USTR's Second IPR Provincial Review to South China

UNCLAS SECTION 01 OF 04 GUANGZHOU 000376

SIPDIS

USDOC FOR 4420/ITA/MAC/MCQUEEN, DAS LEVINE, RIGOLI
STATE FOR EB/TPP MASSINGA, FELSING
STATE PASS COPYRIGHT FOR TEPP
STATE PASS USPTO FOR DUDAS, BROWNING, ANTHONY, THURWACHTER, COHEN,
WONG
STATE PASS USTR FOR ESPINEL, READE, MCCOY, WINTER, CELICO
USDOJ FOR SUSSMAN
DHS/CPP FOR PIZZECK
USPACOM FOR FPA

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: KIPR ECON ETRD WTRO CH
SUBJECT: USTR's Second IPR Provincial Review to South China
Highlights Regional Differences

REFERENCE: A) Guangzhou 51; B) 06 Guangzhou 32379; C) 06 Guangzhou
29875

(U) This document is sensitive but unclassified. Please protect
accordingly.


1. (SBU) SUMMARY: A USTR-led delegation traveled to four cities in
Fujian and Guangdong provinces March 12-15 to engage local leaders
on IPR issues and raise specific areas of concern. Provincial and
municipal-level officials seemed engaged in IPR issues and often
said the right things, but their commitment to enforcement and
transparency varies significantly. Copyright enforcement -- in
CDs/DVDs, software, textbooks, and the internet -- is a priority for
provincial officials but also presents the biggest challenges. In
Xiamen, home of one of China's largest ports, Customs enforcement is
a top concern for the local government. In Putian, the center of
China's shoe manufacturing industry, local protectionism continues
to stand in the way of real enforcement. USTR urged local officials
to improve transparency, transfer more cases to the police, target
internet piracy, and assist foreign SMEs. The visits are part of
USTR's provincial review of China, announced in the Special 301
Report issued in April 2006, and follow a similar trip in August

2006. END SUMMARY.

Background on the Provincial Review
--------------


2. (SBU) In an effort to pinpoint the problems in China's IPR
enforcement system and develop more effective solutions, USTR has
focused on regional IPR enforcement. The 2006 Special 301 Report
names Guangdong as the center of large-scale counterfeiting in China
for goods ranging from low-cost consumer items to electronics. In
Fujian, the report highlights widespread production of counterfeit
athletic shoes, among other products. In August 2006, USTR led an
interagency delegation to Guangzhou, Dongguan, and Shenzhen in
Guangdong Province and Fuzhou in Fujian Province (ref C). USTR's
planned second trip to Guangdong and Fujian in December 2006 was
canceled at the last moment because provincial authorities, under
order from the central government, denied all of the meetings.


3. (SBU) This time the USTR-led delegation visited Xiamen, Putian,
and Fuzhou in Fujian Province and Guangzhou in Guangdong Province.
Chinese authorities approved the meetings only days before the trip
began and downgraded the official level of most of the meetings by
two grades. The ranking official at the August 2006 meetings was the
deputy secretary general; in this instance it was deputy division
chief except in Guangdong, where the head of the provincial
Intellectual Property Office chaired the first part of the meeting.
Attending the meetings on the Chinese side were the Intellectual
Property Office (IPO),Copyright Bureau, Culture Bureau,
Administration of Industry and Commerce (AIC),and Foreign Affairs
Office (FAO). In addition, a Customs official attended the Xiamen
meeting, a Public Security Bureau (PSB) official attended the Putian
and Fuzhou meetings, and a PSB and Technical Supervision Bureau
(TSB) official attended the Guangdong meeting. On the U.S. side was
Stanford McCoy, USTR's Chief Negotiator on IPR, Todd Thurwachter, an
IPR Attache in Embassy Beijing, and Conrad Wong, USPTO Attorney
Advisor and future IPR Attache in Consulate Guangzhou. Econoff and
Econ Assistant accompanied.

Guangdong: Medicines, Internet, and Landlord Liability
--------------


4. (SBU) McCoy opened the meeting with Guangdong Province officials
by highlighting some of the positive developments in Guangdong since
his August 2006 visit: a successful campaign against stores selling
fake drugs, including Lipitor and Viagra; AIC's apparent interest in
using landlord liability laws to clean up local markets; the opening
of IPR complaint service centers; and enforcement actions by
Copyright to shut down websites that provide pirated textbooks. He
also noted continuing areas of concern: 81 percent of counterfeit
goods seized by U.S. Customs in 2006 originated in China -- with
Shenzhen's Yantian and Shekou among the top five ports of lading;
the mechanics of both administrative and criminal enforcement
continue to lack transparency; increasing numbers of internet sites
sell fake products; a need for enforcement actions at universities
to coincide with the beginning of school terms; and infringers use

GUANGZHOU 00000376 002 OF 004


express mail carriers to ship goods abroad.


5. (SBU) Guangdong PSB'S Li Shanxiong stated that the PSB focused on
important industries such as pharmaceuticals and textiles, and noted
cooperation with U.S. comapanies such as Pfizer and Proctor &
Gamble. (McCoy acknowledged that both companies had complimented
these efforts.) Guangdong AIC's Wu Lichao did not elaborate on plans
to use landlord liability laws to clean up markets, but said his
agency will follow the precedent established in Beijing's Silk
Street case. Copyright's Guo Xiuwen said her office is currently
implementing a program which verifies that large-scale enterprises
use legitimate software, and will target SMEs during the next phase.
Through its actions, Copyright closed seven pirate music websites in
2005 and has convinced many popular websites to stop providing
illegal music and software and many have established copyright
protection divisions as a result. Illegal internet gaming sites will
be the target of the next campaign. On textbook piracy, she
referred to a past campaign in 2003. Culture's Chen Ang said
Guangdong has China's largest volume of A/V products and noted that
his agency has increased its staff from 400 to 1,300 to improve IPR
enforcement. He cited close cooperation with MPA and IFPI and said
local offices are encouraged to transfer cases to the PSB. McCoy
encouraged Guangdong officials to target counterfeit CD/DVD
manufacturers for criminal enforcement in the future. Culture stated
that it was considering intensifying work on criminal transfers,
which were already emphasized.


6. (SBU) IPO's Zhu Wanchang said Guangdong has eight municipal-level
courts that accept IPR cases. IPR protection at trade fairs is a
priority for his office. (According to David Buxbaum, head of
AmCham-South China's IPR Committee, China's trade fair regulations
do not state clearly how companies can pursue infringement cases
outside of fairs -- an important avenue for rights holders.) TSB's
Liang Lixin said the TSB Guangzhou special investigation office,
which handles IPR cases, has gone from a staff of 30 to 130 in
recent years. TSB has seen a double-digit increase in case transfers
to the PSB, in part because local offices receive monetary awards of
RMB 2 million (USD 260,000) for doing so. MORO's Zhou Lijun said
Guangdong has established IPR complaint centers in Guangzhou,
Shenzhen, Zhanjiang, and Shantou. Rights holders can also lodge IPR
complaints on MORO's website, which MORO is then required to refer
to relevant agencies in a timely manner.

Fujian: Footwear and Copyright
--------------


7. (SBU) McCoy opened the meeting with Fujian Province officials by
commending recent positive steps: a criminal case in Xiamen
involving internet sales of infringing music and movies; a
successful campaign against counterfeit medicines in Fuzhou and
Xiamen; national-level regulations governing case transfers between
Customs and PSB authorities; and the decision by central authorities
to make permanent the 100 Day Campaign against pirated A/V products.
He also noted continuing areas of concern in Fujian: Xiamen is among
the top five ports of lading for counterfeit goods seized by U.S.
Customs; Putian is a major source of counterfeit footwear; Xiamen
PSB has shown a lack of initiative in investigating retail copyright
criminal cases; and university campuses remain a center of textbook
piracy. McCoy also encouraged Fujian officials to be sensitive to
the complaints of small foreign companies. As an example, he noted
that U.S. art printing companies have identified Fuzhou's Minhou
County as home to a large number of infringing printers.


8. (SBU) IPO's Lin Jinyuan welcomed more data from the U.S.
government regarding IPR infringement in Fujian. He said Fujian IPR
agencies have improved interagency coordination and are transferring
more cases to the PSB. He also touted Fujian's recently established
IPR complaint centers and noted that the Fujian high court and six
cities have IPR tribunals. A Copyright official said all municipal
and county government offices now use legitimate software.
Copyright verifies that computer manufacturers install legitimate
software, and will inspect large enterprises this year to confirm
they use legitimate software. He stated that enterprises that fail
future inspections will be placed on a public blacklist, and
end-user piracy cases will be transferrred to criminal authorities
if criminal thresholds are met. Copyright is also planning a special
campaign against textbook infringement in 2007 to coincide with the

GUANGZHOU 00000376 003 OF 004


beginnings of the spring and fall semesters. With respect to poster
production in Minhou County, Copyright has not received complaints
from right holders. PSB's Zhu Guichang said the Economic Crimes
Investigative Division has a special team devoted to IPR crimes and
has seen good cooperation with administrative bureaus. McCoy praised
the provincial PSB for pushing local PSB offices to conduct raids,
citing Nike's experience in Putian as an example. Fujian officials
also stated that they send IPR officials to major Guangdong trade
fairs, providing a possible avenue for right holder complaints.

Xiamen: Customs Enforcement
--------------


9. (SBU) Xiamen Customs has jurisdiction over approximately half of
Fujian province, including the port cities of Quanzhou and
Zhangzhou, and has a special division that handles IPR enforcement.
According to Xiamen Customs' Zhang Wei, the International Customs
Association presented awards to two Xiamen Customs officials in

2006. He said Xiamen Customs believed that transfer to criminal
authorities was one of the most effective means of addressing
copyright infringements, and that integration of civil, criminal,
and administrative remedies was critical to fighting copyright
infringements. Wei added that his office has worked closely with
foreign rights-holders such as Nike, Microsoft, QBPC, and the
International Olympic Committee. Though Xiamen Customs does not
always have sufficient staffing, he said training is always
provided. McCoy praised the close cooperation between U.S. companies
and Customs officials and encouraged Xiamen Customs to fully exploit
China's 2006 regulations on the transfer of cases from Customs to
PSB. In response, Zhang said his office has already transferred
cases, including one involving Nike. (Nike's Wei confirmed this and
said it is an encouraging step. However, he commented that the time
delay between seizure and investigation gives counterfeiters time to
disappear.)


10. (SBU) McCoy also highlighted the importance of internet piracy
enforcement, and noted a 2006 case in Xiamen's Huli district in
which two men who operated a website providing illegal music
downloads were sentenced to prison. Xiamen Copyright's Wang Weihua
said his office has a working group that deals exclusively with
internet piracy and operates a telephone hotline for tips on
internet piracy cases. Xiamen Copyright sends representatives to an
annual summit of China's internet search engine companies, which has
been held in Xiamen in recent years. Culture's Lei Longtong said his
office transfers cases involving over 1,000 infringing CD/DVDs to
the PSB. McCoy encouraged authorities to step up enforcement on
university campuses, particularly during the beginning of semesters.
McCoy also noted that the local PSB had declined to pursue industry
complaints against large-scale retailers of pirated optical media on
grounds that such cases should be raised with Culture authorities.

Putian: Shoes and More Shoes, but Little Action
--------------


11. (SBU) McCoy opened the meeting with Putian officials by saying
that almost half of U.S. Customs seizures of counterfeit products
are of footwear, noting that Putian is a center of China's footwear
industry. Putian IPO's Chen Kaiping cited a 2006 campaign against
fake shoes and added that infringing factories in Putian are
small-scale, rural "workshop" operations and thus difficult to
track. He noted that local government had an interest in pursuing
illegitimate enterprises because they did not follow labor laws.
Putian's IPR enforcement officials have three areas of focus:
verifying that OEMs produce legitimate brands, confirming that
trademarks are legal, and monitoring import/export channels. PSB's
Wu Jiangshan said the Mountain Eagle campaign remains a focus and
his office publicizes big cases. When McCoy asked him to provide
information on some of these cases to Consulate Guangzhou, he was
noncommittal. He stated that local authorities received good
cooperation from foreign right holdrs such as Nike, Adidas, and
Puma. McCoy also raised a case involving Anheuser-Busch, in which
an unlicensed bottler (Jinshi) is allegedly using Budweiser's
Chinese name and visual elements confusingly similar to
Anheuser-Busch trademarks on its labels. The officials promised to
raise the issue with the Putian AIC, which was not present.


12. (SBU) Following the meeting, Nike representatives led the

GUANGZHOU 00000376 004 OF 004


delegation on a tour of Putian and pointed out several large
factories that had been the subject of local enforcement actions led
by provincial officials, contradicting local officials' assertions
that the problem was mainly in small worksops. A large factory with
apparently modern facilities, Rino, is currently the defendant in a
civil case brought by Nike in the Fujian High Court. In preparing
for that case, Nike successfully requested two separate preliminary
injunctions from the Fujian high court: one for search and seizure
and the other for cease and desist. (AmCham-South China's Buxbaum
commented to the delegation that court injunctions in IPR cases are
extremely useful and foreign rights-holders do not use them enough.)



13. (SBU) The Nike reps pointed out other factories that produced
fake Nike shoes in nighttime shifts, when authorities were least
likely to inspect. They suspected Nike factory staff have cooperated
with some of the infringers. Because Putian officials are
notoriously corrupt, Nike always contacts provincial authorities
first, who then typically work with Fuzhou City officials to conduct
raids. (In 2005, a Putian PSB official allegedly asked the Nike reps
for a RMB 100,000 payment (USD 13,000) for each infringer shut
down.) Enforcement authorities still do not provide Nike with lists
of seized goods after raids done in Putian. Nevertheless, they said
administrative fines -- which typically range between RMB 200,000
and 500,000 (USD 26,000 and 65,000) -- have a deterrent effect on
infringers.

Comment: Local Enforcement is a Mixed Bag
--------------


14. (SBU) Though government officials largely stuck to their talking
points during the meetings, they also provided valuable insights
into their priorities and recent actions. Guangdong and Fujian
province officials are targeting copyright infringement and are
adding resources to relevant offices. Nevertheless, it seems
unlikely that local officials have the training and initiative to
tackle large-scale counterfeit rings, particularly those operating
over the internet and in multiple jurisdictions. On the municipal
level, Xiamen has a proactive Customs office and U.S. companies have
told us they are cooperative. Nevertheless, street-level counterfeit
markets, though not as prevalent as in Guangzhou, continue to exist:
we visited a street of well-marked shops selling golf equipment that
they readily admitted was counterfeit. Putian authorities, on the
other hand, provided almost no useful information and seemed
entirely uninterested in a future dialogue. Industry complaints of
severe local protectionism in Putian seem to be justified.


15. (SBU) The meetings were also an excellent venue for us to state
clearly for the Chinese side our areas of concern, building upon
information gathered from industry and the August 2006 provincial
review, and laying down markers for future interactions with key
local governments. In these large meetings with numerous agency
representatives, it is crucial to step in early to make these points
-- before the Chinese side has a chance to launch into long,
sometimes uninformative presentations. By clearly stating areas of
concern early, as well as praising recent successes, the Chinese
side was more likely to tailor their remarks to our interests.


16. (U) USTR has cleared this cable.

ROCK