China IP Protections Are Improving, but Your IP Is Still at Risk

In marked contrast to the overall tone of hostility coming out of official Washington and beyond, there is a belief within some circles that things are on the up and up in China when it comes to intellectual property rights (IPR) protection. Xi Jinping has been named as one of the year’s “50 most influential people in IP” by Managing IP, a well-regarded IP industry publication, and Foreign Policy recently declared that China’s IPR record “is getting better and better”. What problems exist are explained away by pointing the finger at the usual suspects, venal local officials:

The problem of enforcing IP rights in China can best be understood as a problem of central-local relations. Since the founding of the People’s Republic, China’s central leadership has always kept a tight grasp on political power. However, even as the CCP central leadership sets the policy agenda, it still relies on local authorities to implement and enforce it. While this decentralized system helped promote reform and competition during China’s economic transition, it also left sufficient space for local authorities to pursue their own objectives or avoid compliance with central initiatives deemed to be at odds with local interests.

To be fair, IPR protection in China has improved over time. The number of raids that takes place against counterfeiters these days would have been unimaginable back in 2005, when I first started working on China IPR matters. It would have likewise been hard to contemplate that foreign brands would one day regularly win favorable judgments in IPR infringement actions, as they do now. We have reached the point where my law firm’s China IP lawyers often say that getting a China trademark to protect your brand is “the only China law no-brainer.” (See for example China Trademarks: Register Yours BEFORE You Do ANYTHING Else). Registering your China trademarks with China customs has also become an effective way of preventing counterfeits of your product from leaving China.

We shouldn’t, however, heap too much praise on China for its IPR efforts because it still has a long way to go and is making little to no progress at all in some key respects.

Let’s consider the issue of raids, first looking at the transcript of an interview of IPR investigator Bill Mansfield by reporter Ailsa Chang:

CHANG: Mansfield has found that in China, local authorities have a ton of power. So what he does now is set up lots and lots of meetings with the lowest-level officials who can conduct raids and arrest counterfeiters.

 How do you reward these local authorities after a raid goes down? Do you take them out to dinner?
 MANSFIELD: I award them with the key currency all bureaucrats love, which is a thank you and often a small plaque, a small plaque they can put in their office that they send pictures to people and everything .

 CHANG: A plaque? You really think that excites them, a plaque that they can hang up in their office?

That’s really why they’re helping you?

 MANSFIELD: The people I’m working with, yes. I spend a lot of time…

 CHANG: Are you sure you never bribe people, Bill?

 MANSFIELD: No, never.

CHANG: Mansfield says in the last decade, he’s gotten a dozen counterfeiters around the world arrested and millions of dollars of counterfeit goods destroyed. And he says what he’s learned in this whole process is that China does care about protecting American intellectual property. You just got to show up.

I believe Mansfield when he says he’s never bribed people, just as I never bribed anyone, though I also handed out plaques on occasion. Though the reporter here seems to take the issue lightly, bribes are no laughing matter for Americans or anyone subject to the provisions of the Foreign Corrupt Practices Act (FCPA) (or equivalent legislation such as the UK Bribery Act). But, let’s not be naive: Many “lowest-level officials” in China (and elsewhere) couldn’t give a hoot about a thank you, but certainly care about paying their bills or, if they’re more ambitious, buying mansions in Vancouver. And I doubt there is a single counterfeiter concerned about FCPA liability.

What does this mean in practice? Well, imagine your investigators have found a warehouse where thousands of counterfeits of your product are being stashed. If the cop who can give the go-ahead to raid the warehouse is an honest broker—just like you are—that’s great. But if the guy in charge is a bad apple, in the pocket of counterfeiters and/or on the lookout for baksheesh, then you’re out of luck.

At this point, you might think there may be something to the idea that IPR and counterfeiting problems are caused by rogue local officials who ignore diktats from Beijing. After all, “the mountains are high, and the emperor is far away“. And in fairness there is something to that. Local interests, such as the owners of factories that make counterfeits, are often better placed to influence low-level law enforcement than brass in the provincial capital or Beijing. Sometimes this is due more to the unwillingness of local officials to shut down counterfeiting factories that provide local jobs (and perhaps even taxes) than to bribes. But when we look at China’s great, speedy accomplishments in other regards, one can’t help but conclude that it’s just not much of a priority to get the Chinese police out into the streets and markets to look for fake products—or to monitor which factors are driving target selection.

For their part, Chinese courts are certainly not immune from corruption, but perhaps a greater problem is their susceptibility to political pressures. In our post China Litigation: Not the Same but Different, we extensively cited a piece by two Chinese lawyers, Meng Yu and Guodong Du, clearly explaining how this works. According to Yu and Du, “Consideration of social effects has led judges to sometimes care more about the public’s perception of justice, rather than the parties’ perception of justice in a particular case”. Furthermore, the Supreme People’s Court “emphasizes that the court should provide judicial guarantees for certain political goals” and “maintain social order and economic order”.

These are not theoretical concerns. In a previous post, I discussed a case in which a court refused to hold a counterfeiter liable because she was pregnant. More recently, I discussed the case at length in the Washington State Bar Association’s magazine. Regarding the point at hand, I explained:

[Judges] can be counted upon to administer justice in a way that furthers the objectives of the ruling Communist Party—which includes maintaining “social harmony”. Making a pregnant woman of limited economic means pay damages to a well-known multinational corporation could anger the local populace.

There is no indication that courts in China are about to start prioritizing other objectives over those of the CCP. What this means in terms of IPR protection is that your company’s legitimate interests will always be subordinate to those of the Party, as defined by the Party. And if that means that a pregnant woman or a one-armed man can copy your product with impunity, so be it. One of our international litigators uses a PowerPoint slide that says “Harmony is not just a word from the ’60s” in the speeches he gives on Chinese litigation

Given the current state of U.S.-China relations, risks are of course greater for U.S. companies. Even if a court is inclined as a legal matter to rule in favor of a plaintiff bringing an IPR infringement claim, it may decide that “social and political effects” justify denying relief if the plaintiff is a foreign company, especially an American one.

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