United States v. China – Measures Affecting the Regulation and Enforcement of Intellectual Property Rights

On 10 April 2007 the United States formally requested that consultations be held with the People’s Republic of China regarding China’s alleged failure to carry out its obligations under the Agreement on Trade-Related Aspects of Intellectual Property Rights.  This agreement, known more commonly as the TRIPS Agreement, defines the framework for relations between World Trade Organization (WTO) Member nations regarding the protection and enforcement of intellectual property rights.

Article 64 of the WTO TRIPS Agreement instructs that Articles XXII and XXIII of GATT 1994, as elaborated on and interpreted by the Dispute Settlement Understanding, guide the resolution of disputes between Members over issues concerning intellectual property matters.  These provisions instruct that a complaining Member first request that consultations be held with the respondent Member before progressing to additional dispute resolution measures.

During the consultation period, the Dispute Settlement Understanding allows Members other than the complaining and responding Members, who feel that they have a substantial interest in the issue, to request join in the consultation process.  So far Japan, the European Communities, Canada, and Mexico have requested to join in the US’ case against China (known as “Dispute DS362”).

Under the rules, if within 60 days of the receipt of the request for consultations, the dispute has not yet been settled between the parties, the complaining party may request the establishment of a panel which will be tasked with conducting the fact-finding necessary to present a report about the dispute to the WTO Dispute Settlement Body.  Members unsatisfied with the panel’s conclusion have the opportunity to appeal the decision to a standing Appellate Body.  So far,  the US request for consultations is the only step in the dispute resolution process that has occurred.

The US complaint is based on four claims concerning Chinese law as it pertains to the protection and enforcement of intellectual property rights in China:

I.    Thresholds for criminal procedures and penalties
Article 41.1 of the TRIPS Agreement obligates Members to establish enforcement procedures that will “permit effective action against any act of infringement of intellectual property rights” and which “constitute a deterrent to further infringements”.  Additionally, when infringements consist of “trademark counterfeiting or copyright piracy on a commercial scale”, Article 61 requires Members to provide criminal procedures and penalties in their domestic laws.

The US claims that China’s current criminal procedures and penalties fail to satisfy these obligations.  US interpretation of Chinese law finds that these criminal procedures and penalties are only available when the circumstances are “serious” or “especially serious,” or when the amount of illegal gains is “relatively large” or “huge.”  The meaning of these terms is ambiguous as the Chinese criminal law does not define them, though they have been interpreted as referencing the size of the infringing activity, in terms of value, profit, or number of copies.  However, this measure is made in regards to the prices at which the infringing goods are sold, not the prices of the corresponding authorized goods, for determining the magnitude of the infringing activity.  The US claims that these thresholds, and the requirement that they be met or surpassed before criminal procedures and penalties become available, violate China’s international obligations under Articles 41.1 and 61 of TRIPS.

II.    Disposal of confiscated infringing goods
Articles 46 and 59 obligate Members to provide foreign intellectual property holders with access to local civil judicial authorities that, upon a finding that goods are infringing, have the authority to dispose of these goods “outside the channels of commerce in such a manner as to avoid any harm caused to the right holder”.  In interpreting Chinese customs regulations however, the US contends that Chinese customs authorities give priority to disposal options in which the confiscated goods are  re-introduced into channels of commerce, with destruction of the goods occurring only if the infringing features cannot be removed.  The US contends that China’s prioritization of disposal through entry into the channels of commerce violates China’s obligations under Articles 46 and 59 of TRIPS.  The US argues that Chinese judges and customs officials should instead destroy the unauthorized books, medicines, music, movies, and other IPR goods.

III.    Denial of copyright and related rights protection and enforcement to unauthorized works
Article 9.1 of the TRIPS Agreement requires that all WTO members comply with certain provisions of the Berne Copyright Convention, an earlier treaty administered by the World Intellectual Property Organization (WIPO).  Amongst these provisions, and a core concept of Berne, is the idea of “national treatment,” which obligates signatories to extend to foreign authors of copyrighted works the same rights extended to domestic authors, and that these rights will not be subjected to formalities such as registration.

Under current Chinese copyright law, “protection” is only offered to those works that have been authorized for publication or distribution within the country.  The US argues that the requirement of authorization constitutes a formality and that the disparite treatment between domestic and foreign authors who have yet to satisfy this formality violates the requirement of national treatment imposed by Article 9.1 of TRIPS.  In addition, the US claims that China’s requirement that works first be authorized before a rights holder may enforce copyright violates China’s obligation of providing enforcement measures in Article 41.1 of TRIPS.

IV.    Unavailability of criminal procedures and penalties against individuals engaged solely in unauthorized reproduction or unauthorized distribution
The final claim presented by the US concerns the interpretation of Chinese criminal law regarding unauthorized reproduction or distribution.  According to the US, it appears that criminal procedures and penalties for copyright infringement are available only for acts of reproduction and distribution, but that acts of reproduction or distribution alone are not subject to criminal procedures and penalties.  If this interpretation is correct, the US argues that China is violating its international obligations under Articles 41.1 and 61 of TRIPS.

Possible Results
The most efficient resolution to the dispute will occur if the US’ claims are settled in the consultation process.  Should this fail, the case will be sent further along the dispute settlement process.  If the WTO panel or Appellate Body decides that China’s laws are inconsistent with its TRIPS obligations, China will be required to change its domestic laws and implement the Dispute Settlement Body’s recommendations to conform to these obligations.  Failure to change Chinese law in accordance with the “recommendations” within a reasonable period of time grants the US the opportunity to request that China enter into negotiations to determine a mutually acceptable compensation, or payment to the US.  If satisfactory compensation cannot be agreed upon, the US may request authorization from the Dispute Settlement Body to suspend its own TRIPS obligations with respect to China.