PTO-SPONSORED IP PROGRAM BUILDS BRIDGES IN EAST CHINA

UNCLAS SECTION 01 OF 04 SHANGHAI 000500

SENSITIVE
SIPDIS

USTR FOR CHINA OFFICE - AWINTER, TWINELAND, DKATZ, MCCOYS; IPR
OFFICE -
RBAE; AND OCG - TPOSNER
DOC FOR NATIONAL COORDINATOR FOR IPR ENFORCEMENT - WPAUGH
DOC FOR ITA/MAC: SZYMANSKI
LOC/ COPYRIGHT OFFICE - STEPP
USPTO FOR INT'L AFFAIRS - LBOLAND
DOJ FOR CCIPS - TNEWBY
FBI FOR LBRYANT
DHS/ICE FOR IPR CENTER - DFAULCONER
DHS/CBP FOR IPR RIGHTS BRANCH - GMCCRAY
TREASURY FOR OASIA - DOHNER/CUSHMAN
NSC FOR JIM LOI

E.O. 12958: N/A
TAGS: KIPR ETRD EINV EFIN CH
SUBJECT: PTO-SPONSORED IP PROGRAM BUILDS BRIDGES IN EAST CHINA

SHANGHAI 00000500 001.2 OF 004



1. (SBU) Summary: During an October 16-17 U.S. Patent and
Trademark Office-sponsored trip to Shanghai and Nanjing, Judge
Ronald S.W. Lew from the United States District Court for the
Central District of California and Matthew J. Bassiur, Criminal
Division Trial Attorney and IP Liaison to Industry of the
Computer Crime and Intellectual Property Section of the
Department of Justice, met with a wide-range of IP officials and
participated in a small media roundtable with representatives
from the local press. The Shanghai High Court emphasized the
breadth and depth of its ability to handle IP cases, with over
half of its IP judges having received training overseas.
Shanghai IP administrative officials stressed the benefits and
effectiveness of the city's administrative enforcement, and the
Shanghai Public Security Bureau (PSB) noted its efforts in
tackling the increasing number and complexity of IP-related
internet crimes. The Jiangsu IP Administration outlined a new
local regulation allowing administrative officials to issue
penalties for patent infringement, and the Jiangsu High Court
discussed its increasing IP case load and engaged in a wide
range of judicial topics. Since the filing of the IP-related WTO
cases, meaningful dialogue with IP officials, especially outside
Shanghai, has been sparse. The PTO-sponsored visit was
invaluable in helping us re-establish engagement, particularly
with the PSB and Jiangsu High Court. The Consulate would gladly
welcome similar visits in the future. End Summary.

Shanghai High Court - Proud of its IP Enforcement
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2. (SBU) During a meeting with the Shanghai High Court, Vice
Director of the Intellectual Property Division Zhu Dan and two
other judges from the civil and criminal divisions compared
experiences with Judge Lew and Bassiur on IP-related cases. Zhu
provided an overview of the IPR-related trial system in Shanghai
Courts, noting there are 6 courts in Shanghai empowered to try
IPR cases: the Shanghai High Court, 2 intermediate courts and 3
district-level courts in Pudong, Huangpu, and Yangpu. In total,
there are 45 IPR judges in Shanghai, approximately half of whom
received an education abroad and five who have a technical
background. Thus far in 2008, Shanghai courts have received
more than 1,300 civil IPR cases and 70 criminal IPR cases.
Foreign related cases accounted for more than 10 percent of the
total. In comparing the two systems, Zhu noted that while more
than 95 percent of IPR cases settled before trial in the United
States, in Shanghai, the average rate of settlement before trial
is 60 percent.


3. (SBU) Zhu further outlined how the Shanghai High Court
allocates cases, particularly those involving several different
causes of action. According to guidance from the Supreme
People's Court, IPR tribunals should hear disputes on technical
contracts, unfair-competition cases and anti-monopoly cases.
Counterfeit pharmaceutical case, as well as those cases
involving money laundering and fraud, automatically fall under
the jurisdiction of a criminal tribunal. Zhu also pointed out
that some IPR cases, which involve complex technical issues, are
assigned to judges who have the relevant technical background.


4. (SBU) Regarding the issue of technical advice for IP-related
cases, Zhu explained that complicated IP cases are handled
through a "technical appraisal process." The parties in a case
may choose, with mutual agreement, a third party to conduct the
technical appraisal. The court will designate one if an
agreement cannot be reached. In some cases, the court will
appoint a technical expert as an assessor or consultant directly
to the court.


5. (SBU) On the issue of damages, damages can be calculated
under the Judicial Interpretation by the amount of infringing
goods multiplied by the average profit of the rights holder,
said Zhu. However, there is no clear guidance whether damages
should be calculated based on retail price or wholesale price.
According to Zhu, it depends on the specific case. If the
producer is involved in counterfeiting, the wholesale price is
generally applied. If a retailer is involved, the retail price

SHANGHAI 00000500 002.2 OF 004


is used as the instrument of measure. Regarding the price
difference between legitimate goods and counterfeit goods, Zhu
said if the rights holder makes a claim for damages, which is
calculated based on his/her loss, the price of legitimate goods
might be applied. But, if the rights holder makes a claim for
damages, which is calculated on the infringer's profits, the
price of the counterfeit goods might be utilized.

Shanghai PSB: Internet IP Crime on the Rise
--------------


6. (SBU) In a meeting with the Shanghai Public Security Bureau
(PSB) Economic Crimes Investigation Division (ECID) Vice
Director Tang Xiliang and six other officers, Judge Lew and Mr.
Bassiur discussed both internal and international cooperation,
resource allocation, and the rising number of IP-related
internet crimes. Tang emphasized the importance of
international cooperation on IPR crime investigations,
especially on cases involving the internet. He was pleased with
the degree of cooperation between China and the United States on
transnational crimes, adding that the task force initiated
between the Ministry of Public Security and the United States
helped successfully resolve several crimes with a Shanghai
component. According to Tang, the Shanghai PSB also plays an
integral role in that city's implementation of the National IP
Strategy, and has a unit under the leadership of Yao Jianda,
which is solely dedicated to IP-related crimes. The Shanghai
PSB also is dedicated to working closely with the municipality's
IP administrative agencies to ensure effective cooperation.


7. (SBU) Tang acknowledged that the PSB's ECID does not have
enough resources to effectively deal with every IP-related case.
The PSB gives priority to and reserves resources for crimes
involving terrorism and offenses that affect people's health and
safety. In deciding which IP-related cases to investigate, the
PSB must consider jurisdiction, the amount and value of goods
involved, and the nature of those committing the crime, such as
whether recidivists or members of organized crime are involved.
If there is a conflict over jurisdiction in a case, the Ministry
of Public Security makes the final decision about the
jurisdiction. The PSB also considers whether there is
sufficient evidence to successfully prosecute the case.


8. (SBU) Tang also noted that his office is grappling with a
rapidly increasing number and complexity of internet-related IP
crimes. To develop a cadre of officers with the capacity to
deal with internet-related IP crimes, Shanghai PSB has
established special training programs and sent several Shanghai
PSB officers abroad for training, including the United States.
The ECID also works with the Shanghai Internet Supervision
Department when special support is required. (Note: The
Internet Supervision Department also is under the Shanghai PSB.)


Administrative Enforcement - Viable and Inexpensive
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9. (SBU) The Consul General hosted a lunch for Judge Lew and
Mr. Bassiur. Chinese-Government guests included Vice Director
of the Shanghai Administration of Industry and Commerce (SAIC)
Chen Xuejun, Shanghai Copyright Bureau Copyright Department
Director Wu Youzhang, and Vice Director of the Shanghai IP
Administration Hong Yongqing. Each spoke on Shanghai's
administrative enforcement system, the limits of administrative
authority, and the administrative burden-of-proof issues
compared to that of civil cases. Chen stressed that the SAIC
regularly transfers counterfeit cases for criminal prosecution
when there is a large volume involved and when the case has
other "substantial implications." In addition, criminal and
administrative authorities are empowered to undertake joint
law-enforcement action. According to Hong, the Shanghai IP
Administration annually handles about 40 patent-related cases.
He also emphasized that, unlike the United States, China has
administrative enforcement that allows a non-judicial option for
rights holders to seek redress. Chinese rights holders complain

SHANGHAI 00000500 003.2 OF 004


that their only option in the United States is expensive
litigation, while U.S. rights holders in China have access to
"inexpensive" administrative enforcement. Chen also offered
that a major reason why knock-offs continue to abound is due to
foreign rights holders' inadequate supervision of markets.


10. (SBU) On copyright issues, Wu said that when the violation
is severe enough, Copyright Bureau authorities have the right to
seize equipment, such as copiers that produce the infringing
material. They can also impose a fine up to RMB 100,000 (USD
$15,000),but this depends on the nature of the case as well as
whether recidivism is involved. According to Wu, most copyright
cases in Shanghai are ex officio; the Copyright Bureau regularly
transfers cases to the PSB according to threshold regulations.
Although the PSB has no direct access to administrative
agencies' databases, the agencies willingly provide information,
on request of the PSB.

Jiangsu IP Administration Continuing to Innovate
-------------- ---


11. (SBU) During a visit to the Jiangsu IP Administration,
Department Director of Policy and Law Chen Suning provided an IP
administrative enforcement overview of Jiangsu Province. In
total, Jiangsu has administrative enforcement agencies for
patents in 13 cities throughout the province. From 2002 through
2006, Jiangsu administrative enforcement agencies received more
than 400 allegations involving patent infringement, of which 350
were closed. Of the 400 or so cases, 50 of them involved
foreign rights holders from diverse locations, such as the
United States, Japan, Germany, and Italy. Disputes over
invention patents accounted for 15 percent of all cases. Chen
said that the level of IPR protection has grown in direct
proportion to local economic development. Like the cities of
Beijing and Shanghai and Guangdong Province, Jiangsu also has a
high number of IP cases because of its more advanced economy and
active enforcement.


12. (SBU) Chen clarified that, under current law, patent
administrative enforcement agencies only can order the infringer
to cease the infringing activity. These agencies may not impose
damages or levy fines against an infringer. If the rights
holder demands compensation, he or she should file a civil case.
According to Chen, this is the reason why there are more patent
cases handled in Jiangsu courts than through administrative
enforcement procedures. However, the burden of proof in a civil
case is much greater than that used for an administrative
recourse. Generally, cases handled through administrative
procedures are simple and obvious. Administrative cases are
better suited towards those right holders who have difficulty
collecting evidence and/or do not demand compensation. However,
Chen said that Jiangsu hopes to improve patent protection, and
is about to release a new local regulation entitled "Patent
Promotion Regulation." According to the regulation, the Jiangsu
IP Administration will have authority to issue fines for patent
infringement, particularly for recidivist cases.

Jiangsu High Court - A Meeting of the Minds
--------------


13. (SBU) During a five-hour discussion, President of Jiangsu
High People's Court Gong Pixiang, Member of the Judicial
Committee Liu Aizhen, Jiangsu High People's Court General Office
Director Cai Shaogang, Presiding Judge of the IPR Division Song
Jian, Presiding Judge of the Second Criminal Division Mao
Zhonghua, and Deputy Presiding Judge of the IPR Division engaged
Judge Lew and Mr. Bassiur on issues ranging from rule-of-law and
transparency to defining damages and technical appraisals in IP
cases. The Jiangsu High Court members freely exchanged views
and queried Judge Lew on U.S. IP court cases, common procedures
in U.S. District Courts, and intricacies of U.S. IP-related
laws. Song gave an overview of Jiangsu's IP judicial efforts,
saying there are 6 intermediate courts handling patent cases,
and 9 basic-level courts handling IPR cases in province. From
2001 to 2008, Jiangsu courts received 7,070 IPR-related

SHANGHAI 00000500 004.2 OF 004


first-instance cases, which accounted for 10 percent of the
nation's total first-instance IPR causes of action. Jiangsu
closed 6,707 of these matters, or roughly 95 percent of its
cases. During the same period, Jiangsu received 1,008
IPR-related second-instance cases, of which 979 were closed.


14. (SBU) Most infringement cases involved patents, trademarks,
and copyrights; however, Jiangsu recently has begun to receive
new types of cases, involving novel issues such as
non-infringement declarations and temporary restraining orders.
The majority of Jiangsu's IPR criminal cases involved
trademarks. To better protect IP, the Jiangsu High Court
emphasizes compelling the infringer to disclose all infringement
information, imposing civil sanctions on infringers under
certain circumstances, and inviting technical experts to be
involved in cases. To increase transparency, the Jiangsu High
Court now publishes all IP-related decisions on the internet.
Separately, approximately 60 to 70 percent of all IP-related
cases are settled before trial.


15. (SBU) Song also discussed the criteria that Jiangsu courts
consider when issuing a temporary injunction, including the
probability of the plaintiff prevailing in the case, the
possibility of causing irreparable damage, the applicant's
financial guaranty, and the public interest. Although it may be
difficult to determine the factors constituting "irreparable
damage," the court also factors in the loss of the right
holder's market share that the infringer caused. Jiangsu courts
issue temporary injunctions in about 80 percent of its
IP-related cases. Song also explained that the court considers
the stability of the patent right when issuing temporary
restraining orders because utility-model and design patents are
granted with little or no substantive examination.


16. (SBU) On the issue of defining damages, Song noted that
Jiangsu uses a method similar to that used in Shanghai. If the
rights holder calculates damages based on his/her loss, the
price of legitimate goods normally applies. If the rights
holder calculates damages based on the amount of the infringer's
profit, the price of counterfeit goods is used to determine
fiscal harm.

Shanghai Press Outreach
--------------


17. (SBU) During an interview with three representatives of the
local press, Judge Lew stressed the importance of the rule of
law, and recognized that China has made tremendous strides in
its IPR protection. He emphasized, however, that there must be
increased focus on IP enforcement. The journalists asked a wide
range of questions regarding Judge Lew's background as the first
Chinese-American to be appointed to a Federal District Court
judgeship. They also queried him regarding U.S. protection of
Chinese IPR in the United States, and his views on the state of
IP protection in China.

Comment
--------------


18. (SBU) Since the filing of the IP-related WTO cases,
meaningful dialogue with IP officials, especially outside
Shanghai, has been sparse. Judge Lew's and Matthew Bassiur's
visit to this consular district has nudged the door open a bit
wider for engagement. For example, despite multiple requests,
this is the first meeting that the Shanghai PSB has accepted
with the Consulate on IP issues in over two years of attempts.
The dialogue with the Jiangsu High Court also was noteworthy for
its open discussion,and IPR Attache Conrad Wong.
CAMP