The IP quagmire

Today, some 90% of the software sold in China is pirated and 97% of Western drugs sold are counterfeits. The American film industry says it loses an estimated US $3.5 billion a year to pirate DVDs. President Hu Jintao in New York for the UN meeting in September pledged China would crack down on IPR offenders, but as managing partner Laura Young of the law firm Wang & Wang told the CHINA ECONOMIC REVIEW, more creative solutions are needed as going after the pirates is not practical: "You can't get them all – they're like cockroaches that spread out everywhere."

One of the more recent – and novel – strategies aimed at trouncing Chinese counterfeiters came courtesy of Warner Bros Entertainment earlier this year when it announced it would sell DVDs in China for as low as US$2.65 apiece, a price comparable to pirated versions. Not a bad move, as business strategists and even legal experts say the piracy battle will not be won in the Chinese courts, at least not in the near term: anyone selling IP must take the counterfeiters head on in the marketplace. By selling low-priced DVDs in China, Warner is at least proactively trying to move consumers to actually paying for the real thing, a necessary step towards opening the Chinese market for legitimate DVDs. Any IP vendor waiting for Beijing to act might as well abandon the China market. Take it from the government: China's National Copyright Administration has said that China's rampant IP theft is beyond the government's control, despite its ongoing crackdowns (the government did enact a new copyright law effective March 1 allowing foreign and domestic copyright owners to authorize "collective management organizations" to grant use rights and collect associated fees on the copyright owner's behalf, state media reported). Earlier, Vice-premier Wu Yi told the US that China is unable to correct the piracy problem overnight.

Best practices
McKinsey & Company, in a recent quarterly report, advises companies to first cover the basics: register trademarks and patents and prosecute violators. Beyond that, it found that the companies with the best track record in IP protection are those that carefully weigh which products to manufacture and sell in China, citing one pharma company that withheld its high-margin drugs from China, selling only mature, over-the-counter drugs there. McKinsey also cites an equipment maker which designs and manufactures its hardware in China, but develops their attendant software, which has higher IP value, in countries with strong IP protection. The software is sent to the Chinese engineers with its source code hidden.

McKinsey also recommends taking care to hire employees with high ethical standards, suggesting they tend to be professionals with overseas education and international work experience. Including non-compete clauses in employment contracts is also a step worth taking.

Companies that effectively protect their IP often monitor the activities of their Chinese business partners for potential leaks, according to McKinsey. It cites a leading high-tech components manufacturer that keeps its business partners under close watch to ensure that parts aren't illegally copied and resold, frequently confirming that the number of components of which customers take delivery matches those shipped.

AmCham IPR study
The American Chamber of Commerce in PRC and in Shanghai recently issued a white paper in which they assess IPR in China. Excerpts from the study:

China's regulations themselves, however, contain several weaknesses. Provisions to transfer suspected cases of criminal liability to the public security organs are lacking. Presently, there appears to be no punishment for willful exporting of IPR-infringing goods. Chinese regulations require both domestic and foreign IPR owners to carry a heavy burden to protect their intellectual property. For example, companies must currently provide customs officials with precise information as to which port(s) counterfeit goods will pass through, even though such information is very difficult or impossible to obtain. IPR owners must post bonds to cover the risk of counterclaims in the event that a court finds the detained goods are not counterfeit.

Local standards and protectionism:
Interpretations of liability significantly vary as provinces and municipalities have different thresholds for determining copyright infringement.

Jurisdiction issues: The lack of coordination among the many Chinese government agencies responsible for IPR enforcement prevents effective action. The administrations for industry and commerce (AICs) trademark divisions, AIC economic supervision divisions, technical supervision bureaus (TSBs), copyright administration Offices, customs, social order divisions, and the public security bureaus (PSBs) and their economic crimes investigation divisions (ECIDs), to name a few, have overlapping jurisdiction and authority. Jurisdictional issues need to be resolved and a program adopted to improve coordination.

Patent protection and registration:
Delays: There is considerable delay with respect to trademark invalidation petitions before the Trademark Office, which reportedly has 20,000 undecided cases pending. Some disputes filed in 1999 remain undecided…"The State Intellectual Property Office (SIPO) is understaffed to handle the large volume of applications. The ensuing backlog means that receiving an invention patent can take five years or longer. There is considerable delay with respect to trademark invalidation petitions before the Trademark Office, which reportedly has 20,000 undecided cases pending. Some disputes filed in 1999 remain undecided.

Patents and standards: The intellectual property policies of the standards working groups in China do not conform to international practices….A certain number of member companies have been sued or threatened to be sued in Chinese courts by former local employees who formed companies and proceeded to preemptively and in bad faith file Chinese utility and design patents lifted entirely out of their former employers' technologies or trade secrets. Industry concern continues in the case of SIPO invalidating the use-patent for the drug Viagra. SIPO relied on new guidelines issued after the patent had been granted and then did not allow the patentee the opportunity to meet the revised data provision standard of these guidelines. The decision has been appealed and is in litigation.