CHENGDU IPR JUDGE ON FOREIGN COMPANY CHALLENGES, LOCAL COURT

UNCLAS SECTION 01 OF 03 CHENGDU 000023 SENSITIVE SIPDIS DEPT FOR EAP/CM DEPT PASS TO USTR E.O. 12958: N/A TAGS: ECON EIND ETRD EINV PGOV KIPR KJUS CH SUBJECT: CHENGDU IPR JUDGE ON FOREIGN COMPANY CHALLENGES, LOCAL COURT STRUCTURE CHENGDU 00000023 001.2 OF 003 ¶1. (U) This cable contains sensitive but unclassified information - not for Internet distribution. ¶2. (SBU) SUMMARY. Effective intellectual property rights (IPR) enforcement is a continuing challenge for judges and attorneys in Southwest China, according to a sitting judge on Chengdu's IPR court and a former-judge-turned-attorney. While asserting China's IPR laws had significantly strengthened, both agreed that enforcement remains challenging, citing difficulties both in proving losses, and in collecting damages against Chinese companies that can quickly hide assets. Neither believed that foreign companies are at a disadvantage in China's legal system, but stated that they often face difficulties understanding Chinese law and procedure. Chengdu's court structure includes specialized IPR judges in two district courts, as well as at the intermediate and high court levels. While the sitting judge stated that all IPR decisions are posted on the Internet, a review of the relevant sites indicates only a portion are posted. END SUMMARY. ¶3. (SBU) On January 6, Consul General, EconOff, and ConOff met to discuss IPR enforcement in Southwest China with Chen Ruizi, a sitting judge on one of Chengdu's intellectual property courts, and Wu Tao, an attorney with a Chinese law firm and a former judge of Chengdu's intellectual property court from 2003 to 2007. Problems with Enforcement of Chinese IPR Law -------------- ¶4. (SBU) Chen and Wu both asserted IPR laws in China had steadily strengthened, but acknowledged that enforcement remained a challenge. Wu highlighted that proving a connection between IPR infringement and a defendant's illegal gains is the biggest challenge faced by plaintiffs in order to collect actual damages. There are no regulations on how to submit expert evidence on this issue, he noted. Thus, the courts are more likely to rely on statutory fines, which do not require a determination of damage, but are capped at 1 million RMB (USD 147,059). (Note: This amount was recently doubled from a cap of 500,000 RMB. End Note.) ¶5. (SBU) Even when damages are assessed, noted Chen, collection is likely to be difficult. Chinese law stipulates that an infringing company must be left with sufficient assets to continue operations after payment of damages. If they regard the amount as too high, the infringer will often simply transfer most of the company's assets to third parties or shell corporations, leaving the infringing company with just enough capital to continue operations. As a result, the Chengdu courts have a large backlog of open enforcement cases on their docket. ¶6. (SBU) Nevertheless, our interlocutors expressed optimism that needed changes in China's IPR legal system to strengthen enforcement were gradually being made. Wu cited the Supreme Court's recent decision to double the statutory ceiling for IPR infringement fines as a demonstration of greater commitment to enforcement. (See para 4 above.) However, they did not provide any additional concrete examples of how enforcement was being improved. ¶7. (SBU) Rather, they highlighted the importance of other legal routes for resolving IPR cases. In fact, said Chen, alternative dispute resolution is often more effective. About 70-80 percent of IPR cases before her court end up being settled through mediation or arbitration before final judgment, a trend she encourages. However, Chen admitted, enforcement of settlement agreements is also a problem. ¶8. (SBU) Chen and Wu also stated that procuratorates in the area CHENGDU 00000023 002.2 OF 003 were now more willing to bring criminal IPR infringement cases. Facing the possibility of jail time may be a more powerful disincentive for would-be violators than fines, they noted. Wu mentioned a criminal trade secret infringement case, just concluded in Chengdu, which resulted in the imprisonment of the Japanese defendant. The defendant allegedly shared trade secrets from his employer, a Japanese company, with a Chinese company. Foreign Litigants in Chinese IPR Cases: No Discrimination, but Lack Understanding of Chinese Law -------------- -------------- ¶9. (SBU) Both Chen and Wu asserted that foreign companies are not discriminated against in cases against local companies in Chinese courts. According to Wu, there have been about 100 cases involving foreign companies in Chengdu's Intermediate Court over the last 5 years. Wu specifically cited cases brought by Dunhill, Adobe, Puma, and Monolithic Power Systems (MPS, an American/Chinese manufacturer of integrated circuits). In a follow up memo, he noted that, since 2002, more than 30 of these cases have involved American plaintiffs, most of whom won their cases. ¶10. (SBU) Both complained, however, that foreign litigants often do not have a good understanding of Chinese law or procedures and, as a result, are less effective in pursuing their cases. For example, Chen stated that accusations against a plaintiff that has infringed two patents must always be filed as two separate cases, however closely linked. The same concept applies to contracts - companies can only enforce one contract in one lawsuit, and must file a different lawsuit to enforce a second contract. Chen said she is currently handling a case brought by an American company involving two contracts, and thus requiring two cases in the Chinese courts. However, the plaintiff has so far been very resistant to dividing them, she said. Wu also noted that foreign companies often do not follow the correct procedures in the submission of evidence. Moreover, foreign companies' bias toward the witness testimony, which is not regarded as well as documentary evidence in Chinese courts, may weaken their cases in eyes of Chinese judges, he said. ¶11. (SBU) Separately, Wu and Chen stressed the need for US companies to educate the relevant authorities to increase their ability to assist in IPR enforcement. According to Wu, Chinese law allows customs officials to seize IPR-infringing products to prevent their export from China. However, American companies must educate the customs officials to show them which company is the legitimate right-holder, and how to spot counterfeit products. (Note: Wu's comments echoed statements made by Elliot Papageorgiou, an IPR attorney with Rouse & Co., during a European Chamber of Commerce event in Chengdu in October 2009. Papageorgiou stated that customs enforcement can be a powerful tool for IPR enforcement. However, companies must first record their rights with customs officials, which can take up to 12 months to process, and then train customs officials on how to identify infringing products. End Note.) Chengdu Courts' Resources to Address IPR -------------- ¶12. (SBU) According to Chen, two district courts in Chengdu, the Wuhou District Court and the court in the Chengdu High-Tech Zone, have specialized IPR divisions. In addition, both the intermediate and high courts in Chengdu include specialized IPR courts. Most of these are at the intermediate level; Wu later confirmed that there are 16 judges and three staffers working in Chengdu's specialized intermediate-level IPR courts. (Note: Wu reported that the entire intermediate court system in Chengdu has a total of 178 judges and 206 support staff. End Note.) Chen reported that her court deals with a variety of IPR cases, CHENGDU 00000023 003.2 OF 003 including patent cases (especially patent design cases),unfair competition cases, internet-based IPR cases, biotech cases, cases involving new plant species, and circuit board IPR protection. She individually handles about 70 IPR cases a year. ¶13. (SBU) Comment: The numbers cited by Wu point to the low number of support staff assigned to IPR judges in the intermediate courts (three non-judicial staff members for 16 IPR judges) and suggests that Chengdu's IPR judges engage in much more of the clerical work for their cases than their colleagues. Chinese judges in general already must manage much of the work that is normally done by support staff and law clerks in the United States. End Comment. Some IPR Decisions Posted on Internet, But an Incomplete Record -------------- -------------- ¶14. (SBU) Chen stated that all of Chengdu's IPR court decisions are posted on two websites, both on the Chengdu Intermediate Court's website, and a website for China-wide IPR decisions. However, Wu admitted that he had not posted his decisions on the website during his tenure as a judge from 2003 to 2007, and doubted that all of the decisions of the court were posted online. Reviewing the websites later, we found that the Chengdu intermediate court had most recently posted 24 cases for the third quarter of 2009, which appears to be a low number relative to their likely total case load. Chengdu's courts, however, are well ahead of the national IPR website, where the most recent case to be posted dates to October 2008. (See http://cdfy.chinacourt.org for Chengdu and http://ipr.chinacourt.org for national IPR court decisions.) BROWN