WTO Resolves IP Conflicts after Uncle Sam TRIPS on the Great Wall of China

By Blake P. Hurt

In my opinion, the difference in Intellectual Property (“IP”) protections between nations has been a thorn in the side of the business community since globalization became the name of the game after WWII.  I believe this issue is especially vexing to countries like the United States, who gained economic superiority through industrialization in the last century and now seeks to maintain its position in the new millennium.  Perhaps the most difficult challenge facing this pursuit is how to protect valuable innovation while outsourcing manufacturing and production overseas to maintain low costs.  A perfect example of this struggle is the current dispute between China and the United States in the World Trade Organization (“WTO”).

In 2006, the U.S. and China began high-level talks in the U.S.-China Joint Commission on Commerce and Trade to resolve the disparities in copyright and trademark protections which allegedly permitted infringement and piracy.  These talks were thought to be necessary due to the increasingly aggressive rhetoric coming from Washington that Chinese IP laws, specifically copyright and trademark laws, were not being adequately enforced.  The failure by Beijing to satisfactorily protect U.S. IP interests in China was the central issue.   For example, in one year after these talks, the F.B.I. operating in conjunction with Chinese authorities confiscated counterfeit Microsoft and Symantec software worth more than $500 million.  An even greater concern from a public health standpoint was the counterfeit medicines that were being manufactured in China and ready for distribution to unsuspecting consumers around the world.   Unfortunately, these talks were unsuccessful in achieving a private resolution and the following year, the U.S. filed a complaint with the WTO alleging China had failed to meet its IP protection and enforcement obligations under the Agreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS”).  This was the first time the U.S. had used the dispute resolution mechanism in TRIPS to resolve an IP issue with a foreign power via the WTO.

The WTO convened a Dispute Settlement Body (“DSB”) in April of 2007 to hear the dispute.  In case you are unfamiliar with the WTO procedures, the DSB is basically all the members of the WTO.  It hears complaints regarding trade disputes between WTO members.  In the event that some type of decision needs to be made, the DSB creates a panel (called the Dispute Panel) to hear the details of the complaint and render a decision.  In this case, the U.S. brought four principal claims before the DSB and its subsequently formed Dispute Panel.  First, the U.S. alleged that the thresholds established by the Chinese government to warrant the most serious punishments for trademark infringement and copyright piracy were too stringent to overcome and, therefore, did not serve as a meaningful deterrent under TRIPS.  Second, the U.S. claimed confiscated goods were being returned to the stream of commerce, where they were unfairly competing with authentic goods.  Next, the U.S. alleged that the Chinese government was extending IP protection only to works which Beijing had authorized, and failure to secure government approval was grounds for withdrawing IP protection.  Finally, that the laws subject to the thresholds mentioned in the first claim were also too narrow in scope to apply to the most egregious forms of infringement.  This final claim applied to the breadth of coverage, as opposed to the application, provided by Chinese copyright and trademark laws.    Due to the complexity of the claims, the panel considered the allegations for over a year before reaching its decision, which is long considering the panel is usually required to reach a decision in six months.

In January 2009, the panel released its decision.  The panel concluded that the U.S. was correct; the Chinese government’s decision to protect only works authorized by Beijing was inconsistent with China’s obligation under TRIPS.  The panel also concluded that counterfeited goods could not be returned to the stream of commerce, after being seized by customs, simply by removing the infringing marks.  However, the panel did not agree with the U.S. that the seized goods must be destroyed, which left open the possibility of the goods being donated to charity.  Additionally, the panel was not persuaded that the scope or the thresholds established by the Copyright Act of the People’s Republic of China were so unattainable as to render them a violation of China’s TRIPS obligations.  By issuing a “split verdict,” the panel was likely balancing the interests between encouraging the fledgling Chinese domestic IP protections, while still showing proper concern for the U.S. allegations of infringement and piracy.

After the panel’s decision, representatives from China and the U.S. established that 12 months would be a reasonable period of time for China to make the necessary changes recommended by the panel.  Because the DSB adopted the panel’s findings (as they nearly always do) on Mar. 20th 2009, China agreed to implement the necessary changes by Mar. 20th, 2010.  One day before the deadline, Mar. 19th, 2010, China filed a notice with the WTO claiming that they had complied with all the panel’s recommendations.  In support of these claims, Chinese representatives announced that China’s Copyright Law, as well as China’s Regulations for Customs Protection of Intellectual Property Rights, had been amended to reflect the panel’s recommendation.

Since the Chinese filed the compliance announcement so close to the deadline, the U.S. was not in a position to confirm or deny China’s claimed compliance.  Therefore, both nations came to an agreement, which allows the U.S. to preserve its right to challenge China’s compliance measures in the future.  I was not able to find any information as to how long the U.S. will be able to preserve this right, but my initial reading leads me to believe that the agreement may last for quite a while.  This agreement is perhaps the most illustrative action by these two countries.  On one hand, both China and the U.S. want to be seen as acting in full conformity with the international community and its rules (i.e. TRIPS).   On the other hand, neither country appears ready to admit that it did not get its way in the WTO resolution.  Moving forward, it seems very likely that the U.S. will challenge China’s claimed compliance with the WTO panel’s recommendations, especially if the alleged infringement and piracy are not curbed with these new measures.