CHINA/IPR: ECONOMIC DOWNTURN WEAKENING IPR

UNCLAS SECTION 01 OF 04 BEIJING 001014

SENSITIVE
SIPDIS

State for EAP/CM - PPark and EB/IPE - DBubman
State for EB/TPP - EMagdanz and INL - JVigil
State for EB/CIP - WWitteman and RDaley
USTR for China Office - AWinter; IPR Office -
Kalvarez, JRagland, and SMcCoy
Commerce for National Coordinator for IPR
Enforcement
Commerce for MAC ESzymanski
Commerce for MAC SWilson, JYoung
LOC/Copyright Office - STepp
USPTO for Int'l Affairs - LBoland, EWu, STong
DOJ for CCIPS - MDubose and SChembtob
FTC for Blumenthal
FBI for LBryant
DHS/ICE for IPR Center - DFaulconer, TRandazzo
DHS/CBP for IPR Rights Branch - GMacray, PPizzeck
ITC for LLevine, LSchlitt
State for White House OTP Ambassador Richard Russell

E.O. 12958: N/A
TAGS: ETRD EIND KIPR ECON CH

SUBJECT: CHINA/IPR: ECONOMIC DOWNTURN WEAKENING IPR
ENFORCEMENT

BEIJING 00001014 001.3 OF 004


This cable is sensitive but unclassified and is not
for Internet distribution.

Ref A: Beijing 4527
Ref B: Beijing 3732
Ref C: Guangzhou 0043

Summary
--------------


1. (SBU) China is facing increased difficulty in
enforcing intellectual property rights (IPR) and
preventing "local protectionism" during the economic
downturn, Chinese government officials at the
Supreme People's Court (SPC) and Ministry of
Commerce acknowledged to a recent U.S. government
delegation. A top IPR judge outlined her view that
preserving local businesses and jobs is a higher
priority than ceasing infringement. U.S. businesses
confirm a trend toward weaker enforcement,
describing reluctance by Chinese authorities to
pursue criminal IP cases and citing recent examples
of especially low administrative penalties for
counterfeiters. Chinese officials continue to avow
commitment to protecting IPR, but like the rest of
the Chinese government, minimizing the negative
impact of the downturn may be their most important
goal. End Summary.

SPC Judge Invokes Public Interest
--------------


2. (SBU) In December 2008, Chinese media reported
that the chief intellectual property (IP) judge of
the country's Supreme People's Court had suggested a
public interest test to determine whether those
infringing the rights of others should be ordered to
stop (Ref A). Newspaper reports said Judge Kong
Xiangjun proposed that, in cases where the public
interest was not violated, an infringer should be
ordered to pay damages to the right holder rather
than cease the illegal activity. In order to
mitigate the effects of the downturn in China, the
senior IP judge appeared to support selective or
deferred law enforcement to protect jobs and avoid
the collapse of local businesses, especially China's
vulnerable small and medium-sized enterprises. At
the time, the SPC would not confirm the accuracy of
Judge Kong's quoted remarks.

It's Not Business Protection...
--------------


3. (SBU) In an April 2 meeting with visiting USG
officials, Econoff asked SPC Presiding IP Judge Yu
Xiaobai and IP Judge Ma Xiurong to clarify Judge
Kong's December statement. (Note: Judge Kong
himself, originally scheduled to host the meeting,
cancelled at the last minute due to a "leg injury."
End Note). Judge Yu said it would be a
misinterpretation of Judge Kong's remarks to think

BEIJING 00001014 002.2 OF 004


that the SPC would avoid ordering an injunction to
save a domestic enterprise from collapse. She noted
that SPC President Judge Wang Shenjun has repeatedly
called for those who violate laws to bear
responsibility for their actions, even during the
global financial crisis.

...It's Just Business Preservation
--------------


4. (SBU) However, Judge Yu continued, "we" must all
face the fact that compensation levels sought by
right holders for IPR infringement may not be
available as local businesses struggle through the
economic crisis. Therefore, she suggested, the
better approach would be to avoid issuing an
injunction, and instead allow the infringing
enterprise to continue its operations so that it
might pay the damages in the future. Quoting a
Chinese idiom, she said "you should not drain the
pond to catch the fish," elaborating that closing
down a business and causing jobs to be lost is not
the best solution in cases of infringement. Judge
Yu therefore was making a subtle distinction: the
court would not refrain from issuing an injunction
expressly to save a domestic enterprise from
collapse. The court would, however, do so in order
to preserve the company so that it could eventually
fulfill its obligations to pay damages to right
holders.

Local Enforcement Increasingly Difficult
--------------


5. (SBU) In a March 31 meeting at China's Ministry
of Commerce (MOFCOM),visiting USG officials also
inquired about reports of economic downturn-induced
weakening of local-level IPR enforcement.
Department of Treaty & Law Deputy Director General
(DDG) Li Ling replied that Chinese officials are
aware of an emerging problem of what she called
local protectionism. Especially during the economic
crisis, she said, local officials are feeling
greater pressure to promote exports and increase
domestic demand, resulting in greater than normal
complexities in enforcing IPR. Li assured the group,
however, that "the central government's position [on
protecting IPR] will never change," and stressed
that IPR protection "is a long journey with hard
work," adding that her ministry looked forward to
future cooperation with the United States on the
issue.

U.S. Business Confirms Weaker Enforcement
--------------


6. (SBU) Apple Inc., the California-based designer
of Mac computers, iPods, and the iPhone, is facing
increasingly widespread counterfeiting in China as
its products gain in worldwide popularity (see Ref
B). The company hired a veteran security team

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accustomed to working with Chinese IP officials to
begin making inroads to protect the company's rights
in China. However, the company told Econoff on
March 27 of recent signs that Chinese officials are
less inclined to take action against counterfeiters,
both by referring fewer cases for criminal
prosecution and by applying lower, non-deterrent
administrative penalties.


7. (SBU) Apple's security team has historically
benefited from close cooperation with China's Public
Security Bureau (PSB) on criminal investigations
(i.e., seizures of counterfeit products valued above
China's criminal thresholds). Having prepared a
thorough case file detailing the investigation of an
unusually large number of laptop computers being
prepared for distribution in China, Apple employees
were surprised in March when the PSB refused to
conduct the criminal raid because the raid
threatened as many as 100 local jobs. The PSB
recommended that administrative action be taken
instead; however, by the time the State
Administration of Industry and Commerce (SAIC)
raided the facility, the criminals had fled.


8. (SBU) Apple has also worked productively in the
past with the SAIC on administrative raids.
Recently, however, SAIC officials refused to raid a
large electronics mall in Guangdong province
because, they said, they feared the action would
drive away what little business still existed in the
area. China Customs, another historically good
partner to the company, independently located a
large shipment of counterfeit iPods at a southern
Chinese port. However, the Customs agency levied a
mere $1,700 fine in the case, much lower than the 30
percent of total value that the counterfeiters
should have been penalized, and not high enough to
be deterrent.

IP Protection Still a Priority
--------------


9. (SBU) In other recent bilateral contacts with
Chinese IP officials, they have averred that
bilateral IPR cooperation remains a priority of the
Chinese government, despite the above-noted
indications that weaker IPR enforcement is a side
effect of the economic downturn in China. SPC
President Wang and IP Judge Kong have both made
public statements in support of stricter law
enforcement. In fact, the bulk of their public
comments support this view, and Wang on March 10
told the National People's Congress that "the courts
will improve the IPR trial mechanism, increase the
number of IPR courts, and explore the new model of
comprehensive IPR protection."


10. (SBU) However, the judges have also made
statements that, particularly when left open to
interpretation by lower-level courts and enforcement

BEIJING 00001014 004.2 OF 004


officials, are cause for concern. Judge Kong's
December call for a "public interest test" is one
example. Another, reported by China's "Legal Daily"
newspaper, was Wang's February 6 meeting with local
deputies in Henan province to discuss "how the
people's courts can provide better judicial support
and legal service" to maintaining growth. Wang
"cited the impact of the financial crisis on the
Chinese economy and admonished the courts to pay
close attention to companies' operations, people's
livelihoods, and social stability," and "stressed
that Chinese courts must serve the overall situation
of the country and the focus should be how to better
service the nation's top priority - stable and fast
growth."

Weak Enforcement Extends Beyond IPR Law
--------------


11. (SBU) While enforcement of IPR law may suffer in
particular as China pursues domestic economic
stability and promotes innovation of indigenous
companies over that of foreigners, reports indicate
that the broader rule of law may also be weakened.
In a variety of business disputes, foreign business
community contacts have reported that legal
judgments have weakened in cases where there is a
risk of destabilizing local companies and their
employees. The Guangdong Procuratorate in January
issued ten measures to help local enterprises facing
economic difficulties, including a measure to
postpone actions against company management
committing "small crimes," such as bribes (See Ref
C).

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


12. (SBU) Despite Chinese officials' reassurances of
their commitment to strengthening IPR protection,
the fact that even SPC President Wang identified
economic growth as a priority of the court is
problematic. Such public comments from central
government officials may well prompt lower-level law
enforcement officials to "do their part" in
promoting domestic industry and protecting jobs
during the economic crisis. Such statements may
well be intended as a signal to guide judicial
decision-making toward lessened penalties and fewer
injunctions. If not, there is a danger that such
guidance could be misinterpreted by overzealous
local officials. Moreover, the risk also exists
that such policies could become institutionalized
beyond the economic crisis as an effective way to
promote indigenous innovation and meet other
national development goals at the expense of foreign
and domestic right holders. We will continue to
monitor and report on this situation. End Comment.