The legal and moral status of intellectual property rights in China

Companies doing business in and with China face two main types of IP challenges. One involves trademarked and copyrighted physical products. For example, you are manufacturing a branded toy at a factory, and your friend, colleague, or partner observes someone selling knockoffs in a Shanghai market. You don’t know exactly how this has happened—it could be an employee who has gone rogue and is trying to make money on the side. Or, it could be that you contracted with a manufacturing firm who then made a second tooling or assembly line and is producing their line of the product in addition to yours. Or, it could be a firm that bought the product legally and then reverse-engineered and mass-produced it. There are further variations on these themes. For example, Chinese firms sometimes produce a product that looks identical, but is not quite of the same quality. Luxury brands like Louis Vuitton and Coach are particularly susceptible to lower-priced “knock-offs” that can look authentic to unsophisticated consumers and “good enough” to savvy shoppers.

Another type of IP challenge in China of special concern to technology companies involves ideas, information, or methods. In the IP realm this could involve patents, trade secrets, or copyrights. For example, an employee may “leak” designs, processes, code, etc. Or, and this is not unique to China, an employee leaves your firm, joins another firm, and suddenly they are producing something that competes with your product yet is very similar to it. A more distinctively Chinese version of this problem arises when a former joint-venture partner, often with a wink and a nod from the government, starts competing with your company with proprietary technology belonging to your company. In one particularly egregious case, an American entrepreneur who entered into a joint venture with a Chinese company to design and manufacture racecars reported that his joint venture partner applied for patents on 510 of his designs without notifying him (Saleen, 2020).

Compounding IP challenges in China is the systematic involvement of the government in technology transfer and its willingness to push the envelope, even as far as state-sponsored corporate espionage (Metha, 2005). In 2020, the chair of Harvard University’s Chemistry and Chemical Biology Department and two Chinese nationals were arrested and charged by the US Department of Justice with aiding the Chinese government in stealing intellectual property related to nanotechnology that was created in federally funded labs (Department of Justice, 2020). Later that same year, then-President Trump issued a proclamation “to block certain graduate level and above Chinese nationals associated with entities in China that implement or support China’s Military-Civil Fusion (MCF) strategy, from using F or J visas to enter the United States” (The White House, 2020).

IP challenges are illustrative of other property rights issues affecting business, e.g., the enforcement of contracts (Peerenboom, 2002). Property rights, which in most of the rest of the world underpin commercial ventures, are in China weakly protected by the legal system (Chen, 1999). Commercial success and even survival depend on unpredictable and often arbitrary decisions by a murky web of regulators that all trace back eventually to the ruling Communist Party (Peerenboom, 2001, Pei, 2006, Liebman, 2008). What makes the pervasive and serious IP challenges in China so frustrating for Western business executives is that they fly directly in the face of international legal commitments China made to protect the IP of foreign investors in domestic courts when it joined the WTO two decades ago (Clarke, 2003, Hung, 2004). It should be noted that Chinese businesspeople also complain about vague laws, inconsistent enforcement, and the pointlessness of taking legal action (Feldman, 2013, pp. 355, 373). Moreover, as a matter of international law, the United States and the European Union, in support of their companies operating in China, have legal recourse in international fora under Part V of the Trade-related Aspects of Intellectual Property Rights (TRIPS) agreement that gave birth to the WTO in 1995 (World Trade Organization, 1994). In short, since China joined the WTO two decades ago, foreign businesses have had the theoretical right to protect their commercial interests, including IP rights, as a matter of law. In reality, these legal protections are practically non-existent, except when the government wishes to make an example of some person or organization (Yang, 2004, Lam, 2008).

The uncertain and evolving status of property rights in China are a telltale of the degree to which China has made the transition from a state-run economy under authoritarian rule to a market-run economy where the rule of law prevails. At this particular point in time, entering the third decade of the 21st century and the fifth decade of the economic reform era, the transition is far from complete and its ultimate realization is far from assured (Elliot, 2017). Foreign businesses in China thus continue to operate in an informal realm where traditional culture and ethical precepts have considerable enduring influence (Lu & Enderle, 2006, Lu, 2012, Rothlin & McCann, 2016). For Western businesses, this is a bed largely of their own making. In their zeal to remain in the Chinese market and their fear of reprisal from the Chinese government for asserting legal rights, foreign companies and their home countries have for the most part avoided pressing IP and other legal claims in Chinese courts and in international fora. The failure of Western business to promote the rule of law in the first decades of economic reform was a huge missed historical opportunity to influence the path of China’s economic and political development. It has impeded transparency and accountability within the Chinese legal system generally, and contributed to a suboptimal environment for foreign investment in China (Santoro, 2009). Thus, while we concede that the property rights interests of foreign business in China would best be served by a strong rule of law enforced by an independent judiciary, the current business environment requires Western business to negotiate IP rights in an environment where traditional culture and ethics continue to hold sway.

In approaching IP protection in China from the standpoint of our Ethical Triad, a threshold issue is the uncertain and evolving status of rights generally, and intellectual property rights in particular. Rights, as they are generally understood today, developed not that long ago in the West. Indeed, whether they were discovered as “natural laws” or merely developed as “positive laws” (or perhaps a mix of both) is a matter for debate in an advanced university seminar on philosophy and the law. What is important for present purposes is that notions of rights as many know them today emerged among Western European philosophers starting approximately four centuries ago. In light of our discussion of Chinese history and culture in Chapter 1, it should come as no surprise that, from Chinese perspectives, rights generally, and the idea of legally protected IP rights in particular, are not only foreign notions but Johnny-come-lately ones to boot. From Chinese perspectives, rights are not a major part of how individuals and organizations interact with one another, or should interact, on a daily basis (Ihara, 2004, pp. 11-30). Higher priorities in China have been and seem to continue to be: social order; economic mobility and economic growth; a sense of being respected as a national power on the world stage; harmony within one’s social groups and hierarchies; and, staying out of trouble with the government (Kent, 1993). Hence, appeals to rights, whether they originate from a contractual, constitutional, legislative, or moral basis, just are not recognizable as valid ethical arguments to Chinese mindsets. Moreover, “theft” of intellectual property, in particular, is not viewed as a major offense according to typical Chinese perspectives, as suggested by the title of an important book on the subject: To Steal a Book is an Elegant Offense: Intellectual Property Law in Chinese Civilization (Alford, 1995). P. J. Ivanhoe has argued that there are complex and ancient cultural, political, and economic reasons why China was not a fertile ground for the development of robust Westernstyle notions of IP (Ivanhoe, 2005). This cultural and historical background contributes to the inconsistent, indeed rare, enforcement of IP in the Chinese legal system (Alford, 1995).

Many Chinese businesspeople and political leaders are well aware that developing economies, including European countries and the United States at earlier stages of economic development, tend to have weaker enforcement of IP. In addition, many East Asian economies such as Hong Kong, Taiwan, Singapore, Japan, and South Korea went through processes of IP “violations” as part of their economic growth. Importantly to Chinese perspectives, European and American powers are now pointing fingers, claiming the moral high ground and that they are “in the right” while they themselves were, at earlier stages in their economic development, engaging in the same (or similar) behaviors for which they now publicly criticize and blame Chinese individuals, businesses, and the legal system. Indeed, for some Chinese businesspeople and policymakers, this hypocrisy is thought to effectively give them permission to ignore Western IP claims.^[1] A Chinese official, speaking some years in advance of China’s entry into the World Trade Organization, explained the historical context of IP in China:

Intellectual property protection has everything to do with a country’s level of development—its resources, science, technology, and industry. . . . China’s patent law was adopted in 1984, but a patent law in China could not have been imagined before 1979. In those days, knowledge was in the public domain. It would have been wrong to grant a patent. Nowadays, the work of intellectuals is more respected and people realize that creative labor is integral to economic development. But many people still look at things the old way and believe it is all right to copy others. We must educate people to understand what a patent is and why it is important for science and industry, and we need to encourage inventive activity in our institutions and universities. Without the right attitudes, patent protection has no basis.

(Paine & Santoro, 199S)

It must be admitted that, in addition to explanations based on culture and stages of economic development, the lack of respect for IP ownership is also due, in large measure, to willful, knowing behavior among some Chinese companies and government entities who are quite simply out to get away with as much as they can. At the same time, however, there are significant elements of Chinese culture that help color not only whether IP is a socially valid interest or legal right, but also how one should respond when your IP ownership is disregarded or outright stolen. As we note a number of times in this book, it is possible for two thoughts to be simultaneously true—that China is changing and needs to change in some ways to be part of a global rule-oriented market system, but also that traditional Chinese culture continues to occupy a distinctive role in contemporary Chinese business. We are not suggesting that abandoning legal rights is a wise course for long-term success for investing in and trading with China. Nor should one fail to recognize that there are important forces both in the government and private industry that understand China’s future economic development requires a strong IP system that will incentivize scientific discovery and creativity.

We imagine a spectrum, where the extremes are to just give up and go along with Chinese realities relating to rights at one end, and aggressive legal action typified by a “just sue ’em” mentality on the other. If those are the extremes, there are more moderate “middle paths” available, which would, as circumstances require, either engage in dialogue with Chinese partners and government officials or resort to legal remedies in Chinese courts and international tribunals. To be successful, such dialog needs to demonstrate Ethical Awareness, and can be used as an alternative to, or perhaps in tandem with, legal remedies. From a strategic perspective, it makes sense for a business executive intent on securing property rights to keep each potential tactic in reserve to be used according to which gains more practical advantage in the short or long term. Such a strategy is precisely what Master Sun (the same as Sunzi or Sun Tzu) advises in The Art of War when he advises leaders to be adaptable:

the disposition of your [resources] should be like water. Water adapts to the terrain and allows the land to determine its course. An army should adapt to the disposition of enemy forces and allow this to guide them.

(Sunzi, 2011, p. 39)

• [1] Some Chinese businesspeople and officials have observed a more retail form of hypocrisy by Europeans and Americans—managers and executives from those very same tech firms, buying knock-offs and counterfeits while visiting China. Consider a particularly poignant account: a Chinese consulate officer whose job it is to protect American industry in this regard observed Polo Ralph Lauren executives buying Polo counterfeits (Feldman, 2013, p. 368).