China Pirates Intellectual Property

August 8, 2003
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GRAND RAPIDS — Nothing is sacred in China when it comes to intellectual property.

Trademark piracy and product counterfeiting in China is a $20 billion to $25 billion industry, according to the State Council Development and Research Center of China.

China consistently ranks No. 1 on the U.S. Customs’ list of intellectual property seizures. China, Taiwan and Hong Kong, in fact, constitute 80 percent of all Customs’ seizures, noted Susan Tong, an international trade specialist with the U.S. Department of Commerce’s International Trade Administration.

Today China is the fifth largest trading nation and also the world’s fastest growing manufacturing hub, Tong told a group of 60 to 70 business people at a recent presentation sponsored by Warner Norcross & Judd.

China became the world’s capital of IPR infringement because of its rapid economic growth and subsequent rise in consumer wealth. Brand awareness, particularly the awareness of foreign brands, was a contributing factor, Tong said.

In the early 1980s when China’s economy was basically closed to the outside world, piracy and counterfeiting barely existed, she observed. But as its economy slowly opened in the early 1990s, there was dramatic rise in the production of counterfeited and pirated goods for sale in China as well as to other countries.

“We believe IPR violations will get worse before we see any improvements,” Tong said.

In China laws are enacted at the central level and enforced at the local level, she explained. Barriers to effective IPR enforcement include local protectionism, bureaucratic rivalries, lack of adequate sanctions and criminal prosecutions and limited enforcement resources.

Two options are available to halt imports of infringed goods: U.S. International Trade Commission Section 337 procedures and the authority of U.S. Customs and Border Protection to seize goods entering the United States.

The U.S. Department of Commerce and the commerce department in China can offer some assistance, too, Tong added, but the problem is that intellectual property rights are private rights and the U.S. government only has a limited role in enforcing them.

A lot of people in China think that infringement issues are somewhat victimless, said Mark Allen Cohen, an attorney-adviser in the Office of Enforcement of the U.S. Patent and Trademark Office.

“The fact is this is not victimless,” he said. “If you go up the line of distribution, you frequently find organized crime and sometimes you’ll find terrorist activity. Organized criminal links are behind a lot of this.”

Software designers, musicians and movie producers are major victims of China’s poor IPR enforcement system, he said.

IPR infringement cases in China can be pursued through administrative, civil and criminal litigation, the latter of which is virtually non-existent, Cohen said. The volume of administrative litigation far exceeds civil litigation. He estimates that 75,000 or more administrative IPR cases are pursued each year.

A U.S. company has to have Chinese patents in China in order to protect its products, and there’s an international procedure for filing patents in multiple jurisdictions in China. Patents can help protect against claims of infringement by others as well, Cohen pointed out.

He encourages U.S. companies to develop an IP strategy. Patents, trade secrets, trademarks and copyrights all are part of the overall business strategy to ensure that intellectual property isn’t stolen.

Although IPR conditions in China are dismal right now, Cohen said there are a lot of indications that those conditions could change.

“There’s increased interest by the Chinese, on a national level, about better IPR enforcement. They recognize enforcement is a problem. I think that intellectual property is increasingly becoming a strategic element for China.”

The Chinese market is huge and getting bigger, and as soon as a product hits the street it’s copied, said Ray Wood, a senior patent counsel at Warner Norcross & Judd.

Don’t wait. Get involved now, because it takes time to lay out the IP groundwork, he advised.

“Plan, plan, plan. Start before you get to China. Don’t wait until after you’re already there and selling the product. They’re going to steal it, therefore you’ve got to plan for it.”

How much is the company willing to pay for its IP rights and how much is it going to allocate to enforcement? The company has to develop a budget as well as a strategy for handling problems in China, Wood said.

He recommends a multifaceted approach that includes copyrights, trademarks, patents and trade secrets.

“Use all of them when you’re there. You don’t know which one’s going to work, you don’t know which one’s going to stick. We don’t know how Chinese law is going to develop. Try to use different methods of protecting your intellectual property.”

He stressed the need for companies to develop local contacts and follow local events because most laws are enforced at the local level. A company also should actively participate in the legal system and develop contacts among lawyers and people in the local trademark and patent offices, he said.

Don’t bribe, Wood warned. It’s a criminal violation in both the United States and China to bribe.

“It’s also just plain wrong. What China is trying to do and what the United States wants is for China to have a nice clean legal system that’s very effective and clean of graft and corruption. We can’t have bribes if we’re going to achieve that result.”

A company is not always going to get what it wants, but it has to be persistent, Wood said.

“Let people know you’re there and you’re not going to leave. Be there for the long haul and don’t give up.”    

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