2009 SPECIAL 301 RECOMMENDATION FOR HONG KONG

UNCLAS SECTION 01 OF 06 HONG KONG 000382

SENSITIVE
SIPDIS

STATE FOR EEB/IPE/TMCGOWAN, JURBAN
STATE FOR EAP/CM
DEPT PASS USTR FOR LEE, RAGLAND
DEPT PASS USPTO FOR TBROWNING
BEIJING FOR COHEN/GUANGZHOU FOR WONG

E.O. 12958: N/A
TAGS: KIPR PGOV ETRD EFIN EINV CH HK
SUBJECT: 2009 SPECIAL 301 RECOMMENDATION FOR HONG KONG

REF: A. STATE 8410

B. 08 HONG KONG 1775

C. 08 HONG KONG 2121

Post Recommendation and Summary
--------------


1. (SBU) Post recommends that Hong Kong be excluded from the
2009 Special 301 list (ref A). Hong Kong authorities with
specific responsibility for intellectual property rights
(IPR) administration, education and enforcement are generally
responsive to rights-holders' concerns and are active and
effective partners in efforts to protect intellectual
property. The Hong Kong Government (HKG) effectively combats
online piracy and trade fair infringement, and acts on
industry information about counterfeit goods. While Hong
Kong in many ways remains a model for IPR protection, the
government needs to do more to combat transshipment of
counterfeit goods, create a system for copyright registration
verification, do a better job of protecting patented
pharmaceuticals, streamline its system for handling trademark
infringements, and stiffen sentences for convicted IP
infringers.


2. (SBU) Summary: The HKG continues to maintain an effective
IPR protection regime. Several useful amendments to the
Copyright Ordinance were enacted in 2007 and took effect in
July 2008. The amendments addressed industry concerns about
circumvention of technical protection measures and
established criminal liability for directors of companies
using infringing products in business. The HKG announced in
late 2008 its intent to enact key fair use and safe harbor
provisions in 2009 legislation. In August 2008, the HKG
Commerce and Economic Development Bureau (CEDB) concluded its
consultations regarding follow-on statutory amendments to
address "Copyright Protection in the Digital Environment."
U.S. industry representatives criticized the CEDB's proposed
amendments with regard to penalty levels for uploading and
downloading of infringing works, Internet Service Provider
(ISP) identification of copyright-infringing subscribers,
statutory damages for copyright claims, and secondary
liability of ISPs (ref B). In July 2008, the CEDB
established a Tri-Partite Forum among ISPs, content providers
and content users designed to facilitate implementation of a
voluntary framework for digital IPR protection. Pending the
outcome of Tri-Partite Forum discussions, the HKG postponed
enactment of statutory amendments governing IPR protection in
the digital realm (ref C).


3. (SBU) Summary Cont'd: The sale and shipment through Hong
Kong of counterfeit pharmaceuticals remains a pressing
concern for U.S. firms, as does the continued marketing of
patent-infringing pharmaceuticals. Transshipment of other
infringing products from mainland China is also increasing,
despite notable HKG efforts at greater surveillance and
interdiction. Immediate measures are needed to close
loopholes that allow "shadow companies" to register under the
Hong Kong Companies Registry. Most prosecutions of IP crimes
result in convictions, but sentences are typically light and
are not strong deterrents to illegal activity. End Summary.

Background
--------------


4. (SBU) The HKG's Intellectual Property Department (IPD),
which includes the Trademarks and Patents Registries, is the
focal point for the development of Hong Kong's intellectual
property regime. The Customs and Excise Department (CED) is
the principal IPR enforcement agency. CED officers are armed
and hold police powers to search and arrest suspected IPR
infringers.

Copyright Law Amendments Boost IPR Protection
--------------


5. (SBU) The passage of long-awaited amendments to the
Copyright Ordinance in June 2007 was a significant step
forward for IP protection in Hong Kong. The amendments took
effect in July 2008. The government addressed industry
concerns about the circumvention of technical protection
measures (TPMs),included provisions for Director Liability,
and reached a compromise with industry on the issue of
parallel imports. Businesses providing circumvention of
technical prevention measures as part of their business can
now be held criminally liable. Any person circumventing

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technical protection measures can be held civilly liable
under the amended law. While exceptions are allowed,
industry does not believe these are so broad as to undermine
the effectiveness of the law. Directors and partners can be
held criminally liable for the infringing activities of their
companies, but the new law allows them to escape liability if
they can show they did not authorize and took steps to
prevent such activities. The amendments relaxed restrictions
on parallel imports, reducing the period in which parallel
imports are prohibited from 18 to 15 months. This was a
compromise with industry; the original draft bill called for
the prohibited period to be cut to nine months.


6. (SBU) Exclusions for Education: Industry representatives
are pleased that the HKG proposed extending criminal
liability for the copying and distribution of copyright
infringing printed works. CED continues to raid illegal copy
shops that produce infringing copies of copyrighted works
(most recently, at the beginning of Fall 2008 and Winter 2009
semesters). Industry stakeholders remain concerned about the
scanning of printed copyrighted material and its subsequent
distribution by email in university and school settings. Some
Hong Kong universities have begun to publicize university
honor codes prohibiting students from engaging in copyright
infringing activities. Industry groups are conducting IPR
outreach programs on university campuses, but universities
continue to be centers for IP infringement.


7. (SBU) Fair Use/Safe Harbor Provisions: Fair use provisions
have been criticized by industry as too broad and open to
abuse by for-profit educational institutions (numerous in
Hong Kong). In December 2008, the HKG announced its
intention to enact amendments governing the maximum allowable
safe harbor quantities and dollar values of physically
reproduced copyrighted materials. Industry observers will
comment on specific provisions in the HKG's safe harbor
amendments, as they move toward LegCo debate and possible
enactment in 2009. Exceptions to the fair use and safe
harbor provisions will likely be included for
government-supported schools and non-profit educational
establishments.


8. (SBU) Technological Protection Measures: Industry
continues to voice concerns about full protection of all
access controls used in connection with the copyright of a
work, and the scope of the "further exceptions by notice"
within the final Copyright Ordinance legislation. The pace
of technology and market practices requires industry to
consult with government on each proposed exception for the
law to effectively protect IP. Post will continue to monitor
implementation of this provision.


9. (SBU) Parallel Imports: The Copyright Ordinance amendments
shorQned the period during which parallel imports can
attract criminal liability from 18 months to 15 months. The
amendments included provisions on presumptions and affidavit
evidence to facilitate criminal enforcement. The HKG
continues to suggest its intent to fully liberalize the use
of parallel imports of copyrighted works in future
legislation.

Further Amendments to Protect Digital IP
--------------


10. (SBU) In December 2006, the government released a
consultation paper to seek public views on more effective
copyright protection in the digital environment. The HKG
sought comments on the following measures: legal liability
for unauthorized downloading and uploading activities;
protection of copyright works transmitted via all forms of
communication technology; the role of the ISP in combating
Internet piracy; facilitation of copyright owners in civil
action against online infringement; statutory damages for
copyright infringement; and copyright exemption for temporary
reproduction of copyright works. Based on over 600 comment
submissions from ISPs, content users and copyright owners,
the CEDB in April 2008 presented seven specific proposals to
strengthen the Copyright Ordinance. During the ensuing
public comment period that ended on August 31, 2008, U.S.
industry representatives cited several perceived weaknesses
in CEDB's proposals. Specifically, the CEDB proposals: do
not criminalize unauthorized downloading and peer-to-peer
(P2P) file-sharing activities; allow an exemption (using
TRIPS-compliant criteria) for temporary storage of
copyrighted works by ISPs; envision continued reliance on

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expensive, court-ordered "Norwich Pharmacal" procedures to
force ISPs to identify alleged infringers; and do not include
statutory damages for copyright infringements.


11. (SBU) In July 2008, the CEDB established a Tri-Partite
Forum (including ISPs, content providers, and content users)
tasked with creating a voluntary code of conduct governing
the electronic copying and transmission of copyrighted
materials. Pending the outcome of efforts to create a
voluntary framework of digital IPR protection through the
Tri-Partite Forum, the HKG has delayed LegCo consideration of
its proposed statutory amendments to the Copyright Ordinance.
U.S. industry representatives voiced concern that a
voluntary code of conduct would prove unenforceable, even if
agreed upon during 2009. Post continues to monitor the
Tri-Partite Forum process and urge the HKG and legislators to
further reinforce - not weaken - Hong Kong's strong IP regime.

Business Software End-Use Piracy
--------------


12. (SBU) According to the Business Software Alliance's (BSA)
global piracy study, Hong Kong continued to have a high rate
(51 percent) of illicit business software end-use in 2007,
with industry claiming losses of USD 224 million that year
(the latest figures available). This rate remains quite high
for a developed economy like Hong Kong, with comparable
regional economies (Singapore, Taiwan and South Korea) having
rates 8-14 percentage points lower. Hong Kong's business
software piracy rate declined slightly in 2007, in part
related to efforts by Hong Kong's Intellectual Property
Department (IPD) to redirect its educational outreach program
toward Small and Medium Enterprises (SMEs).


13. (SBU) In October 2006, IPD teamed up with BSA to set up
the "Genuine Business Software Campaign", with the aim of
educating businesses on the value of Software Asset
Management (SAM) and combating corporate software piracy in
Hong Kong. The first year's success, combined with the
impending implementation of director liability provisions,
spurred the October 2007 launch of the "Software Asset
Management (SAM) Consultancy Programme" to provide free
on-site consulting to SMEs and non-profits for effective
management, control and protection of business software
assets. Information can be found at: www.samhelp.hk. During
the ten months ended July 31, 2008, the BSA and IPD
approached over 50,000 companies to provide education about
the program. 648 companies joined the program and educated
their personnel in detail about SAM. In September 2008, the
BSA presented a senior IPD official with an award for
"Government Best Practices, Asia Pacific" related to the
HKG's efforts to combat business software piracy. Director
liability provisions went into effect in Summer 2008.
Industry observers anticipate further improvement in Hong
Kong's business software piracy rate, as Hong Kong Customs
enforces Copyright Ordinance amendments that hold company
directors criminally liable for pirated software use in their
firms, and as the benefits of the Genuine Business Software
Campaign accrue.

Pharmaceutical Counterfeits and Patent Linkage
-------------- -


14. (SBU) Industry surveys and recent CED raids on pharmacies
suggest that counterfeit pharmaceuticals continue to be a
serious problem in Hong Kong. Judges - who possess wide
leeway in sentencing - often levy light penalties against
infringing pharmaceutical retailers. The maximum penalties
for selling counterfeit drugs are no different than those for
any other retail product (a fine of up to USD 64,000 and 5
years imprisonment). Most retail cases are settled on the
magistrate level, resulting in suspended jail terms and
minimal fines. CED and IPD claim that strict separation
between the judiciary and the government administration makes
it difficult for the HKG to urge judges to issue stronger
penalties, although government is conducting educational
campaigns on fake drugs to build awareness of the health
dangers of the problem.


15. (SBU) According to industry representatives, counterfeit
pharmaceuticals from other countries (particularly within the
Asia-Pacific region) are being imported in increasing
quantities into Hong Kong. Counterfeit pharmaceuticals are
then re-packaged to appear similar to legitimate
pharmaceuticals registered in Hong Kong. The industry has a

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mechanism to share intelligence with CED, but complains that
CED does not always reciprocate by sharing intelligence with
industry on the status of specific cases. Nonetheless, CED's
continued raids on pharmacies and arrests of vendors indicate
CED's commitment to combat fake pharmaceuticals. In
addition, customs officials partnered in 2008 with four Hong
Kong Internet Service Providers (ISPs) to prevent the sale of
counterfeit pharmaceuticals and other infringing products on
Internet auction sites. Pharmaceutical industry
representatives note that their relationship with CED
remained strong in 2008.


16. (SBU) In 2008 CED investigated a total of 46 cases
involving retail sale of counterfeit pharmaceuticals and
seized USD 43,226 worth of infringing products in retail
stores, compared with 27 cases and seizures totaling USD 2.6
million in 2007 (Note: USD 2.5 million of the 2007 total was
seized in a single case). CED scored its largest success of
2008 with the break-up of a syndicate that imported
counterfeit pharmaceuticals from Mainland China into Hong
Kong. In July 2008 the CED raided the Hong Kong apartment
where the fake pharmaceuticals were repackaged for sale to
local pharmacies. The CED seized over 60,000 tablets with a
street value of approximately USD 348,000. The CED arrested
a 67-year-old man in the apartment who subsequently pleaded
guilty and was sentenced to 20 months imprisonment.


17. (SBU) U.S. pharmaceutical companies remain concerned over
a loophole in the HKG's Department of Health (DH) drug
approval process that enables generic pharmaceuticals to be
sold legally in violation of patent-owners' rights. The DH
issues marketing approvals for generic drugs without
verifying the status of the patent. The DH states that
intellectual property concerns are the responsibility of
other HKG agencies. IPD complains it has no role in the drug
approval process. Although patent-holders can seek redress
through legal action after a drug is approved, the DH should
take measures to better protect the rights of patent-holders
before it approves new products for the marketplace. A local
industry association representing American and international
firms continues to lobby the HKG to allow patent owners to
begin legal action against infringing generics before the DH
authorizes an application to sell a generic drug in Hong
Kong. However, the HKG has shown no willingness to address
this problem as no Department accepts jurisdictional
responsibility.

Transshipments
--------------


18. (SBU) U.S. firms indicate that significant quantities of
IPR-infringing products -- particularly pharmaceuticals,
watches and pirated optical discs, primarily from mainland
China -- move through Hong Kong on their way to other
markets. In 2008 CED made six seizures of shipments
transiting Hong Kong containing pirated or counterfeit goods;
the seized shipments' aggregate market value was USD 382,000.
Most seizures are based on industry-provided intelligence
directing CED to specific shipments, not from random
searches. When possible, CED informs customs agencies in
other countries if it possesses intelligence that infringing
products transited Hong Kong and are destined for that
country, but does not inform rightsholders about the status
of on-going investigations.

Company Registry and "Shadow Companies"
--------------


19. (SBU) International and local companies remain critical
of the HKG for registering new companies under names which
infringe well-known trademarks. "Shadow companies" are
typically shell companies that register with the Hong Kong
Companies Registry under names that are designed to be
confused with well-known registered trademarks. A complete
revision of the Hong Kong Companies Ordinance is expected by
2012; however, immediate measures are needed to close
loopholes that allow "shadow companies" to register
international brand names as part of their own name (i.e.,
Hong Kong Coca Cola International, Ltd). Currently, the
Registry does not conduct a trademark or registration check
before accepting a company registration; the only recourse
for victims is through lengthy court action to force a name
change by the infringing companies. The Registry stated in
October 2008 that it intends to examine the mandatory use of
one or more independent arbitration companies, as a means to

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resolve shadow company disputes outside the court system.

Education
--------------


20. (SBU) The HKG's Intellectual Property Department (IPD)
conducts a wide range of public education efforts to
encourage respect for intellectual property rights, including
seminars, exhibitions and public lectures. In 2008, IPD
continued its "I Pledge" and "No Fakes" campaigns. In the
former, consumers promise not to buy infringing products and,
in turn, receive preferential access to local concerts and
shows. In the latter, local retailers pledge to not sell
counterfeit goods and, in return, they can display a "No
Fakes" sign in their shop windows and tourist and business
chambers feature them in promotional material. IPD also
continued its IP Tutor program for schools, providing IPR
training to teachers, who then conduct IPR awareness classes
for intermediate school students. IPD intensified its IPR
protection cooperation with officials in Guangdong Province,
and with mainland China's State Intellectual Property Office
(SIPO). By the end of 2008, the "No Fakes" campaign had been
introduced in eight Guangdong cities. Further details
concerning these cooperative efforts can be found at:
http://www.ipd.gov.hk/eng/ip cooperation corner.htm.


21. (SBU) IPD and CED also continued their "Youth Ambassadors
Against Internet Piracy" program involving an estimated
200,000 children and teenagers who search for online IPR
violations and report them to a special CED website (1,652
violations reported to date). In addition, in 2007, CED
opened the "IPR Enforcement Museum," a HKD 2 million,
235-sq.km facility for public education. CED also regularly
publicizes news of enforcement actions, raids, and the
judicial punishments levied against infringers. As a result,
awareness levels of Hong Kong's IPR laws rose to 91.6 percent
in 2008 from just 55.2 percent in 1999, while 96.3 percent of
respondents considered it necessary to protect IP rights in
Hong Kong, according to IPD's bi-annual survey.

Enforcement
--------------


22. (SBU) CED launched a "Lineament Monitoring System" in
March 2007 to conduct round-the-clock monitoring of online
BitTorrent (BT) infringement activities. Only one new case
of infringement activity in Hong Kong using BT technology was
detected in 2008. The "Fast Action Scheme" was initiated in
2006 for IPR enforcement at large-scale exhibitions and trade
shows. CED arrested five individuals in 2008 at the jewelry,
toy and electronic shows. The Department established two
"Anti-Internet Piracy Teams" in 2000 and 2004 respectively,
which in 2008 detected 31 Internet infringement cases, up
from 27 cases in 2007.


23. (SBU) CED continued aggressively raiding retail level
shops for counterfeit and pirated goods. In 2008, CED
reported handling 9,505 copyright infringement cases,
including 7,679 piracy cases (mostly related to optical
discs) and 1,826 cases of trademark counterfeiting. A total
of 1,841 persons were arrested, with goods seized worth over
USD 32.3 million (including almost 2.2 million pirated
optical discs). CED estimates that the number of shops
selling pirated optical discs has fallen to approximately 25
establishments, but dispersed sales of infringing products by
street vendors and illegal immigrants remain a problem. An
April 2008 raid by CED of an underground production facility
resulted in the seizure of 110 DVD writers, 27,000 optical
discs, and the convictions of two defendants; they each
received 24 month prison terms. In June 2008, following a
year-long investigation, CED raided 17 locations in Hong Kong
and seized over 12,000 pirated optical discs that had been
smuggled in from Mainland China. CED arrested 22 individuals
and seized cash, jewelry and two cars worth USD 800,000
during the operation.


24. (SBU) In September 2008, CED arrested seven individuals
at a cyber caf and travel agency, after the companies were
identified as using pirated business software. Under Hong
Kong's newly enforceable amendments to the Copyright
Ordinance, the companies' directors and partners face a
maximum penalty of four years in jail and a USD 6,500 fine
for each infringing software copy identified by CED.

Judicial System Results

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--------------


25. (SBU) During 2008, the judiciary handed down 525
convictions in 671 cases involving violations of trade
description laws -- a conviction rate of over 78 percent.
One hundred twenty-five of these individuals received prison
sentences (almost all under one year),and 358 were assessed
fines (almost all less than USD 6,500). The judiciary handed
down 910 convictions in 989 copyright cases -- a 92 percent
conviction rate. These cases resulted in 672 prison sentences
(almost all under one year),and 93 fines (almost all less
than USD 6,500). Post supports the HKG's enforcement actions
against trademark infringements and copyright piracy and
urges the HKG to consider tougher sentencing that will serve
as a deterrent to intellectual property violators.

Compliance With International Agreements
--------------


26. (U) Hong Kong has filed its notice of compliance with the
trade-related intellectual property (TRIPs) requirements of
the World Trade Organization. Hong Kong has acceded to the
Paris Convention for the Protection of Intellectual Property,
the Bern Convention for the Protection of Literary and
Artistic Works, and the Geneva and Paris Universal Copyright
Conventions. Hong Kong also continues to participate in the
World Intellectual Property Organization as part of Mainland
China's delegation. The World Intellectual Property
Organization Copyright Treaty (WCT) and WIPO Performances and
Phonograms Treaty (WPPT) apply to the Hong Kong Special
Administrative Region with effect from October 1, 2008. The
HKG states its copyright legislation is currently in full
compliance with the international standards contained in the
two treaties.
DONOVAN