Chinese Legal System Hinders IP Protection Efforts

By Bill Marcus  |  Posted 10-24-2005
If finding a software pirate is as simple as walking down the street and looking around for wheelbarrows, why is China—home of the largest authoritarian government on the planet—having problems catching these guys?

One reason could be that it's arresting them that's hard; it's keeping them locked up that's the problem.

Local bureaus of the AIC (Administration of Industry and Commerce) raid shops and prosecute commercial infractions.

But before they will act, complainants must prove that they specifically—and not a distant and often foreign software company— are entitled to relief.

Once standing is established, it is up to the complainant, not the state, to collect and present evidence of wrongdoing.

The requirements make it difficult for commercial software companies to recover damages.

Companies whose intellectual property is pirated but not sold on the street—U.S. companies whose proprietary software or data is copied and reused by Chinese contractors or employees, for example—have an even harder time making their cases.

Lovells Shanghai is a law firm that bills $4 million a year on piracy cases.

Forty percent of that goes right to investigators who, in effect, do all the work that the police would be doing in any other country.

"If you have strong evidence, you bring it to the local AIC," said Geoffrey Lin, an attorney with Lovells Shanghai. "Then they initiate a raid."

Courts also don't compel disclosure in most cases, Lin said.

"If the defendant says, 'This is all I have; I don't have anything else,' then the court usually accepts that," Lin said.

In addition, rules of evidence are weighed and applied differently.

In the United States, a receipt is sufficient to prove that a product was purchased from a certain place.

In China, a notary must accompany the plaintiff as he purchases the illegally sold product for the product to be accepted as evidence, Lin said.

As a result of the effort it takes to successfully bring a case, only the biggest companies like Johnson & Johnson and Proctor & Gamble have been able to achieve court victories in trademark infringement.

Otherwise, civil prosecution success is rare, said Lovells Shanghai IP attorney Douglas Clark. "No one's getting anywhere," he said.

Software companies that sell products with broad appeal—as does Microsoft—are the easiest victims of pirates.

But any company that operates in China is at risk of having trademarks or privately developed software pirated, and having patents or copyrights violated.

Successful prosecutions for theft of IP are rare in China, but they do happen. Click here to read about a Hong Kong man who was just convicted in a file-sharing in a BitTorrent network.

Chinese authorities do investigate criminal infractions themselves, but they rarely prosecute, Clark said.

And although the thresholds for criminal sanctions have been lowered, they are still high.

Though the threshold beyond which an activity would be considered criminal varies by business category, it takes about $6,000 in revenues or $3,600 in profit to qualify.

Pirate copies of Windows often sell for as little as the equivalent of 50 cents; it takes a lot of 50-cent sales to make that much money.

Making things even more difficult for authorities, pirates often distribute their products so that no one location does enough business to be considered criminal; or, they change locations altogether.

Violations are punishable by sentences of three to seven years in jail, so there's incentive for the pirates to keep quantities low.

"Anyone smart will structure their business to avoid meeting the threshold," said Clark.

Of course, even if a pirate has passed the threshold, it can be hard to prove it, since those who steal and replicate intellectual property commonly don't keep accurate books and records, he said.

What all this means is that Western firms battling piracy don't have one or two big operators address; instead there is a loose network of small operations—or what look like small operations from a legal perspective.

Customs Failures

Every part of the government system in China is ineffective at battling piracy, but none more so than Chinese customs.

"You have a lot of ports in China and huge ships with massive amounts of containers," said Lin.

As with other enforcement efforts, there are not enough people and not enough attention paid to the issue.

But it just gets worse, because some pirates are actually going on the legal offensive.

The American Chambers are asking the Chinese government to change trademark registration processes so that pirates can't register trademarks and software patents before the Western companies finish the long, burdensome process required of a foreign company.