Changes in Enforcement

Compared to the systematic updating of the substantive IP legislation, the enforcement options available to rights-holders in China have not undergone such significant changes, as the main IP agencies remain essentially unchanged in terms of bureaucratic structure, with the State Administration of Industry and Commerce (SAIC) responsible for trademark registration and enforcement; the General Administration of Customs the body responsible for enforcement of IP at the border; whilst copyright is still dealt with by the National Copyright Administration (under the General Administration of Press and Publication). Finally, the State Intellectual Property Office (SIPO) remains the body responsible for patent registration and enforcement. However, a noticeable recent change which was discussed by several interviewees was the establishment of several specialist IP courts in Beijing, Shanghai and Guangzhou from late 2014 onwards. Prior to the establishment of these three specialised courts, there already existed, from the mid-1990s onwards, specific intellectual property tribunals in many courts: by the end of 2013, such specific intellectual property tribunals numbered around 410 (Li 2016, p. 304). Consequently, there was already a recognised need to concentrate skilled and experienced personnel into specialised IP fora for the purposes of dispute resolution. However, the more recent establishment of these three specialist courts in Beijing, Shanghai and Guangzhou was intended to funnel this expertise into regional centres and indeed, has been extremely positively received by rights-holders generally.

Several respondents independently mentioned these newly established specialist IP courts as a welcome positive development in the framework of IP protection in China. Indeed, recent statistics suggest that these courts are already proving popular amongst rights-holders, with the 2015 Supreme People’s Court Work Report, issued 13 March 2016, reporting that these specialist courts concluded 9872 cases in 2015 alone (Supreme People’s Court of the PRC 2016a). However, despite the relative success of these three pilot intellectual property courts, some commentators are also critical that there remains no central national appeal court for IP-related cases which “would greatly improve the judicial protection of intellectual property rights” by ensuring greater consistency (Li 2016, p. 317). Respondent 15LAW02 also expressed concern about the heavy workload for these specialist judges as case volumes increase and also that the quality of judgments issued may subsequently be compromised. Thus, it is to be hoped that resources provided to these specialist courts, in terms of the number of judges appointed, can keep pace with the continual growth in the number of IP-related civil cases filed, as clearly these courts are well regarded by respondents overall.

In terms of foreign rights-holders bringing litigation against infringers, there was a clear belief a decade ago that the foreign party would be disadvantaged by a perceived bias against foreign rights-holders. However, more than one respondent in 2015 referenced the high success rate of foreign companies bringing cases before Chinese courts, “probably because they’re more prepared and they’re spending more money.”¹³Another respondent reported specifically on their analysis of win rates in patent infringement cases: “comparing the ratio for foreign patentee and domestic patentee to win the case, almost the same... maybe 70[%], maybe 72[%], only 2% difference, quite low, yeah.”¹⁴ This narrowing of the gap between foreign and domestic rights-holders is a significant shift from 2005 and should boost the confidence of all rights-holders that the courts can offer a viable option for enforcing their intellectual property. Nevertheless, the vast majority of civil litigation related to IP heard by the Chinese courts involves a Chinese plaintiff and a Chinese defendant, with one respondent 15LAW01 estimating that 95% of cases are between Chinese parties; thus, foreign rights-holders are largely absent. On the other hand, when foreign rights-holders do bring civil litigation against infringers, experiences from the 2015 respondents suggests that they should feel quite confident about the perceived equity and fairness in the civil litigation process.

Conversely, there can still be a certain degree of reluctance on the part of major multinational corporations (MNCs) to bring civil litigation in China if their IP rights are infringed which may be as a result of the low levels of damages typically awarded or due to difficulties in obtaining sufficient evidence of infringements. One respondent from a large MNC operating in China for several years admitted that their company has deliberately never brought civil litigation in China to tackle IP infringements; not only was it thought to have potentially negative consequences for the company’s reputation and image in China, but it was also thought to be impossible to catch the “big fish” ultimately responsible for the infringements rather than the “small fry” typically caught red-handed in the infringing factory or warehouse. Thus, their IP enforcement strategy instead focused on building relations with key administrative enforcement agencies such as the local AICs.

A further significant enforcement issue which appears to have persisted since the initial research project began in 2005, which may also hamper rights- holders in tackling infringers in court, is the issue of inadequate damages. One respondent from the pharmaceutical sector estimated average compensation across the whole IP litigation field at only around 80,000 RMB per case.¹⁵ Indeed, respondents mentioned damages as not just insufficient to act as a deterrent:

The penalties often aren’t there at the level that will really put that person in jail or make them pay... sometimes it’s just the cost of doing business, people pay the fine, open up a new shop next week.¹⁶

They also discussed the damages as insufficient to even cover the costs of bringing an action against the infringer:

So it still remains that some trademark owners cannot cover their legal costs with the damages. Actually one of our clients complained about this recently.¹⁷

Therefore, although there have been some high-profile damage awards recently¹⁸ with large amounts being awarded to rights-holders, the impression remains that the typical award of damages is insufficient to fully compensate rights-holders for the infringement. This issue of low damages was also highlighted as a major concern in 2005 and arguably little progress has been made in this area in the past decade. Another frustration which remains with the contemporary system of IP protection is with difficulties in gathering evidence of potential infringements. For example, if a patent is granted covering a manufacturing process, it is difficult to access a potential infringer’s factory to gather evidence!¹⁹ However, it could be argued that such frustrations are not unique to China and arise more from the nature of IP infringements being an opaque activity.²⁰

In contrast to civil enforcement by the courts, criminal enforcement was cited by several respondents as a potentially positive means of pursuing infringers which was used frustratingly infrequently, with one respondent’s own estimates suggesting only 2% of raids result in a transfer to criminal liability.²¹ This low rate of transfer from administrative agencies to criminal liability is also reflected in the official statistics which showed only 2684 concluded criminal IP cases in 2007 compared to more than 100,000 cases dealt with through administrative sanctions and 17,395 civil IP cases handled by the local courts (Liu 2010, p. 141). Nevertheless, the past decade has seen a rapid criminalisation of IP infringements witnessed in both the expansion of criminal IP offences in the substantive law and the rapid and consistent rise of transfers from administrative agencies to criminal courts (Liu 2010, p. 153). This increase in the criminalisation of IP infringers is welcomed by respondents, amongst whom there was a clear consensus that criminal liability for infringers was seen as a more effective deterrent compared to facing administrative or civil consequences because “criminal action is mostly effective in China. The infringer, they don’t care about the economic fine but they do care about their personal safety issues.”²² As a result, there was an unmistakeable desire for the threshold at which criminal liability can be imposed to be further lowered and the rate of transfer from administrative to criminal liability to continue to increase.

An interesting issue in the enforcement of intellectual property rights in general is the question of who is seen to be the “victim” of IP infringements? Rights-holders would clearly say that they are the victims as it is their exclusive rights which are being breached and as such, they should play a key role in the prosecution of any infringers. On the other hand, enforcement authorities now more commonly perceive the “victim” to be the public, for example, innocent individual consumers who may be deceived or even harmed by counterfeit goods. This increased focus on the rights of individual consumers reflects the consumer “revolution” said to have taken place in China since the reform and opening-up era began in 1978 (Wu 2014). Prior to 1978, the notion of individual consumer choice and corresponding consumer rights were completely unknown in China as the socialist economy was directed by the state and relied on collective production and distribution. However, as China began to transition to a socialist market economy throughout the 1980s, the role of the individual consumer in selecting from a range of goods and services rose to prominence. Nevertheless, the focus on individual consumers as the true “victim” of IP infringements does push rights-holders out of the enforcement process. Although this sidelining in the enforcement process may be a source of considerable frustration for rights-holders, the countervailing focus on the public as the victim could actually be seen as a significant prompt for the improved enforcement environment. As enforcing intellectual property rights becomes more aligned with the central government policy focus on improving rights for individual consumers, IP enforcement should continue to become more and more consistent.

However, despite clear changes and improvements in the domestic enforcement environment, the export of counterfeit products from China to major trading partners such as the US and the European Union (EU) continues to be a concern. China continues to be the origin of 80% of counterfeit goods detected at the EU’s borders according to the Report on EU Customs Enforcement of Intellectual Property Rights 2014 (European Commission 2015). Furthermore, United States Trade Representative (USTR) annual reports on China’s WTO compliance still show concerns about the IP system in China; for example, the 2015 report highlighted “serious problems with intellectual property rights enforcement in China, including in the area of trade secrets” as a particular area of concern (United States Trade Representative 2015, p. 4). As a result, although respondents were positive about the changes they had witnessed in the IP enforcement system in China, enforcement practices remain far from perfect, with issues such as the evidentiary burden on plaintiffs or the level of damages routinely awarded persisting from ten years earlier.

In terms of enforcement, the changes that China made have evidently increased formal compliance with the TRIPS Agreement, for example, an increase in the availability of criminal liability by lowering the quantitative threshold for liability. However, there is little evidence that the improvements in the IP enforcement environment in China were primarily motivated by the desire to increase compliance with the TRIPS Agreement. Rather, the changes in enforcement of IP rights witnessed over the past decade have been largely driven by domestic demands. Thus, both legislative and enforcement changes, although undeniably resulting in positive improvements for rights-holders, have not been primarily driven by compliance with the TRIPS Agreement.