Enforcement The Main Problem of Intellectual Property Protection in China

By Harry Yang, China IP,[Comprehensive Reports]

Editor’s note:
    As the negotiations for the China-EU framework agreement on developing a new partnership and cooperation are speeding up, the communication between the two parties is increased. IP protection is one of the key points in the negotiation, and also, is the focal concern of the world. In order to help the readers better understand the China-EU communication on IP issues, China IP is interviewing IP officers and trade officers of the EU Committee and its Member States, and provide a series of reports to the readers.

    Mr. Thomas Pattloch used to work for the Max Planck Institute for Intellectual Property, Competition and Tax Law, where he joined the Asian Department. Afterwards he left the institute and came to Shanghai to work for the first German law firm in Shanghai. Mr. Pattloch worked there for almost three years and built up the law firm’s IP department. During that time he also held the Chair of the European Chamber’s IPR Working Group in Shanghai. He has been working in Beijing for the European Commission since April 2006 when he joined the Commission as the new Intellectual Property Officer.

    On January 9, 2007, we interviewed Mr. Thomas Pattloch, Intellectual Property Officer with the Delegation of the European Commission to China at the Beijing office of the European Commission to China.

    China IP: When and why was the position of the Intellectual Property Officer of the Delegation of the European Commission established?

    Thomas Pattloch: The position of the Intellectual property Officer is a rather new one. The problems of IP enforcement in China over the years have caused great concern for European industry. That is the reason why the European Commission decided to put a person on the ground here in China to learn more about the IP environment and problems of companies in this environment. As a result, this new position was created inside the trade section of the Delegation because intellectual property has a strong link with trade and is an important element of the trade relationship between countries or regions.

    The position itself has different functions. One function obviously is to help the Commission’s headquarters in Brussels to get a better understanding of the IP environment in China. This includes analyzing the IP situation and actions by the Chinese government, looking into new laws and regulations, explaining their impact, and consulting on any important IP-related matter to which the European Union should react. Further, to offer expertise on all questions which are related to intellectual property in China and which might influence Europe. That is my function in respect to the Brussels headquarters.
    I also relay and communicate messages coming from our headquarters to the Chinese side. The EU sustains an open line of communication with the Chinese government authorities to discuss various problems and to cooperate on certain projects such as technical assistance, or to talk about concrete cases with great importance either for the EU or for China. Thus the communication with the Chinese government is an important and strong element of my work.

    Another function is related to European right holders, especially with regard to those companies doing business directly in China through investment. They often find it quite difficult to understand the legal environment when it involves intellectual property. There are many different agencies, which are responsible for different types of intellectual property rights. There are different ways as to how you can enforce your rights. Some rights you must register. Other rights you may register. Some rights even require registration or approval, such as in case of acquiring rights in China through technology transfers. So there is a complex system of administration and judicial bodies, which for foreign companies, and especially for small and medium sized EU companies, is almost impossible to understand. My job therefore is also to help to create mechanisms and new tools for EU right holders to access the market, to understand it, and to find the right counterparts here in China to address their problems and wishes. Therefore the function is also in part a service function for our companies and for European citizens, who are in China and do business with China, and who feel that they have problems with IPR protection.

    China IP: In what ways are you conducting your work as Intellectual property Officer of the Delegation of the European Commission to China?

    Thomas Pattloch: Basically the efficiency of an IP Officer in China depends to a great extent on his ability to communicate directly with the stakeholders and on a regular basis with the Chinese government and related authorities. What we try to do is to offer a point of contact for the Chinese side and to deepen and continue the political dialogue, which on a formal level is held annually with the Chinese government within the framework of the so-called EU-China IP Dialogue. In between the formal encounters of the IP Dialogue there are additional IPR Working Groups involving industry and stakeholders twice a year. There is a need to link these formal communications and to cooperate more deeply with the Chinese side. My function is to facilitate this work.

    I also liaise with our EU member states because our European member states are, in a manner of speaking, the shareholders of the EU and its delegation. Member States often experience serious IP violations and are interested in actively addressing these problems. But they do not always have sufficient people on the ground to manage the task completely by themselves. So the European Union and the European Commission try to focus on their concerns, relay it and to communicate back what we have learnt from the Chinese side. We also cooperate with the Member States’ embassies and with the responsible Member States’ governments to help the voice of the member states be heard. We inform them about our own activities in China. We try to gather their input and their proposals in order to give EU policy a coherent direction and not to re-invent the wheel.

    We also observe and follow closely individual cases of exemplary character. Those are cases with a wider impact beyond the specific issue at stake, or cases where we feel that the conditions for a fair trial require our support. We hope to help and to sustain the process of further developing a sound judiciary system in China according to Chinese law. Where necessary we communicate and cooperate with our Chinese counterparts to see whether we can help to further push the task of the enforcement organs in China so that they can do their job.

    China IP: What are your opinions concerning IPR protection in China? In what ways do you think China should reinforce its IPR protection?

    Thomas Pattloch: First of all we have to acknowledge that the Chinese government has made tremendous efforts to address the problem, and continues to do so. That in and of itself, together with the official acknowledgement that there is a problem means progress.

    The EU always tries to support and sustain the development work on IPR protection in China. For example, in the recent past we had a large technical assistance support program called IPR I, which primarily aimed at helping in the process of drafting new IP legislation in China. This project was completed in 2003. As a result, we have seen substantial progress on the legislative side. We have witnessed that several urgent issues have been addressed by new legislation and that several amendments of the IP laws have been undertaken to further modernize the Chinese IP law. 

     I also think that other efforts are being made. The Chinese government each year in the recent past has initiated enforcement campaigns, which increase in intensity year after year. The Chinese leadership, in the year 2006 for the first time ever has openly and clearly discussed the problem of IP protection in China on the highest government level in a very transparent and very communicative way. These are all hopeful signs when you look at the urgent complaints from the other side, which still ring loud and clear, and which the European Commission and many of its Member States and EU companies and investors in China share.

    The problem is still the enforcement of the above-mentioned laws and regulations on the ground. And this situation at the grass root level also involves the resources that are dedicated to enforcement. There are insufficient people in many agencies to actually enforce all the laws and take action against all the infringements occurring throughout the country. One example in place is copyright protection. There are far less than 1,000 officials throughout all of China, a country with 1.3 billion people, who actually deal with all the copyright issues, not only those involving enforcement. This shows clearly that if you want administrative authorities to act on your behalf and to enforce the law they might quickly reach the end of their capacity.

    There are other problems as well: different IP agencies competing with each other; sometimes contradictory or ambiguous law that needs clarification; and sometimes local protectionism. All these problems have not gone away. To some extent they have even become worse due to the increased pressures in the regions to find their own sources of income, i.e. to attract investment and to create jobs. So what we see now here in China is a mixed picture. From the outside, especially on the central government level, you see the first signs of a turnaround when it comes to addressing the problem of IP protection in China. But inside on the regional level, in the provinces, this picture does not match and IP protection becomes far more critical. Many laws and regulations are unenforceable or judgments are not enforced because the authorities are reluctant to take action due to the feared impact on the local economy, political pressure, corruption or other reasons.

    Another problem is that powerful political institutions might have interests in certain industry sectors, which collide with those of the foreign investors and the protection of their intellectual property. This problem is not peculiar to China. This is something which you will find anywhere in the world. The important question from an EU point of view is rather whether these conflicts are solved in a fair and transparent manner, and with respect for the property of others. This is by no means irrelevant. The manner and conduct in which these conflicts are resolved are important indicators of a mature and fair partnership between the EU and China. And they determine China’s further success in the future. China should always ask herself: When you look at the measures and decisions taken, will they be sufficiently efficient, balanced and fair to sustain economic growth, to support innovation and innovative qualities? Will China’s IP laws enable China to build up a modern economy, which is truly based on knowledge and innovation? Or will it lead to calls in the Western world to exclude China from still needed Western technology? Will it discourage Chinese inventors and creators from achieving important contributions to build China’s future?

    When you look at China nowadays you’ll find that the speed of economic development contributes to the scope of the problem of IP protection. Nowadays everyone in China has more opportunities to get access to the international markets than previously. As a result, today there are more people engaged in trade. In some cases and in some regions the easiest way to do business is by counterfeiting. Because, when you counterfeit, you take virtually no business risks: You make products which consumers and purchasers will definitely buy. You have no costs for advertisements, and no costs for compliance with labor laws or other regulations. You may use very cheap and shoddy substances. The profit margin for counterfeited goods often is as high as in the drug trade. Further, many Chinese industries are not yet developed enough to produce high end, high value high-tech products completely on their own. Under these circumstances you are more prone to try to enter into businesses involved in IP infringement. All these factors contribute to the attractiveness of the counterfeiting businesses, and have contributed to the difficulties in China to actually create legal industries with their own homegrown IP. Only if you have invented your own products and then try to bring them to the market, will you actually have the natural interest to protect it.

     Summing up, I think that efforts undertaken by the Chinese government deserve praise and we support these efforts strongly. But China still has a long way to go. The EU is ready to support China in doing that.

    China IP: You have said China’s IP legislation is already quite good, but the main problem lies in enforcement. Do you have any concrete suggestions?

    Thomas Pattloch: There are different aspects to consider. Enforcement is the biggest problem in China. It is also a problem in many other countries in the world. This has to do with acceptance of intellectual property as such by businesses and by citizens. It is important to understand that other parties can own intangible property. So when you buy a fake DVD or you illegally download a movie or song from the Internet, it involves a kind of theft of property. This idea has not yet reached the average consumer. Using counterfeited goods or downloading illegal content from the Internet is not regarded as being the same as a theft of a bicycle. Most consumers nowadays may know that its illegal, but they don’t care. It’s a matter of awareness.

    The government needs to communicate to the Chinese people that IP enforcement is not something brought in from outside to control Chinese society and to keep Chinese society from progressing. It is rather like your own grain that you plant in the ground which will grow and later enable you to harvest, to become richer, to become better educated, and to have a better life for all consumers. Therefore, the perception of the IP system must be changed, and IP must be seen as one of the normal parts of doing business. This can be done via the educational system, on TV and in other media, and via campaigns, which educate, but also prosecute IP infringement. This is one side of the problem.

    The other side of the problem is even more important: So far the scope and existence of an “IP problem” in China is also not yet really a major concern for Chinese officials and Chinese enforcement agencies. In practice, one will still have little trouble in brushing aside a case of open and clear infringement right before the eyes of the authorities if deemed convenient. There is still a strong lack of recognition of the importance of more action, regardless of whether this is deemed to be troublesome or not. Sanctions for passiveness and inactivity must be dealt with much more strongly for those inside the system who do not sufficiently support the efforts of the central government.

    The pressure on China to do more on IP has increased, but in fact existing administrative abilities are also insufficient in light of the scope of the problem. China has started to do more and to train officials to act. But much more training is required. This January the European Union signed a new technical cooperation program with China called IPR II. The EU will assist in further training and building up institutions, capacities, and bringing European knowledge to China to help to build a safe legal environment for future business.

    Also, China needs to do more when it comes to the number of officials doing the enforcement work. There are many officers that need a very good support system, a system for monitoring problems on the ground to improve the situation. I think in this regard the first step is accomplished by creating 50 IP complaint centers throughout the country. But this step also has to be followed by more manpower, and more resources for IP enforcement agencies.

    I think also that it is extremely important to work together with right holders and increase transparency.

    China IP:China’s central government supports IPR protection. The main problem lies in local protectionism. The Chinese cannot solve the problem themselves. Even the orders from the central government cannot be enforced properly, let alone the pressure from Europe. The local governments consider it less important. This problem is difficult to resolve.

    Thomas Pattloch: I think one way that we can help the Chinese government and all the IPR protection agencies is to make it more transparent by identifying the specific local areas where IPR is not properly enforced, such as by creating a public ranking of IP protection in the provinces The results should be available to all EU Member States and the general public inside and outside of China. This approach builds on transparency and publicly available data. We should ask for the cooperation of the Chinese central government and tell them the experience of European companies and investors in problematic areas. The pressure from outside can thereby support the Chinese central government. We would need to take action as quickly as possible because it is not something that can be realized in a short time.

    China IP: One of the main points of the report titled “Integrating Intellectual property Rights and Development Policy” published by Commission on Intellectual Property Rights in Britain is that the ultimate purpose of IPR protection is no longer to encourage innovation or creation, but to protect the monopoly or interests of commercial giants, and to counteract the spread of knowledge; and thus has a detrimental influence to the spread of technologies, and also restricts creative activity. What is your comment on this point?

    Thomas Pattloch: These arguments are not new. There exists a long and intense debate on how you can improve the intellectual property system and still encourage innovation, bring benefit to the people, and help the economy to develop. So far there is no scientific proof that IP systems are absolutely necessary for stronger economic growth. However, there are a couple of studies which show that business confidence is negatively affected and that innovators are strongly influenced psychologically if no IP system exists. Consequently, the willingness and ability of innovators to invest and bring new products to the markets is strongly affected. In practice one can also observe an interesting correlation between the degree of economic development and the scope of intellectual property rights granted.

     I believe that one basic question when it comes to intellectual property is whether its creation and use is good for the economy or not. In the early years of the PRC, property as such was regarded in a more critical manner than it is today. With the new perception of property rights economic growth has returned and China has become the economic powerhouse of the world, but not yet a leader for hi-tech in the world market. Today, the discussions in China are more focused on intangible rather than tangible property. It remains to be seen how China will treat this kind of property in the future.

     But also many developed countries face different opinions as to whether and how intellectual property should exist. The objective is always to have a creative society, to give inventors a chance to invent new technology and bring it to the market. At the same time the means and manner in which you achieve this kind of creative environment must also be beneficial for consumers and citizens.

     I believe that it is a gross exaggeration to say IP protection is just for pure monopolists as your question states. Maybe we have to put a name to these monopolies and enter into more specific discussions in order to make sure that IP protection doesn’t lead to monopolies beyond the intended content of the intellectual property.

     China IP: Maybe I should use the word “commercial giants” instead of “monopoly”.

     Thomas Pattloch: “Commercial giants” is a too general term to use in this discussion.

     When you want to evaluate whether an IP system benefits China or other developing countries you have to look at the objectives of the IP system, i.e. to achieve economic growth and create jobs and innovation. It does not so much depend on whether this is done by commercial giants or SMEs. Let me give you an example of an industry, which knows many commercial giants: the movie industry. Take the Chinese movie industry. It is a growing industry, and extremely promising. But most Chinese directors and producers are afraid of shooting their movies in China because of the lack of IP protection. So they prefer to go to Hong Kong or abroad. This shows that actually you drive creative minds out of the country if you don’t have an environment for protecting IP.

     Another example is the pharmaceutical industry: Why would you expect that a company investing millions of Yuan to develop a new medicine should not be protected for its efforts? New medicines are quite easy to analyze. You can take it to the lab and in most cases will then know the precise ingredients. So you are vulnerable as an innovator and only obtain protection through special rights such as patents. If there were no protection for the innovating company, all the risks taken would not be compensated for. In the long run, I doubt that we would see new medicines.

     On the other hand, what about the limits of protection, for example, a right of fair use for consumers regarding copyright, or access to medicines for poorer countries? Where is the end of the scope of protection? The fair balance between the right holders’ interest and the consumers is actually the most important factor to judge the question put forward by the study of the Commission on Intellectual Property Rights It’s not a question of whether you need protection or not. You do need protection to help foster innovation. The question is where the scope of the protection should end. This is the question I have.

    China IP: As for China do you think China should have as strict a legal system as developed countries? Or China should protect their IP in a slightly different manner?

    Thomas Pattloch: I think first of all China is a WTO member, and within WTO the TRIPs Agreement (Agreement on Trade-Related Aspects of Intellectual Property Rights) is a very important part of the WTO framework. This Agreement guarantees a very important minimum standard, which most developing and developed countries by acceding to the WTO have agreed to. First of course, China should always be in compliance with the requirements of TRIPs.

     Then it is up to the judgment of the Chinese government to determine which areas need even stronger protection, for example because of problems which are peculiar to the special situation in China. In this respect, there are many voices in China stressing that “China has done enough or even too much”. The background of these opinions is that IP is seen as only beneficial for foreigners and not so much for the Chinese. But this attitude most certainly is wrong and distorted.

     Let me clarify this with an example: Today in many industries we find many look-alikes in China. Most often these are slavish imitations of foreign products or Chinese original products copying another company’s products. This type of behavior in most cases is not competition but is mere imitation. Unless there is a design patent to protect the outer appearance of the goods copied, there is very little the original producer can do in opposition to it, due to a very weak Anti-Unfair Competition Law. And even Patent Law or Copyright Law contains loopholes and insufficient legal remedies. On top of it, this type of imitation in China today is culturally speaking not regarded as something negative. Some may argue that imitation actually helps the originator to make his product well known - an argument which Western companies can hardly follow.

     To enter into competition in the same market is one thing, but when you have enterprises only imitating other enterprises by copying them, it does not involve creation and brings no added value to the economy. It is an attempt to free ride on the goodwill of others. This kind of behavior is hurting China, its image, as well as its economy, and of course its consumers.

     Some argue that this is a necessary stage for China to acquire know-how and expertise. Japan has gone through the same stage in the past, as well as South Korea. By imitating a product, one will naturally gain valuable knowledge as to how to produce it and how to make it competitive. The fact remains that this know-how in most cases is acquired illegally or at least unfairly. I don’t know how Chinese companies would feel if they encountered the same scope and degree of imitation in the West. Would they say it is acceptable in turn, just because the West claims to need it? I believe that there are other ways to solve the problem of technology transfers and accumulation of know-how in China. It is certainly not enough to simply state that this is what is necessary and proceed with it.

     There are also losses for China by allowing the system to continue into this direction. China may gain market share now, especially in lower-end markets, but China will delay the maturing of its own industries. Consumers trying to buy original products are deceived. Quality problems are always an issue, especially with consumer products. Sometimes health-related concerns make this industry dangerous, if we think about alcohol beverages such as Scotch Whiskey, or brakes for cars. Buyers of counterfeited goods often support organized crime and money laundering of drug money. You may even unwillingly support child labor. Tax revenue is lost on illegal business. And so on.

     On a macroeconomic level, as long as people can make easy money from counterfeiting, there is no need for them to build up an industry capable enough to develop innovative products on their own. Legal business is inhibited or even made almost impossible. On the contrary, if you enforce IP you will find that you create opportunities for new business types which are much more profitable and much better for China in the long run than the counterfeiting business.

     The EU is currently strengthening its IP system, especially on the enforcement side. A directive on enforcement has been issued. Also, a proposal is under way to harmonize the criminalization of IP infringement. This is driven by the realization that more protection can help Europe rather than by doing nothing or only requiring the minimum standards.

     The people saying it is not necessary for China to be as strict as the EU or other countries say China should strive to have its own Chinese way of doing things. I don’t oppose the Chinese way. I think it’s a good thing to find your own way. But it’s a bad thing if you take experiences you learn from others, and use them to your own advantage.

     So I believe that for China, it’s not the right attitude to say we need a very low standard, and we have done too much for IP protection. I think China should look at its need to develop industries, which are truly competitive. This cannot be done over night. China can only achieve this through cooperation. And China can only develop industries in a fair way with partners who have knowledge and are willing to share it. European companies are willing to share their know-how and expertise if it is ensured that they can protect what it is their own. They are willing to transfer it to China and work together with Chinese partners in a safe environment. This is what China actually needs, not a nationalistic simplified approach of resentment and “going it alone”.

    China IP:  I heard that an engineer who works in Zhongguancun (“Silicon Valley” in China) said that all the software he uses is copyrighted. And so far he has spent more than 100,000 yuan for this. Then do you think it’s realistic for all Chinese to use these copyrighted products? They are so expensive compared with the income of ordinary Chinese.

    Thomas Pattloch: You are right that average Chinese will not be able to afford 100,000 Yuan. You are also right to say that this engineer is using all this kind of software, which is worth 100,000 Yuan. There are two sides to the problem.

    First of all the right owners must think of feasible and realistic prices for their products. Otherwise nobody will be able to buy it. Some people use the prohibitively high cost of products they want to buy as an excuse, saying that “if you had made them cheaper I would have bought the real one”. But if it is too expensive I may obtain it another way. So they buy illegal copies. I disagree with this kind of attitude: It only takes into account the appetite of the user. I myself also live in Europe. And I would like to drive a very beautiful Mercedes Benz car. In my home country Germany there are Mercedes Benz cars everywhere, and many people are driving them. But I myself cannot afford one. Therefore do I have the right to steal a Mercedes Benz or buy a counterfeited Mercedes Benz just because I can’t afford it? Of course not. If I can’t afford to buy it I shouldn’t own it. The problem will solve itself through the market. If the existing market players cannot provide software cheap enough, new opportunities open up for other players and providers. The consumer can force down prices by choosing competition.

    This is now a simplification of the underlying argument. But it shows you that you cannot always justify stealing something because it is too expensive to buy. There may be cases, such as medicines that you need for health reasons, where access is required for other reasons than just “I want to have it, too”. For medicines in my view it is unreasonable to try to create a market where people don’t have enough money to but it and suffer instead. This is not the right way to make big money.

     From many products, especially for consumer products, which are luxury goods under a famous trademark in China, no one really should feel obliged to buy it. And there’s no valid argument to say “I want to have it, but I cannot afford it. So I will obtain it by any means.” That’s simply wrong.

     China IP:Many factories that produced pirated DVD’s have been investigated and seized in Guangdong Province. It was found that European or Japanese companies provide most of the machines used for the production of pirated DVD’s. The Chinese government hopes that companies in Europe will no longer sell these machines to pirate makers. What’s your opinion on this matter?

    Thomas Pattloch: If the European or Japanese companies knowingly sold their machines to non-registered illegal enterprises involved in production of copyright protected material, they could be liable for aiding and abetting of copyright infringement, and could be sued in Europe. But in reality the sellers won’t care or know who the buyers are and what they will produce. For the right holders it usually will not be possible to prove their knowledge. And for the producer the payment for the machine will matter most. In some cases the buyer may also provide false certifications and wrong information to the manufacturer, should it decide to inquire.

     The way I recommend to solve this problem is for stronger control of the industry in China. Import of these machines should require special approval with a traceable registration for the specific machine. Only factories with permission from the Chinese government should be allowed to own any CD/DVD production line in China, and the permission should be searchable on the Internet. Violations should automatically lead to criminal sanctions.

     China IP: This year Mr. Mandelson visited China, and he said that IPR protection is the key to the economic relationship between China and Europe, and also the core of retail marketing. Why?

     Thomas Pattloch: IP is one of the important main factors for competitiveness, among others such as knowledge or innovation. Mr. Mandelson has pointed out that the EU is concerned that unless there is a level playing field between China and the EU with respect to IPR protection, it will be very difficult to further improve the relationship between China and the EU. IP protection is a key element for EU products and services. This is why the EU needs open recognition and acknowledgement by its trading partners.

    The retail markets in China (often dubbed “Fake Markets”) are one important example of this problem. When you can find copies in certain markets in the heart of Beijing of any major European luxury brand with no difficulty, it is indeed very troublesome for the EU and its companies. This is something that the EU cannot tolerate. And China will have difficulties claiming that we’re making progress on this issue if it still has symbols of IP infringement at the heart of its capital close to the major officers and close to the central government.

    This is one of the major reasons why Mr. Mandelson has conveyed his message that the IP issue is fundamental for the competitiveness of Europe, fundamental to a good relationship with China, and also fundamental for enabling China to grow its legal businesses. Thus we believe that we need to do much more together with China to make progress on this issue.

    China IP:What will the EU do if it loses confidence and patience?

    Thomas Pattloch: The problem we are facing is very serious. Many European companies have the feeling that to invest in China is really too dangerous, and that China is a lost case. As a result, China loses necessary technology transfers from Europe to China. This already hinders the development of China, and to some extent it will hinder the development of Europe as well.

    The EU has ways to defend against improper violation of China’s obligations under WTO, but does not want to lose confidence or patience with China, provided China continues to further increase its efforts. The EU wants to cooperate with China in this matter and solve the problems through intensive cooperation, better understanding and more communication.



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