An Initial Assessment of China’s Overall Compliance with TRIPS Obligations
Clearly China took significant steps to implement the obligations of the TRIPS Agreement into both the legislative framework and enforcement systems. However, the implementation of TRIPS obligations into the domestic legislation is not enough to be in full compliance with the Agreement. Therefore, China’s consequent compliance with the specific provisions of TRIPS will now be analysed. Overall, China appeared to be in substantive compliance with the majority of its TRIPS obligations. These included, for example, Article 41 of the TRIPS Agreement which provided there should be no unreasonable time limits or delays (Article 41(2)); Chinese provisions stated that cases should be concluded within six months or three months for summary cases. Equally, Article 41(3) of the TRIPS Agreement provided that decisions should be reasoned and in writing. Chinese provisions mandated that judgments should be issued immediately or within ten days and must include reasons for the judgment. However, transparency of such judgments did remain somewhat unclear.
Additionally, there were still a handful of provisions where China’s compliance was in doubt. The most significant provisions under scrutiny involved enforcement measures, as these were the primary focus of the TRIPS Agreement. The first of these areas of possible non-compliance was Article 45(1) of the TRIPS Agreement, which expressed the principle that “the judicial authorities shall have the authority to order the infringer to pay the rights holder damages adequate to compensate for the injury the rights holder has suffered.” Compliance with this provision is not easy to assess in China. The Trademark Law 2001 Article 56 provided that there were two tests for the amount of compensation awarded: either the profits the infringer has earned or the losses to the rights-holder. Article 48 of the Copyright Law 2001 was similar: it stated that compensation shall be the actual losses suffered or unlawful gains where the actual losses are difficult to calculate. Therefore, although in most cases, the calculation of damages was supposed to be based on the actual losses suffered by the rights-holder, in practice many rights-holders were still complaining about the inadequacy of damages awarded. Thus, this remained a possible area of non-compliance for China.
The second substantive TRIPS provision on enforcement that China potentially did not comply with was the requirement in Article 61 that criminal penalties should be available “at least in cases of wilful trademark counterfeiting or copyright piracy on a commercial scale.” Furthermore, “remedies available shall include imprisonment and/or monetary fines sufficient to provide a deterrent.” This is another difficult area in which to measure China’s compliance. As outlined above, criminal penalties were available under the Criminal Law 1997 for serious trademark counterfeiting (Article 213) or copyright piracy (Article 217). Furthermore, imprisonment and fines were both available as remedies. However, the precise linguistic relationship between “serious” in China’s Criminal Law and “wilful” in TRIPS was problematic. The other issue of possible non-compliance under Article 61 was whether the penalties provided were sufficient to provide a deterrent.
Assessing China’s compliance with TRIPS provisions is clearly not straightforward and Article 64 of TRIPS makes disputes about TRIPS obligations subject to WTO’s dispute resolution procedures. Up until 2006, there had been 24 cases brought to the WTO dispute settlement body concerning the TRIPS Agreement, with only four cases dealing with the enforcement provisions in TRIPS. The respondents in these cases were Denmark and Sweden (for failing to make provisional measures available in the context of civil proceedings involving intellectual property rights) and the European Community and Greece (involving the regular broadcast in Greece of copyrighted motion pictures and television programmes without the authorisation of the copyright owners). The complainant in all cases was the US, alleging breach of Article 50 in the case of Denmark and Sweden and breaches of Articles 41 and 61 in the case of Greece. All four cases were eventually resolved through negotiation and the dispute settlement body was notified of the relevant mutually agreed solutions.16
These cases demonstrated that it is extremely difficult to establish noncompliance with the TRIPS provisions on enforcement. In all disputes brought to the WTO, it is necessary to show clear evidence of systemic failing, not just anecdotal weaknesses. This procedural difficulty is highlighted by the request made in October 2005 by the US, Japan and Swiss governments for China to provide enforcement data to help them to assess China’s TRIPS compliance. This must be borne in mind when considering China’s compliance with these provisions. The difficulties in bringing a formal complaint to the WTO are also illustrated by the United States Trade Representative (USTR)’s annual reports to Congress on China’s WTO compliance. These reports can offer a useful supplementary source of data regarding China’s TRIPS compliance as they are largely based upon reports from foreign rights-holders in China. Indeed, the USTR’s reports confirm that despite efforts to implement TRIPS obligations into domestic legislation being “largely satisfactory...IPR enforcement, however, remains ineffective” (USTR 2003, p. 49).17
It is noticeable that the tone of these reports grew increasingly bullish in the two or three years immediately following WTO accession, as promised improvements in reducing IP infringements proved unforthcoming. Indeed, this reflects the notion that initial reforms made by China to comply with WTO obligations generally were substantial, but when further, deeper reforms were required in subsequent years, the pace of reform slowed considerably. Furthermore, criticisms of the IP system in China initially focused on the poor enforcement system in general and bemoaned the lack of transparency (in the 2003 and 2004 reports), before focusing on the specific problem of the “chronic underutilization of deterrent criminal remedies” (2006 and 2007 reports). This also reinforces the impression that the US was forced to focus on substantive failings in the IP enforcement system in order to bring a WTO dispute, rather than just rely on anecdotal inadequacies reported by rights-holders.
It is perhaps surprising that China had not been the respondent in a case involving compliance with TRIPS obligations before April 2007, given the publicity surrounding China’s poor intellectual property enforcement. However, this indicates that despite the perceived failings in the intellectual property enforcement system in China, it is difficult to compile clear evidence of systemic non-compliance with the TRIPS provisions. Furthermore, the request for consultations of April 2007 made it clear that the complaint referred to specific failings in the system, rather than mere inconsistencies in enforcement. In addition, it has also been suggested that the US refrained from filing a WTO dispute against China earlier than 2007 because the US was hoping that TRIPS would force China to finally fulfil its international IP obligations (Harris 2008, p. 98). However, from 2005, China’s compliance with its TRIPS obligations was increasingly under US scrutiny; China was placed on the USTR Priority Watch List in 2005 and a China Enforcement Task Force was also established in February 2006, with the aim of preparing WTO cases against China (Harris 2008, p. 114).
On 10 April 2007, the US circulated two requests for consultations with China. The first of these concerned measures affecting trading rights and distribution services for certain publications and audio-visual entertainment products (World Trade Organisation 2007a). This dispute was not directly connected with China’s obligations under the TRIPS Agreement, rather it concerned commitments made in China’s Protocol of Accession. However, the second dispute did specifically concern commitments made under the TRIPS Agreement. The second dispute concerned measures affecting the protection and enforcement of intellectual property rights (World Trade Organisation 2007b). Following the circulation of the request for consultations by the United States, several other members also requested to join the consultations. They included Japan, Mexico, Canada and the European Communities. Thus, the issue of protection and enforcement of intellectual property rights in China was clearly of concern to many WTO members, not only the US. China’s reaction to the initiation of these WTO complaints was strenuous denial and disappointment that the US had deemed such an action necessary (PRC Ministry of Commerce 2007).
Within the broad complaint about enforcement of intellectual property rights, several separate areas were identified for further consultations. The US and China held consultations specifically concerning these issues on 7-8 June 2007, but although “those consultations provided some helpful clarifications but [they] unfortunately did not resolve the dispute” (World Trade Organisation 2007c, p. 1). One element of the US’s initial complaint which was resolved by the consultations concerned the unavailability of criminal procedures and penalties for a person who engaged in either unauthorised reproduction or unauthorised distribution of copyrighted works. The existing Criminal Law and associated regulations appeared to subject a person who engaged in both unauthorised reproduction and distribution to criminal liability, but not only one or the other. This appeared to be inconsistent with TRIPS Articles 41.1 and 61. The consultations resolved the issue of confusion about whether both unauthorised reproduction and distribution were necessary for criminal liability to arise, but the other issues remained in dispute. As a result, a panel was appointed to consider the dispute (World Trade Organisation 2007d).
The first element of the complaint heard by the WTO panel was that existing Chinese laws and regulations denied copyright and related rights protection and enforcement to works that had not been authorised for publication or distribution within China. In essence, the US alleged that works were not protected by copyright legislation until they were authorised for publication or distribution after going through a stringent content review process. This appeared to be inconsistent with TRIPS Article 9.1 which obliges members to comply with Articles 1-21 of the Berne Convention (1971); Article 5(1) of the Berne Convention states that copyright granted to foreign authors should not be subject to any formality. Furthermore, if foreign authors were indeed not granted copyright protection prior to approval of their works, this may also be inconsistent with Article 3.1 of the TRIPS Agreement which lays down the national treatment principle. The measure at issue was the first sentence of Article 4 of the PRC Copyright Law 2001, the mutually agreed translation of which was as follows: “Works the publication and/or dissemination of which are prohibited by law shall not be protected by this law” (World Trade Organisation 2009, para. 7.1). China conceded that Article 4(1) denied copyright protection to those works which had not passed the content review but argued that this provision did not remove the copyright from such works. The panel found this measure to be inconsistent with China’s obligations under Article 5(1) of the Berne Convention (1971), as incorporated by Article 9.1 of the TRIPS Agreement, and Article 41.1 of the TRIPS Agreement.
The second element of intellectual property enforcement that was subject to consideration by the WTO panel was that the disposal of goods confiscated by the customs authorities, which infringe IP rights, was inconsistent with TRIPS Articles 46 and 59. This is because the Chinese customs regulations appeared to endorse the practice of merely removing the infringing features of the counterfeit products and then allowing then to enter channels of commerce through auction instead of destroying them. TRIPS Article 46
on judicial remedies and Article 59 on customs authorities’ remedies make it clear that goods seized should only be destroyed or disposed of outside of the channels of commerce. The measures at issue here were the Customs IPR Regulations in force from 2004, Article 27 of which provided different options for the disposal or destruction of goods seized for infringing trademark, copyright and patent rights upon exportation or importation. The Implementing Measures for the Customs IPR Regulations also entered into force in 2004 and Article 30 further clarified the process for disposal or destruction of such infringing goods.
The US claim was made under Article 59 of the TRIPS Agreement which provides “without prejudice to other rights of action open to the right holder and subject to the right of the defendant to seek review by a judicial authority, competent authorities shall have the authority to order the destruction or disposal of infringing goods in accordance with the principles set out in Article 46. In regard to counterfeit trademark goods, the authorities shall not allow the re-exportation of the infringing goods in an unaltered state or subject them to a different customs procedure, other than in exceptional circumstances.” The panel held that this Article should be read as part of section 4 of Part III of the TRIPS Agreement which together sets out procedures for dealing with goods at the border. A key consideration for the panel was the obligation in the first sentence of Article 59 that the competent authorities “shall have the authority” to order certain types of remedies with respect to infringing goods.
The US conceded that this obligation would not require members to make such an order, rather the issue was what decisions Chinese Customs authorities were permitted to make by law. Clearly, China’s customs measures, taken together, provided for the authority to order the destruction of infringing goods; the issue was whether destruction could only be ordered in highly limited circumstances. The panel found that the US had failed to establish that China’s customs measures were inconsistent with Article 59 of the TRIPS Agreement, as it incorporates principles set out in the first sentence of Article 46 of the TRIPS Agreement (World Trade Organisation 2009, para. 7.395). The first sentence of Article 46 read: “In order to create an effective deterrent to infringement, the judicial authorities shall have the authority to order that goods that they have been found to be infringing 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.”
On the other hand, China’s customs measures were found to be inconsistent with Article 59 of the TRIPS Agreement as it incorporates principles set out in the fourth sentence of Article 46 of the TRIPS Agreement. The fourth sentence of Article 46 states: “In regard to counterfeit trademark goods, the simple removal of the trademark unlawfully affixed shall not be sufficient, other than in exceptional cases, to permit release of the goods into the channels of commerce.” China’s customs measures were found to be inconsistent with this principle because they allowed for the simple removal of the trademark from counterfeit goods and the subsequent auction of such goods in more than just “exceptional cases.”
The third element of the US complaint to the WTO concerned the thresholds in place in China which had to be met before criminal liability for IP infringements could be imposed and that these thresholds for criminal procedures and penalties appeared to be inconsistent with TRIPS Articles 41.1 and 61. The first part of Article 61 provides that “Members shall provide for criminal procedures and penalties to be applied at least in cases of wilful trademark counterfeiting or copyright piracy on a commercial scale.” The measures at issue were to be found in China’s Criminal Law 1997, Section 7 of Chapter III in Part 2 of which provided for crimes of infringing intellectual property rights in Articles 213-20. These Articles in the Criminal Law were also interpreted by several judicial interpretations which were also considered by the WTO panel. The key question considered by the panel was whether China’s thresholds were too high to capture all cases of counterfeiting on a commercial scale as required by the TRIPS Agreement.
The panel concluded that the US failed to establish that China’s criminal thresholds were inconsistent with its obligations under the first sentence of Article 61 of the TRIPS Agreement. Subsequent analysis of the panel report suggested that this aspect of the US claim relating to “commercial scale” needed more evidence specific to the Chinese market. The US did provide press articles and notes as evidence about the status of the criminal thresholds in relation to the Chinese marketplace; however, the panel found that these were not reliable evidence (Zhou 2011, p. 154). This must be recognised as putting “rather a heavy evidentiary burden on complainants especially when dealing with opaque markets such as the Chinese market where obtaining reliable information or even convincing people to submit it... may be difficult” (Pauwelyn 2010, p. 415).
Overall, the focus of the United States’ submission was on fairly minor procedural aspects of the intellectual property system in China. Several of the grounds for complaint may simply have arisen from imprecise language in the primary legislation, such as the doubt over whether prohibiting illegal reproduction and distribution included illegal reproduction or distribution only. However, the complaint did confirm the need to identify specific failings in the system rather than merely complaining about inadequate or inconsistent enforcement and thus had important lessons for future WTO disputes relating to members’ TRIPS compliance. The immediate impact of the panel report may have been described as largely pyrrhic for the US, but nevertheless a number of commentators also recognised the broader impact beyond the limited legislative changes that China was forced to implement. Indeed, 2007-8 was felt to be an excellent time to file a WTO complaint against China as China was preparing to hold the Beijing 2008 Olympics and was thus seen as relatively vulnerable to external international pressure (Harris 2008, p. 186).
In addition, the US complaint to the WTO was not only aimed at tackling systemic failings in China’s enforcement of IP rights, but also aimed to send a signal to other countries perceived as not making serious enough efforts to crack down on counterfeiting or piracy, such as Brazil or Ukraine (Pauwelyn 2010, p. 400). Moreover, it was felt that even if the US did not prevail in its claim, there may be “extra-judicial” benefits to bringing the dispute to the WTO (Harris 2008, p. 99), at the very least signalling to China that the US would no longer sit idly by waiting for China’s IP enforcement to improve, as well as sending a powerful signal of intent to other countries with weak IP enforcement. Overall, the panel report on the US-China IP dispute is interesting “because it suggests an unexpected degree of flexibility in WTO members’ compliance with the TRIPS Agreement” (Gervais 2009, p. 549). In particular, in the part of the US claim relating to the disposal of seized goods, the panel considered that the words “shall have the authority” did not amount to an obligation to exercise power in any particular way (Gervais 2009, p. 550).
In general, as discussed in the previous section, China appeared to be in compliance with the majority of its TRIPS obligations on enforcement. The most significant areas where compliance appeared to be in doubt were the issues of damages and the availability of criminal penalties. Assessing compliance in these areas seems to be dependent on how the wording of the relevant articles is interpreted. The difficulties of identifying non-compliance appear to be confirmed by the 2007 complaint to the WTO Dispute Resolution Body by the United States; criminal thresholds were a target of the complaint as they are fixed and evident, whereas problems of inadequate damages or lack of a deterrent are too imprecise to be the focus of a formal WTO complaint. Consequently, this reflects the problem of judging compliance in general; as a relative concept, distinguishing compliance from non-compliance is a largely subjective process (Chan 2006, p. 66).
The limited victory for the US in its dispute with China over the inadequate enforcement of intellectual property rights also illustrates the wider difficulties experienced with bringing WTO disputes concerning the TRIPS Agreement. Contrary to the expected “fear factor” of dispute settlement through the WTO finally adding teeth to the international IP obligations, the WTO dispute settlement system has only dealt with a handful of TRIPS-related disputes. In 1995, the TRIPS Agreement was seen as revolutionary for introducing the formal dispute settlement mechanism into the field of international intellectual property protection. However, now 20 years have passed since the inauguration of TRIPS; in terms of dispute settlement, it is clear that TRIPS has had relatively little impact, with the predicted flood of disputes failing to materialise. In fact, from 1995 to 2010, the share of claims brought to the WTO dispute settlement body under the TRIPS Agreement was only around 3% of the total; additionally, the expected wave of cases initiated by developed countries against developing members did not arrive. Indeed, there is a sense that such frustrations with the inadequacies of the WTO to enforce the global trade rules, including the TRIPS Agreement, have led to a focus on regional trade agreements, such as the Trans-Pacific Partnership (TPP), instead as the future alternative for global trade negotiations (Bhagwati 2013).