US to Complain to WTO Regarding PR China's Failure to Protect IPR

April 9, 2007. The Office of the U.S. Trade Representative (OUSTR) announced that the US will initiate two related complaint proceedings before the World Trade Organization (WTO) regarding the People's Republic of China and intellectual property rights (IPR).

The two requests for consultations, to be filed with the WTO on Tuesday, April 10, will address China's failure to protect IPR in movies, music, books and other content, and China's access barriers for US content distributors.

That is, the gist of the two requests will be that not only does China not engage in adequate criminal enforcement, and not provide US content providers with adequate civil remedies, but that China also precludes US content providers from competing with their pirates.

Susan Schwab, the USTR, argued in a statement [4 pages in PDF] that "The United States believes we have a strong case on IPR protection and a strong case on the market access problems facing our audiovisual and publications industries, and we will vigorously pursue our rights as a WTO Member."

Notably, these proceedings will not address all of China's failures to provide adequate IPR related protection. Moreover, not all copyright based industries whose works are pirated in China have backed (or opposed) this action by the OUSTR. The Business Software Alliance (BSA), for example, maintains its neutrality.

OUSTR Summary of its Requests. The OUSTR announced in a release on April 9 that the US "will make two requests tomorrow for World Trade Organization (WTO) dispute settlement consultations with the People’s Republic of China: one over deficiencies in China's legal regime for protecting and enforcing copyrights and trademarks on a wide range of products, and the other over China’s barriers to trade in books, music, videos and movies."

The OUSTR release summarizes the content of the first request, regarding deficiencies in IP laws. First, it states that the request "focuses on provisions of Chinese law that create a substantial ``safe harbor´´ for wholesalers and retailers who distribute or sell pirated and counterfeit products in China. China has established quantitative thresholds that must be met in order to start criminal prosecutions of copyright piracy and trademark counterfeiting." It states that pirates are "able to operate below high thresholds without fear of criminal liability. These thresholds appear to effectively permit large-scale piracy and counterfeiting."

Second, the release states that the first request "focuses on the rules for disposal of IPR infringing goods seized by Chinese customs authorities. Those rules appear to permit goods to be released into commerce following the removal of fake labels or other infringing features, when WTO rules dictate that these goods normally should be kept out of the marketplace altogether."

Third, it states that Chinese law apparently denies "copyright protection for works poised to enter the market but awaiting Chinese censorship approval." It adds that "Immediate availability of copyright protection is critical for new products entering a market, and it appears that copyright protection is available immediately to Chinese works."

Fourth, the OUSTR release states that Chinese criminal law "appears to provide that someone who reproduces a copyrighted work without the owner’s permission is not subject to criminal liability unless he also distributes the pirated work. Thus, persons who copy large quantities of copyrighted goods may face no possibility of criminal punishment." However, it also notes that a recent Chinese judicial interpretation "appears designed to address this problem".

All of this, the OUSTR asserts, violates WTO Agreement on Trade-Related Aspects of Intellectual Property Rights, which is also known as TRIPS.

The OUSTR then summarizes the second request for consultations, regarding market access. First, it states that this request "focuses on a Chinese legal structure that denies U.S. companies the right to import books, journals, movies, music, and videos, and instead requires all imports to be channeled through specially authorized state-approved or state-run companies."

Second, it states that there are "rules that severely impede the efficient and effective distribution of publications and home entertainment video products within China. These rules appear to prohibit some distribution activities outright, and in other areas, they seem to apply discriminatory rules to U.S. and other foreign companies involved in the activities that are allowed.  These barriers slow down the flow of genuine products within China".

See also, OUSTR release [PDF] regarding IPR protection, and OUSTR release [PDF] regarding market access.

Congressional Reaction. Sen. Max Baucus (D-MT), the Chairman of the Senate Finance Committee (SFC), stated in a release [PDF] that "Rampant and large-scale piracy and counterfeiting in China have persisted too long, and China is not penalizing pirates and counterfeiters. WTO action is overdue, and I commend Ambassador Schwab for taking it ... I know that China can do more to crack down on intellectual property violations, and it’s high time the U.S. did more to protect Americans hurt by these offenses. Vigorous enforcement of intellectual property rights is good for the United States, good for China's economy, and good for our bilateral economic relationship."

Sen. Charles Grassley (R-IA), the ranking Republican on the SFC, stated in a release [PDF] that "I'm glad to see this action. Intellectual property drives a big part of our economy. We need to defend U.S. companies against abuse and hold our trading partners to the commitments they made in joining the WTO. The ability to protect intellectual property is a hallmark of a mature economy and responsible trading partner."

Sen. Grassley (at right) added that "Litigation isn’t always the answer, but when informal negotiations don’t work, we need to stand up for ourselves. The WTO gives us a forum to assert our rights. The Administration is making good use of that forum. This is the latest in a number of cases the United States has brought to hold the Chinese accountable for trade-distorting policies. In each case, we filed a WTO complaint as a last resort after informal efforts at resolution failed. That's the way it should be. American businesses and consumers stand to lose if we overreact. But when China continues to refuse to play by the rules, then we need to take strong action, like we’re doing today."

The SFC and the House Ways and Means Committee held hearings in mid-February that covered this subject. See, story titled "Senate and House Hold Hearings on Trade, TPA and IP Theft in PRC" in TLJ Daily E-Mail Alert No. 1,538, February 15, 2007. See also, story titled "Schwab Discusses Doha Round and IPR Violations in PR China" in TLJ Daily E-Mail Alert No. 1,530, January 31, 2007.

The House is in recess for another week. The Senate formally returns from its April recess on April 10.

Industry Reaction. Dan Glickman, head of the Motion Picture Association of America (MPAA), stated in a release [PDF] that "This is a welcome and logical next step in efforts to spur progress in China ... Fair market access and respect for the intellectual property of other countries are basic conditions of membership in the global community which China committed to live by when it sought acceptance into the WTO. This action is fair, timely and appropriate."

The Association of American Publishers (AAP) stated in a release that "copyright piracy and trademark counterfeiting remain endemic" and that "China has failed to fulfill its commitments as a WTO member to liberalize restrictive importation and distribution practices that hobble the ability of foreign companies to do business in the Chinese market."

The China Copyright Alliance (CCA) issued a short release to "applaud" Schwab's announcement. The CCA is an umbrella group that was formed in late 2005 to work with the OUSTR on this issue. It members include the MPAA, AAP, Recording Industry Association of America (RIAA),  and other copyright groups. However, it does not include the BSA, or other groups that primarily represent software companies.

Robert Holleyman, head of the BSA, stated in a release that the "BSA continues to believe that a constructive dialogue between the U.S. and China is the best way to address the broad range of issues that affect both countries and their economies. We look forward to continued productive dialogue in the future."

He also wrote that "We have long been in favor of legal reforms in China that would make it easier to take criminal action against piracy on a commercial scale."

He also noted that China has improved its protection of software. He explained that "It is important to note that there have been recent improvements in IPR protections in China. For example, the software piracy rate in China has decreased significantly over the last three years. BSA and its members were encouraged by the software legalization measures announced by the Chinese government after U.S.-China trade talks a year ago, which included China’s commitment to complete and implement a plan for ensuring legal software use by enterprises by the end of 2006. The Chinese government also issued decrees requiring computer makers to pre-install legally licensed operating system software on all computers sold in China, and separately, required all Chinese government agencies to procure computers with legally licensed operating system software pre-installed."

WTO Procedure. The OUSTR has announced that on April 10 it will take the first step in the WTO complaint process -- the filing of requests for consultations. It clarified that there will be two separate requests.

China, as a member of the WTO, must respond to these requests within sixty days. TLJ spoke with James Bacchus of the Washington DC office of the law firm of Greenberg Traurig. He is legal counsel to the CCA. He stated that most requests are resolved at this stage.

See also, the WTO's introductory web page titled "Understanding the WTO", and especially  web page titled "Settling Disputes: a Unique Contribution" and web page titled "Settling Disputes: the Panel Process".

However, if both requests do not result in resolution, then the next step for the US is to file with the WTO requests for the establishment of panels. This, said Bacchus, is the "WTO equivalent of the filing of a legal complaint".

China can delay proceedings for another 30 days. Then, the WTO would form two separate ad hoc panels, which process can take one to two months. These panels take around 11 months to complete their work and issue a report.

The next step, if the underlying disputes are still not resolved by the parties, would be appeals to the standing WTO appellate body. The appellate body rules within 90 days. Finally, there is acceptance of the appellate body's decision by the Dispute Resolution Body.

Ultimately, the WTO has no enforcement authority. However, if a party is found to be in violation of its WTO obligations, and does not then come in to compliance, then the WTO may authorize the aggrieved WTO member to impose trade sanctions.