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The WTO’s Dispute Settlement Body has adopted the first ever panel report involving China’s enforcement of intellectual property rights, finding for the defendant on the central point.
The principal US claim was that Chinese legislation sets such high thresholds for criminal prosecution of trademark counterfeiters or copyright pirates as to provide them with a ‘safe harbour’ to escape liability. It argued that criminal procedures and penalties for counterfeiting or piracy were available under Chinese Criminal Law only if the circumstances were ‘serious’ or ‘especially serious’. In addition, the US said the law required the amount of sales/illegal gains from an act of counterfeiting or piracy to be ‘relatively large’ or ‘huge’. The precise meaning of these terms was not defined, the US said.
Under Article 61 of the WTO agreement on intellectual property rights (TRIPS ), Members must “provide for criminal procedures and penalties to be applied at least in cases of wilful trademark counterfeiting or copyright piracy on a commercial scale.” On this crucial issue, the panel ruled that the US had not provided sufficient evidence that such was the case. Although the panel conceded that Chinese legislation did indeed “exclude certain commercial activity from criminal procedures and penalties”, it added that “based solely on the measures on their face [i.e. the legal provisions alone], the panel cannot distinguish between acts that, in China’s marketplace, are on a commercial scale, and those that are not.” The US had produced some evidence to prove that this was so, but the panel said it was “too little and too random to demonstrate a level that constitutes a commercial scale for any product in China.” It therefore concluded that the US had not established that the criminal thresholds were “inconsistent with China’s obligations under the first sentence of Article 61 of the TRIPS Agreement.”
The panel report (WT/DS362/R) was adopted on 20 March. While the US stressed its commitment to IPR protection and said China would have to make changes to its enforcement regime following the ruling (see below), Chinese government spokesman Yao Jian stated the panel had “rebutted the great majority of the US side’s claims and broadly vindicated China’s intellectual property system.”
Other Findings More Favourable to the US
The US fared better on most of its other claims. For instance, the panel agreed that the simple removal of counterfeit trademarks was not sufficient to permit the release of goods into the ‘channels of commerce’ as it would be easy to reaffix identical false labels to them, making it possible that the “goods will infringe once again.”
However, the panel rejected the US argument that Chinese customs officials’ lack of authority to order the destruction of infringing goods violated TRIPS Article 59. Under Chinese law, authorities may sell infringing goods to social welfare bodies or the rights holder, or auction them off. The panel found that although Article 59 provides that competent authorities “shall have the authority” to order the destruction or disposal of infringing goods, there is no obligation to “exercise that authority in a particular way.”
The panel ruled in favour of the US with regard to copyright protection for works whose publication or dissemination has been prohibited by law. China’s copyright law explicitly excludes IPR protection for such works. The panel acknowledged that a government’s right “to permit, to control, or to prohibit the circulation, presentation or exhibition of a work” could interfere with the copyright owner’s exercise of ‘certain rights’, but added that there was “no reason to suppose that censorship [would] eliminate those rights entirely with respect to a particular work.”
The panel further noted that the denial of copyright protection for works based on their content was inconsistent with TRIPS Article 41.1, which requires WTO Members to “ensure that enforcement procedures [...] are available under their law so as to permit effective action against any act of infringement of intellectual property rights covered by this Agreement.”
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