Info Service on WTO and Trade Issues (Feb09/05)
Panel decision on IP case favourable to
5 Feb (Sanya Reid Smith) -- The World Trade Organization on 26 January
issued a panel report in a case brought by the US challenging China's
enforcement of intellectual property rights. While the case has been
commonly reported as a victory for the
have actually characterized it as a loss for the
Geist added that "two more important issues [border measures and
criminal thresholds] were near total losses for the
a WTO delegate who is an expert on intellectual property characterized
it as a "good win for
US won two out of its 11 claims and in a third claim, it succeeded for
two out of five types of works. Furthermore, in four out of the five
areas where the Panel exercised judicial economy, it appeared to be
Yao Jian, spokesman of the Ministry of Commerce of
The Parties have 60 days to lodge an appeal.
panel report analysed three main areas of China's intellectual property
law that were challenged by the US as not complying with China's IP
obligations under the WTO's TRIPS Agreement. The first was an allegation
that Chinese law did not provide copyright protection to works that
are censored in
[Although censorship is permitted by the TRIPS agreement, censored works must still receive copyright protection, unless it satisfies one of the exceptions in TRIPS.]
The Panel found that Article 4 of the Chinese Copyright Law was sufficiently clear, on its face, to show that it denies copyright protection to certain works and even if the measure in question has had no actual impact on foreign works to date, it has a potential impact on works of WTO Member nationals, so is inconsistent with TRIPS. However, of the five possible types of works that the Panel investigated, it found that only two types were actually denied copyright protection and thus China's Copyright Law did not fulfil its TRIPS obligation to protect the copyright in these censored works, and it also did not meet its TRIPS enforcement requirements with respect to this small category of censored works.
On another related point, the US also argued that China's denial of copyright to censored works violated the Berne Convention provision (incorporated in TRIPS) that copyright be given without any formalities (because it required works to pass content review before they could get copyright protection, according to the US). The Panel exercised judicial economy on this.
With regard to the second group of claims concerning customs measures, Articles 46 and 59 of TRIPS requires authorities to have the power to order that goods that they have found to be infringing IP, be without compensation of any sort, disposed of outside the channels of commerce in such a manner as to avoid any harm caused to the right holder, or, unless this would be contrary to existing constitutional requirements, destroyed. For counterfeit trademark goods, TRIPS specifies that the simple removal of the trademark unlawfully affixed is not sufficient, other than in exceptional cases, to permit release of the goods into the channels of commerce.
China's law on customs measures provides the disposal of infringing products in any of the following ways: (a) give to charities to use for public welfare (with Customs carrying out the necessary supervision); (b) selling to the IP holder; ( c) auctioning the products (after all, intellectual property rights infringing features have been removed and with a minimum price to ensure that the infringer cannot buy them back at a price cheap enough to put them on the market again) with the proceeds going to the state treasury; and (d) destruction.
Panel observed that Chinese "statistics show that, in practice,
over half of infringing goods seized by Customs in terms of value are
in fact destroyed" (the remainder of infringing imports confiscated
between 2005 and 2007 were donated to the Red Cross Society of China).
The Panel noted that in that period, no infringing imports were auctioned.
The Panel pointed out that in fact
The Panel found that Article 59 (first sentence) of TRIPS only obliges competent authorities to have the authority to be able to make certain orders (destruction or disposal). It added that the competent authorities could make other orders besides the destruction and disposal of the infringing goods. The Panel disagreed with European Communities' submission that all remedies must be "in such a manner as to avoid any harm caused to the right holder" (found in Article 46 of TRIPS) and said that the phrase was only applicable when the infringing products were disposed outside the channels of commerce.
In interpreting "outside the channels of commerce", the Panel found that "if the social welfare bodies later sell goods donated to them by Customs for charitable distribution, even to raise money for charitable aims, the goods are not in fact disposed of outside the channels of commerce but into the channels of commerce."
The Panel further found that if social welfare bodies charitably distribute goods donated to them by Customs but the goods later find their way back into the channels of commerce, this does not alter the fact that the goods were disposed outside the channels of commerce, in the ordinary sense of "disposal". The later sale of the distributed goods is relevant to the assessment of whether the disposal outside the channels of commerce was "in such a manner so as to avoid any harm caused to the right holder", the panel added.
When interpreting "in such a manner so as to avoid any harm caused to the right holder", the Panel stated that disposal of infringing goods outside the channels of commerce, in context, is an alternative to destruction of the goods. In the Panel's view, this implies that any inherent risk of harm due simply to the fact that the goods have not been completely destroyed is insufficient to disqualify a disposal method, as it would nullify the choice between disposal and destruction. The Panel went on to point out that this shows that when goods are disposed of outside the channels of commerce, it is not assumed that the removal of the trademark is required.
The Panel stressed its finding that "any inherent risk of harm due simply to the fact that the goods have not been completely destroyed is insufficient to disqualify a disposal method, and that evidence of actual harm caused to the right holder by the manner of disposal could be relevant in assessing whether the manner of disposal conforms to this principle." The Panel went on to note that "goods donated by Customs to the Red Cross are not distributed in ordinary circumstances" and that the Red Cross distributes donated goods itself, outside the channels of commerce, including in disaster relief projects, where it cannot simply be assumed that the recipients are misled as to the origin of the goods or that the recipients are potential consumers of the genuine goods.
The purposes of the Red Cross and the circumstances in which it may use goods donated by Customs form part of the legal structure bearing on the "manner" of disposal of infringing goods by Customs, the panel added. It further said that there was no evidence to suggest that any harm had ever been caused, or is likely to be caused, to right holders' reputations due to donation of infringing goods under the measures at issue and that in fact the evidence shows that two internationally famous right holders have actually participated in the distribution by the Red Cross of goods that infringed their rights, suggesting that they do not presume that donation of infringing goods harms their reputation.
The Panel concluded that it had not been demonstrated that Customs lacks authority to donate goods to social welfare bodies in such a manner as to avoid any harm to the right holder caused by lower quality goods.
case brought into sharp relief the context in which developing countries
are trying to balance the rights of producers and users of intellectual
property and their development needs while complying with their TRIPS
obligations. For example, the Red Cross, the only social welfare body
the situation where counterfeit trademark goods are being released into
the channels of commerce, TRIPS requires more than the simple removal
of the trademark, except in exceptional cases. In this regard, the Panel
first claim was that China's laws did not "provide for criminal
procedures and penalties to be applied at least in cases of wilful trademark
counterfeiting or copyright piracy on a commercial scale" as Article
61 of TRIPS requires. (The Panel noted that "wilful" and "on
a commercial scale" appear to apply to both "trademark counterfeiting"
and "copyright piracy"). The
interpreting "commercial scale", the Panel considered the
definition proposed by the
Panel also rejected this argument. It said that it understood the term
"commercial scale" to exclude trivial or de minimis activities.
The Panel pointed out that where the negotiators intended de minimis,
they used different language, which indicates that here they intended
something other than de minimis. The Panel found that the
According to the Panel, the EC proposal in 1989 was the first to use the words "on a commercial scale", but "The records of the TRIPS negotiations do not disclose any discussion of the meaning of the phrase on a commercial scale'". The EC, responding to the Panel query, said that: "In spite of intense research, the European Communities has not been able to find any trace that the phrase on a commercial scale' in the EC proposal of 30 May 1989 was sourced from another instrument."
Panel also said that for the
Panel noted that "commercial scale" varies not only by market
but also by product within the same market, adding that the evidence
presented by the
the Panel found that none of them were corroborated and that most of
the articles were anecdotal with some repeating casual remarks about
prices of fake goods, anonymous statements or speculation. They have
titles including "Fake Pens Write Their Own Ticket", "Chasing
copycats in a tiger economy", "Hollywood takes on fake Chinese
DVDs", "Film not out yet on DVD? You can find it in
panel noted that there were four press articles from Chinese sources,
one from Xinhua News Agency and three from the English-language China
Daily. Two were quoted simply to demonstrate the existence of certain
goods in China; another quotes a vague statement from unnamed "market
insiders" on how illegal publishers tend to work; and the other
quotes an "insider" for the maximum and minimum prices of
a range of pirated and genuine goods. One other alleged "recent
news account" is not attributed to any source at all. The Panel
found that "the information that these press articles contain is
inadequate to demonstrate what is typical or usual in
By comparison, China supplied official statistics from its Economic Census that showed that China's "illegal business operation volume threshold for counterfeiting one registered trademark is equivalent to 0.41% of the average annual revenue of enterprises engaged in light industry; 0.8% of the average annual revenue of small-size enterprises; and 0.84% of the average revenue of Chinese retail businesses."
Panel noted that "There is no indication that probative evidence
on this point would be difficult to obtain" and gave examples of
evidence in the
The Panel referred to the Appellate Body Report in US-Gambling, which states: "A prima facie case must be based on evidence and legal argument' put forward by the complaining party in relation to each of the elements of the claim. A complaining party may not simply submit evidence and expect the panel to divine from it a claim of WTO-inconsistency. Nor may a complaining party simply allege facts without relating them to its legal arguments."'
Panel therefore found that the
The Panel also commented that "it is not clear why or if the United States considers that the possession of non-infringing items should have been sufficient for conviction of an intellectual property crime" and remarked that "the United States does not sufficiently relate its assertion to the measures at issue" and "the United States does not sufficiently explain the operation of the measures at issue to support its assertion."
The US then tried to prove that the tests were too narrow by alleging that China ignored other indicators of commercial scale such as the impact that counterfeiting has on the commercial marketplace and by extension, right holders. The Panel found that the impact "does not appear to be relevant consideration."
terms of the way the case as a whole was conducted, in contrast to
The panel found no link in the story to Customs and to social welfare bodies, stating that the alarming story was therefore irrelevant to the assessment of the claim.
response to another claim, the Panel was forced to point out that the
summary, generally, the US won two out of its 11 claims and in a third
claim, it succeeded for two out of five types of works. Furthermore,
in four out of the five areas where the Panel exercised judicial economy,
it appeared to be leaning towards
reaction to the ruling,
That the Panel "did not agree with one of Washington's most serious allegations: that Chinese law is lax on commercial-scale counterfeiting because it sets too high a bar for the criminal prosecution of copyright violations... has prompted some analysts to argue that, contrary to some immediate reactions, the ruling is in fact anything but a clear-cut win for the US", Dr Geist remarked.
Stressing that IPR protection was a global issue, Yao of the Ministry of Commerce of China said, China had always attached great importance to protecting IPR and in the past 30 years had made significant progress in IPR laws, enforcement, education and international cooperation.