This billboard in Donguan, China encourages people not to sell pirated goods.

This billboard in Donguan, China encourages people not to sell pirated goods.

On January 26, the USTR announced an “important victory” in the recent World Trade Organization (WTO) dispute resolution panel regarding China’s compliance with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). And even though most media coverage declared a win for the United States, it’s not quite that clear cut–it seems that China may have won as well. Is the ruling just all bark and no bite? After all, of the three separate issues at hand, the U.S. won on one, won on part, and lost on part of another, and lost on what was arguably the most important of the three. Having waded through the entire 135 pages of the WTO Panel’s decision myself, here is a more accurate look at what actually transpired in the dispute.

Counterfeiting and piracy are obviously huge concerns in China. The U.S. actually submitted press articles to the WTO Panel to illustrate its points regarding the seriousness of the problem, covering a wide range of infringing products such as fake pens, pirated DVDs (often available while a film is still in theaters), and counterfeit designer clothes. However, as the first U.S. case against China in respect to these issues, it was a bit of an uphill battle. TRIPS only contains a general obligation for its members to enforce its provisions, and the U.S. claims rested on the language of China’s laws, not on how well they work in practice. There were three basic issues at hand, which the Panel had to decide:

  1. Because of censorship provisions, does China actually provide copyright protection for all works as required by TRIPS?
  2. Do China’s customs measures (which allow officials to donate to social welfare organizations, auction off, or sell to the rights holders confiscated infringing goods) violate TRIPS?
  3. Do China’s minimum thresholds for intellectual property crimes violate the enforcement requirements in TRIPS?

Copyright Protection

China’s Copyright Law contains a carve-out for works that are “prohibited by law”; in other words, there is no copyright protection for works that are not allowed under law to be published in the country. This includes works by foreign copyright holders. Whether a work is “immoral or unconstitutional” and therefore prohibited is determined by a content review process. The U.S. claimed that this violated Article 5 of the Berne Convention (which is incorporated into TRIPS), which requires protection of authors’ rights that are granted by the Convention–including copyright. Even though China tried to make a distinction between “copyright” and “copyright protection” (basically a meaningless exercise in semantics), the Panel decided that the law clearly violated TRIPS. The U.S. asserted that the violation was in regards to works that have not yet undergone content review or are waiting to be reviewed rather than just those that have failed the review–but China convinced the Panel that it does consider copyright to vest at creation (i.e., something is copyrighted until their review system decides otherwise). The Panel also rejected the U.S. claim that the content review process constitutes a copyright “formality,” which is not allowed under TRIPS (this is why the U.S. no longer requires copyright registration). In any case, China still clearly lost on this point, and is now required to change its laws so that all works, regardless of content, are protected by copyright.

Though it should be noted that in practice, this requirement means very little. Part of China’s argument was that despite not providing copyright protection for the works, it does not allow those that have failed content review to be published at all, and that their procedures for stamping out publication of censored works are even more effective than those dealing with copyright infringements. So whereas this does not matter for the purpose of TRIPS compliance, it is a fair practical point in that the addition of copyright protection will probably do very little to affect unauthorized distribution of censored works.

Customs Measures

China has a set of laws and administrative rules that provide procedures for their customs authorities to take protective measures in regards to suspected infringing goods, and in particular, guidelines for what happens to goods that are confiscated. Basically, these authorities can (1) donate the goods to social welfare organizations, (2) sell the goods to the rights holder, (3) remove the infringing features and sell the goods at auction, or (4) destroy the goods. The U.S. claimed that because the first three options appeared to be mandatory (i.e., at each level the one below can only be done if the ones above cannot be done), the customs officials do not have decision-making authority. This would be a violation of Article 59 of TRIPS, which requires that these officials must have the “authority” to order the destruction or disposal of confiscated goods. In particular, the U.S. was concerned that infringing goods would not be destroyed. Also, TRIPS requires that if goods are disposed of rather than destroyed, it must be in a manner to “avoid any harm to the rights holder.”

The Panel decided that the construction of the customs measures does not make any of them mandatory, and therefore authorities do have the ability to make decisions as to the appropriate method of disposal. This included a lengthy discussion of how donations to social welfare organizations may cause harm to rights holders, but the Panel was persuaded by China’s evidence regarding its relationship with the Red Cross. In regards to the auction provision in particular, the U.S. also claimed that it violated a part of TRIPS that allows counterfeit trademarked goods to be released back into the stream of commerce only if there is more than a “simple removal” of the infringing trademark. The Panel determined that China’s practice of simply taking off the trademark before auctioning the goods is a violation of this provision, since the buyer of the goods could simply affix a new counterfeit trademark and then sell them again.

So the U.S. did win on this last issue, though again, it will only have limited effect. The Panel decided at the onset of the consideration that the TRIPS borders provisions are only mandatory for imported goods, not goods destined for export. This actually includes only a very small percentage of confiscated goods. In fact, China destroys far more goods than it auctions, and no infringing goods being imported have ever been auctioned. So if that trend continues, then the changes that China must make to its procedures will essentially have no impact at all.

Criminal Thresholds

China’s Criminal Law involves specific thresholds for specific intellectual property rights violations, criminalizing different types of infringement only, for example, “if the circumstances are serious,” “if the amount of sales is relatively large,” or “if the amount of illegal gains is huge.” These vague phrases are interpreted by Judicial Interpretations into specific quantitative definitions; for example, a business volume of “not less than 50,000 Yuan,” or a distribution of “not less than 500 in total” of the infringing works. China’s reasoning for this construction of its laws is for public and economic order, and for the prioritization of resources.

The U.S. claimed that these thresholds were in violation of Article 61 of TRIPS, which requires criminal penalties for “wilful trademark counterfeiting or copyright piracy on a commercial scale”–which could include many of the crimes that China is not prosecuting because they fall underneath a threshold. Most of the Panel’s inquiry involved formulating an exact definition of “commercial scale”; they eventually settled on “the magnitude or extent of typical or usual commercial activity.” In other words, whether an activity falls under the TRIPS requirement depends not only on the activity itself, but on the overall surrounding market conditions. Because the U.S. had no real evidence about what was actually happening in China (the Panel was unmoved by the submission of articles from the U.S. press such as those linked above), there was nothing to indicate that the activities falling under the thresholds were on a commercial scale; the Panel found that the U.S. had failed to make a case for the TRIPS violation.

This was arguably the most important issue for the U.S.–at least, it seemed to be the one that they pushed the hardest, and the popular understanding of the issues in the case (at least, judging from media reports) was that it was all about piracy. And given that the other two U.S. wins on issues will on a practical level have very little effect, this was the real opportunity to force some substantive change. However, the U.S. did applaud the formulation of a market-based approach to analyzing the issue.

Still, there were some points that they did not seem to push hard enough that may come into play later–for example, the effect of non-commercial Internet uses that may harm the market without having any quantitative value that can be measured with respect to a threshold. The Panel noted that “commercial scale” should be technologically neutral, and also pointed out that the U.S. laws did not really account for non-commercial infringement prior to 1997. This was somewhat surprising, considering that several of the other countries who joined the dispute as third parties, particularly Canada, seemed to emphasize this as the most pressing issue.

What Now?

Given the above, I would be reluctant to call the Panel’s decisions a “victory” for the U.S.–though I’m not sure that it is a victory for China either. The issues decided in favor of the U.S. were more wins in principle than in practice; though they could be important if only to stress the necessity of complying with TRIPS and to ensure that small violations do not snowball into more serious problems. Additionally, both sides can appeal, and it seems likely that they both will do so. The U.S. may eventually return with concrete evidence about market conditions and piracy in China in hopes that the new market-based analysis will find criminal thresholds to be in violation of TRIPS.

In any case, this is just a small step in the struggle against international piracy and counterfeiting. And as disputes brought under TRIPS are generally in regards to the law itself rather than the application of it, it is likely to continue to be an uphill battle.

–Casey Fiesler

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