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TWN Info Service on WTO and Trade Issues (Feb09/05)
10 February 2009
Third World Network

Trade: Panel decision on IP case favourable to China, say experts
Published in SUNS #6634 dated 6 February 2009

Geneva, 5 Feb (Sanya Reid Smith) -- The World Trade Organization on 26 January issued a panel report in a case brought by the US challenging China's enforcement of intellectual property rights. While the case has been commonly reported as a victory for the US, careful and detailed analysis of the panel ruling indicates that China's intellectual property laws have been vindicated in the most important areas that were disputed.

Experts have actually characterized it as a loss for the US. University of Ottawa law professor Dr. Michael Geist said that "the headlines get it wrong. The US did not win this case, but rather lost badly".

Dr. Geist added that "two more important issues [border measures and criminal thresholds] were near total losses for the US... The Chinese IP enforcement system, which sets a minimum threshold for criminal enforcement, was a huge issue for the US and it lost badly on it... This represents a major loss for the United States as well as for countries such as Canada that supported the US in the case."

Similarly, a WTO delegate who is an expert on intellectual property characterized it as a "good win for China".

[The US won two out of its 11 claims and in a third claim, it succeeded for two out of five types of works. Furthermore, in four out of the five areas where the Panel exercised judicial economy, it appeared to be leaning towards China's submissions.]

Mr. Yao Jian, spokesman of the Ministry of Commerce of China, commented that "China welcomed the ruling of the Report that the US had not established that the criminal thresholds were inconsistent with China's obligations under the TRIPS Agreement." He noted that China "is making a further assessment of the DSB panel report."

The Parties have 60 days to lodge an appeal.

Argentina, Australia, Brazil, Canada, the European Communities, India, Japan, Korea, Mexico, Chinese Taipei, Thailand and Turkey reserved their rights to participate in the Panel proceedings as third parties.

The panel report analysed three main areas of China's intellectual property law that were challenged by the US as not complying with China's IP obligations under the WTO's TRIPS Agreement. The first was an allegation that Chinese law did not provide copyright protection to works that are censored in China. The second group of claims concerns the way that Chinese law deals with products that have been confiscated because they infringe IP rights ("customs measures"). The last area relates to whether Chinese law sufficiently criminalizes small-scale copyright and trademark infringement ("criminal thresholds").

The US also abandoned some of its claims, such as that China treated its authors more favourably than foreign authors in the area of protection and enforcement of copyright.

The US's first area of complaint involved the copyright status of the small percentage of works (such as books and paintings) that are censored each year in China. The US argued that China did not provide copyright protection to censored works because Article 4 of the Chinese Copyright Law states that: "Works the publication and/or dissemination of which are prohibited by law shall not be protected by this Law."

(China pointed out that its censorship removes banned content from the public domain more securely than would be possible through copyright enforcement. So, if prohibiting infringements is the goal, censorship does this even more effectively than copyright enforcement. Therefore, copyright enforcement is meaningless in this context and this Chinese provision has negligible implications in the marketplace and in terms of any nullification or impairment of benefits to WTO Members.)

[Although censorship is permitted by the TRIPS agreement, censored works must still receive copyright protection, unless it satisfies one of the exceptions in TRIPS.]

The Panel found that Article 4 of the Chinese Copyright Law was sufficiently clear, on its face, to show that it denies copyright protection to certain works and even if the measure in question has had no actual impact on foreign works to date, it has a potential impact on works of WTO Member nationals, so is inconsistent with TRIPS. However, of the five possible types of works that the Panel investigated, it found that only two types were actually denied copyright protection and thus China's Copyright Law did not fulfil its TRIPS obligation to protect the copyright in these censored works, and it also did not meet its TRIPS enforcement requirements with respect to this small category of censored works.

On another related point, the US also argued that China's denial of copyright to censored works violated the Berne Convention provision (incorporated in TRIPS) that copyright be given without any formalities (because it required works to pass content review before they could get copyright protection, according to the US). The Panel exercised judicial economy on this.

With regard to the second group of claims concerning customs measures, Articles 46 and 59 of TRIPS requires authorities to have the power to order that goods that they have found to be infringing IP, be without compensation of any sort, disposed of outside the channels of commerce in such a manner as to avoid any harm caused to the right holder, or, unless this would be contrary to existing constitutional requirements, destroyed. For counterfeit trademark goods, TRIPS specifies that the simple removal of the trademark unlawfully affixed is not sufficient, other than in exceptional cases, to permit release of the goods into the channels of commerce.

China's law on customs measures provides the disposal of infringing products in any of the following ways: (a) give to charities to use for public welfare (with Customs carrying out the necessary supervision); (b) selling to the IP holder; ( c) auctioning the products (after all, intellectual property rights infringing features have been removed and with a minimum price to ensure that the infringer cannot buy them back at a price cheap enough to put them on the market again) with the proceeds going to the state treasury; and (d) destruction.

The Panel observed that Chinese "statistics show that, in practice, over half of infringing goods seized by Customs in terms of value are in fact destroyed" (the remainder of infringing imports confiscated between 2005 and 2007 were donated to the Red Cross Society of China). The Panel noted that in that period, no infringing imports were auctioned. The Panel pointed out that in fact China's law was stronger than the TRIPS agreement as its provisions on customs measures applies to trademark, copyright and related rights and patents, both for import and export.

The Panel found that Article 59 (first sentence) of TRIPS only obliges competent authorities to have the authority to be able to make certain orders (destruction or disposal). It added that the competent authorities could make other orders besides the destruction and disposal of the infringing goods. The Panel disagreed with European Communities' submission that all remedies must be "in such a manner as to avoid any harm caused to the right holder" (found in Article 46 of TRIPS) and said that the phrase was only applicable when the infringing products were disposed outside the channels of commerce.

In interpreting "outside the channels of commerce", the Panel found that "if the social welfare bodies later sell goods donated to them by Customs for charitable distribution, even to raise money for charitable aims, the goods are not in fact disposed of outside the channels of commerce but into the channels of commerce."

The Panel further found that if social welfare bodies charitably distribute goods donated to them by Customs but the goods later find their way back into the channels of commerce, this does not alter the fact that the goods were disposed outside the channels of commerce, in the ordinary sense of "disposal". The later sale of the distributed goods is relevant to the assessment of whether the disposal outside the channels of commerce was "in such a manner so as to avoid any harm caused to the right holder", the panel added.

When interpreting "in such a manner so as to avoid any harm caused to the right holder", the Panel stated that disposal of infringing goods outside the channels of commerce, in context, is an alternative to destruction of the goods. In the Panel's view, this implies that any inherent risk of harm due simply to the fact that the goods have not been completely destroyed is insufficient to disqualify a disposal method, as it would nullify the choice between disposal and destruction. The Panel went on to point out that this shows that when goods are disposed of outside the channels of commerce, it is not assumed that the removal of the trademark is required.

The US pointed out that the Chinese measures applied to both imports and exports. However, when questioned by the Panel, the US stated that it "takes no position" as to whether the first sentence of Article 59 of TRIPS (that competent authorities must be able to order the destruction or disposal of infringing goods in accordance with Article 46) also applies to goods destined for export. The Panel found that this provision does not apply to goods destined for export.

The US tried to argue that defective or dangerous counterfeit goods could damage the right holder's reputation or expose it to claims of compensation and that this would constitute harm to the right-holder. However, the Panel found no evidence that Customs would or could donate defective or dangerous goods to charity (Chinese law requires the confiscated goods to be used for social public welfare and it cannot be to the detriment of public interest), and so rejected the US's claim.

The Panel stressed its finding that "any inherent risk of harm due simply to the fact that the goods have not been completely destroyed is insufficient to disqualify a disposal method, and that evidence of actual harm caused to the right holder by the manner of disposal could be relevant in assessing whether the manner of disposal conforms to this principle." The Panel went on to note that "goods donated by Customs to the Red Cross are not distributed in ordinary circumstances" and that the Red Cross distributes donated goods itself, outside the channels of commerce, including in disaster relief projects, where it cannot simply be assumed that the recipients are misled as to the origin of the goods or that the recipients are potential consumers of the genuine goods.

The purposes of the Red Cross and the circumstances in which it may use goods donated by Customs form part of the legal structure bearing on the "manner" of disposal of infringing goods by Customs, the panel added. It further said that there was no evidence to suggest that any harm had ever been caused, or is likely to be caused, to right holders' reputations due to donation of infringing goods under the measures at issue and that in fact the evidence shows that two internationally famous right holders have actually participated in the distribution by the Red Cross of goods that infringed their rights, suggesting that they do not presume that donation of infringing goods harms their reputation.

The Panel concluded that it had not been demonstrated that Customs lacks authority to donate goods to social welfare bodies in such a manner as to avoid any harm to the right holder caused by lower quality goods.

The US next tried to argue in eight different ways that infringing goods donated to charities by customs could be sold back into the channels of commerce. The Panel rejected all of the arguments.

[The case brought into sharp relief the context in which developing countries are trying to balance the rights of producers and users of intellectual property and their development needs while complying with their TRIPS obligations. For example, the Red Cross, the only social welfare body in China that received donations of infringing goods destined for importation, distributed trademark infringing products such as noodles and kerosene heaters to victims of natural disasters such as typhoons and floods. The US attacked a sensible Chinese provision which provides that "Where the property donated is not preservable or transportable or exceeds the actual need, the donee may sell it, but all the income therefrom shall be used towards the aim of the donation." However, the Panel found that "the United States' assertions with respect to the collective construction of these two laws and a specific contract constitute mere speculation and the evidence on the record is wholly inadequate to form any view" (as to whether this could allow the infringing goods back into the channels of commerce) and so it rejected this US claim as well.]

In the situation where counterfeit trademark goods are being released into the channels of commerce, TRIPS requires more than the simple removal of the trademark, except in exceptional cases. In this regard, the Panel found that China's law did not comply with this TRIPS requirement.

The US's third area of argument was with respect to China's provision of criminal thresholds. There were three main claims in this area.

The first claim was that China's laws did not "provide for criminal procedures and penalties to be applied at least in cases of wilful trademark counterfeiting or copyright piracy on a commercial scale" as Article 61 of TRIPS requires. (The Panel noted that "wilful" and "on a commercial scale" appear to apply to both "trademark counterfeiting" and "copyright piracy"). The US argued this in two ways. The first was that China's thresholds are too high; the second was that the tests are too narrow.

In interpreting "commercial scale", the Panel considered the definition proposed by the US to be unsatisfactory, as it seemed to equate "commercial scale" with merely "commercial", not a term used in TRIPS. The Panel noted that in negotiations of TRIPS, the US had proposed using "commercial" but this wording was rejected. The US then argued that "commercial scale" means "seriously" or "genuinely" engaged in pursuing financial gain.

The Panel also rejected this argument. It said that it understood the term "commercial scale" to exclude trivial or de minimis activities. The Panel pointed out that where the negotiators intended de minimis, they used different language, which indicates that here they intended something other than de minimis. The Panel found that the US's proposal reads the word "scale" down to such an extent that it lacks the significance that the negotiators evidently intended, further adding that the term "seriously" is not used in TRIPS.

According to the Panel, the EC proposal in 1989 was the first to use the words "on a commercial scale", but "The records of the TRIPS negotiations do not disclose any discussion of the meaning of the phrase on a commercial scale'". The EC, responding to the Panel query, said that: "In spite of intense research, the European Communities has not been able to find any trace that the phrase on a commercial scale' in the EC proposal of 30 May 1989 was sourced from another instrument."

The Panel also said that for the US to succeed in its claim that China's thresholds are too high, it needs to provide quantitative evidence. The evidence the US provided in support of its assertion was a quote from a short article from a US newspaper regarding the number of stores in a particular mall in Yiwu and the physical dimensions of some stalls, a statistic quoted from an extract from a management consultant report and a quote from an article in Time magazine about a shopping mall in Luohu that spans six floors of small stores.

The Panel noted that "commercial scale" varies not only by market but also by product within the same market, adding that the evidence presented by the US was too little and too random to demonstrate a level that constitutes a commercial scale for any product in China.

The US then submitted other press articles which it said contained information which was "drawn from a variety of well-established and well-regarded sources".

However, the Panel found that none of them were corroborated and that most of the articles were anecdotal with some repeating casual remarks about prices of fake goods, anonymous statements or speculation. They have titles including "Fake Pens Write Their Own Ticket", "Chasing copycats in a tiger economy", "Hollywood takes on fake Chinese DVDs", "Film not out yet on DVD? You can find it in China" and "Inside China's teeming world of fake goods". Most of the press articles are printed in the US or other foreign English-language media that are not claimed to be authoritative sources of information on prices and markets in China.

The panel noted that there were four press articles from Chinese sources, one from Xinhua News Agency and three from the English-language China Daily. Two were quoted simply to demonstrate the existence of certain goods in China; another quotes a vague statement from unnamed "market insiders" on how illegal publishers tend to work; and the other quotes an "insider" for the maximum and minimum prices of a range of pirated and genuine goods. One other alleged "recent news account" is not attributed to any source at all. The Panel found that "the information that these press articles contain is inadequate to demonstrate what is typical or usual in China for the purposes of the relevant treaty obligation."

By comparison, China supplied official statistics from its Economic Census that showed that China's "illegal business operation volume threshold for counterfeiting one registered trademark is equivalent to 0.41% of the average annual revenue of enterprises engaged in light industry; 0.8% of the average annual revenue of small-size enterprises; and 0.84% of the average revenue of Chinese retail businesses."

The Panel noted that "There is no indication that probative evidence on this point would be difficult to obtain" and gave examples of evidence in the US exhibits that the US did not refer to in its submissions. However, it went on to conclude that "The information in the exhibits would not necessarily have been sufficient and, even if it were, it would not be appropriate for the Panel to trawl them for evidence to which the United States did not refer to make the United States' case for it."

The Panel referred to the Appellate Body Report in US-Gambling, which states: "A prima facie case must be based on evidence and legal argument' put forward by the complaining party in relation to each of the elements of the claim. A complaining party may not simply submit evidence and expect the panel to divine from it a claim of WTO-inconsistency. Nor may a complaining party simply allege facts without relating them to its legal arguments."'

The Panel therefore found that the US had not made a prima facie case with respect to its argument that China's thresholds were too high.

The second US argument with respect to Article 61 of TRIPS was that China's threshold tests are too narrow because they ignore other indicators of commercial scale such as the presence of unfinished products and fake packaging. The Panel dismissed this argument on the basis of the provisions of Chinese law and the judgments in Chinese courts which had included unfinished products etc.

The Panel also commented that "it is not clear why or if the United States considers that the possession of non-infringing items should have been sufficient for conviction of an intellectual property crime" and remarked that "the United States does not sufficiently relate its assertion to the measures at issue" and "the United States does not sufficiently explain the operation of the measures at issue to support its assertion."

The US then tried to prove that the tests were too narrow by alleging that China ignored other indicators of commercial scale such as the impact that counterfeiting has on the commercial marketplace and by extension, right holders. The Panel found that the impact "does not appear to be relevant consideration."

The US again tried to prove that the tests were too narrow, by listing other factors that should be considered in deciding "commercial scale". The Panel found that the US "did not submit argument in support" of these other factors, did not make it clear how these other factors could not already be taken into account under Chinese law and "did not relate these factors sufficiently to the measures at issue or to its claim to discharge its burden of proof." Therefore, the US did not succeed in this claim.

The US's second and third main claims with respect to China's criminal thresholds were contingent on it proving its case under the first sentence of Article 61 of TRIPS. Although the Panel found that the US had failed in its claim under the first sentence of Article 61, the Panel exercised judicial economy with respect to the US's second and third claims.

In terms of the way the case as a whole was conducted, in contrast to China's submission of considerable statistics, the Panel frequently criticized the United States' failure to provide sufficient evidence. For example, on one occasion, the Panel noted that in fact, apart from the text of the measures at issue, the United States submits only a US newspaper article titled "China's New Concern: Exploding Phones" reporting on an unrelated case of mobile phone batteries that had failed safety tests in China and were reportedly prone to explode under certain conditions. The article reports statements by right holders that the batteries were counterfeit.

The panel found no link in the story to Customs and to social welfare bodies, stating that the alarming story was therefore irrelevant to the assessment of the claim.

In response to another claim, the Panel was forced to point out that the US bore the burden of proof and it had "provided no evidence to support its assertion besides the text of the Law (which is unclear) and three provisions of the Contract Law".

[In summary, generally, the US won two out of its 11 claims and in a third claim, it succeeded for two out of five types of works. Furthermore, in four out of the five areas where the Panel exercised judicial economy, it appeared to be leaning towards China's submissions.]

In reaction to the ruling, University of Ottawa law professor Dr. Michael Geist concluded that "the headlines get it wrong. The US did not win this case, but rather lost badly." Dr Geist went on to comment that the "two more important issues [border measures and criminal thresholds] were near total losses for the US... The Chinese IP enforcement system, which sets a minimum threshold for criminal enforcement, was a huge issue for the US and it lost badly on it... This represents a major loss for the United States as well as for the countries such as Canada that supported the US in the case."

That the Panel "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... 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", Dr Geist remarked.

Stressing that IPR protection was a global issue, Yao of the Ministry of Commerce of China said, China had always attached great importance to protecting IPR and in the past 30 years had made significant progress in IPR laws, enforcement, education and international cooperation.

In 2008, China set up a national strategic program for IPR, Yao said. As China strengthens its work on domestic intellectual property rights, it will continue to promote international exchanges and cooperation, in order to encourage the healthy development of trade relations. +

 


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