amount of this bond. In
some cases, the amount must be negotiated with government officials. The amounts under consideration can be quite
substantial. In fact, they can be large
enough to preclude even major U.S. corporations from operating in the Chinese
market. Exporters need published
guidelines on the basis that Chinese government authorities use to calculate
such bond amounts. Clear, published
guidelines will provide certainty and will facilitate the financial planning
required to undertake commercial operations in the Chinese market.
·
Unexpected Storage Costs: U.S.
corporations are unexpectedly assessed fees for the storage of seized
counterfeit goods. As with the bond
amounts, there are no clear guidelines on the circumstances under which such
fees will be assessed, no prior arrangement for such assessments, and no
indication of when payment of such fees will be required. The imposition of uncertain storage fees
without prior notice or advance agreement undermines the ability of U.S.
business to address the Chinese domestic market effectively. Uniform requirements in a clear, published
form, are essential.
·
Patent Concerns
Although China has put into
place a legal and regulatory framework that is substantially in compliance with
TRIPS, implementation of those regulations is inadequate. Local public officials evince a stronger
interest in protecting their local economy than in policing IPRs and have been
known to act uncooperatively in patent infringement suits. Moreover, attempts to enforce patent rights
through patent administrative departments are largely ineffective because the
administrative agencies only have the power to stop infringements in their
local territories and because they act slowly, cannot collect damages and
suffer from a lack of transparency.
Enforcement actions through the court system are generally more
effective, but damages are not calculated in such a way as to compensate all
the actual expenses of a rightholder in stopping infringing acts. Procedures for evidence exchange where trade
secrets are alleged are not fully defined, and courts have referred matters to
appraisal panels without input from parties involved, despite the clear TRIPS
mandate that parties are entitled to see any evidence used to determine their
rights. A 2003 Chinese Supreme Court
case overturning a high court decision related to an appraisal conclusion based
on evidence withheld from the opposing party and holding that parties must have
an opportunity to review and challenge relevant underlying evidence, however,
may herald improvements in this regard.
Further, while patent
infringement is decided through the judicial process, patent validity is
decided at the Patent Reexamination Board (PRB) of the State Intellectual
Property Office (SIPO). While many
countries separate the infringement and validity determinations in a similar
way, the PRB has accepted challenges to validity based on arguments already
decided during the original patent examination process, and has permitted
multiple, simultaneous challenges by the same party, making enforcement and
defense of valid patent rights difficult.
Moreover, the PRB has improperly generated and applied its own
patentability standards that are more restrictive than those in the Chinese
Patent Law and Implementing Regulations.
USCIB
member Pfizer Inc. has recently had its patent on the use of the active
ingredient in Viagra invalidated in China.
The decision appears to create and impose standards of patentability
that are inconsistent with TRIPS Article 29.1. Moreover, this raises concerns
that limiting patentability in such a way subsequent to WTO entry is violative
of TRIPs Article 70.2.
The
use of the patent system to thwart originator-proprietary companies is also troubling. Some companies, including USCIB member
Baxter Healthcare, have faced the situation where a local manufacturer has
obtained patents on a foreign company's commercial products in addition to
knocking off the product. This has
caused the originator-proprietary company to expend time and money to
invalidate the pirate's patents. A
great deal of effort is required by the administrative agency to prove beyond
reasonable scope the invalidity of the patent.
As for design patents, some
infringers obtain a design patent registration based on a copied product
designed by utilizing the non-substantive examination system in China, and
insist the legality of their infringing conduct based on the invalid design
patent right, notwithstanding the existing procedures available to invalidate
such design patents. In regulated
product areas such as pharmaceuticals, there is no linkage between the
regulatory agency and the enforcement of patents. Thus, the State Food and Drug Agency approves generic versions of
patented medicines without regard to the patent protection that covers the
product.
Finally, the judicial
enforcement system lacks transparency.
All courts should follow the same rules and guidelines, and decisions
should be published so that companies can learn how the rules and guidelines
are implemented.
In addition to enforcement concerns, foreign companies
face impediments to technology licensing.
The “Regulations on Technology Import and Export Regulation” of January
1, 2002 define the procedures for technology licensing contracts between a
Chinese company and a foreign company.
There have been many criticisms, however, that these regulations impose
unfair burdens on foreign licensors, requiring them to make excessive
warranties.
·
Trade Secrets and Protection of Confidential Test Data
Enforcement of trade secrets is very difficult because
the evidentiary burden is very high, ability for discovery is minimal and local
protectionism can be a serious obstacle.
Foreign companies are often reluctant to transfer key trade secrets into
China because of the serious threat of misappropriation by competitors and
employees and the near impossibility of enforcement. The legal infrastructure for the enforcement of trade secrets
(including breaches of contracts including confidentiality provisions) needs to
be significantly strengthened. In
addition, although China’s State Drug Administration issued regulations to
implement China’s commitment to provide six years of data exclusivity pursuant
to TRIPS Article 39.3, protection of such data provided to the government from
‘unfair commercial use’ is inconsistent.
Conclusion
We appreciate the opportunity
to express our concerns about China’s intellectual property obligations and
trust they will be useful in the Administration’s on-going efforts to encourage
China’s improvement of intellectual property protection. USCIB stands ready to meet with U.S.
agencies to discuss our recommendations and concerns at greater length.
Yours truly,
