Mixed Signals: Why China is Right and Wrong to Violate Intellectual Property Rights
In China, the trade of counterfeit goods (jia huo) is as profitable as it is pervasive. In 2002, the state-run Development Research Center valued the nation’s counterfeiting industry at US $16 billion, which some consider a conservative estimate. Experts believe that over 90% of the consumer goods sold in the city of Yiwu, regarded as the counterfeit capital of China, are counterfeit. Each of the 300 private showrooms in Yu Bao Lu, a facility in Yiwu, represents a factory that specializes in fake goods. Even the capital city of Beijing is host to an outdoor counterfeit market called “Treasure Street.” Places like Yiwu and Treasure Street provide counterfeit items ranging from car inspection stickers and college diplomas to designer clothing, computer software and even pharmaceutical products. Literary counterfeiters even produce Harry Potter books in Chinese that do not exist in English.
In China, as the International Trade Administration of the U.S. Department of Commerce stated, “if a product sells, it is likely to be illegally duplicated.” Tony Gurka of Hong Kong’s Commercial Trademark Services asserts a similar principle: if a company believes that their products are not counterfeited, “either they have a lousy product or it’s being copied so well they don’t know about it.” Rolex watches, Gucci handbags, Duracell batteries, Gillette razor blades, Safeguard soap, and Head & Shoulders shampoo are just a few brands that have fallen victim to counterfeiting. In the city of Donguan, a CBS News correspondent was offered counterfeit Callaway golf irons, putters, golf bags, gloves and even a Callaway umbrella for a grand total of US $275.00; in the United States, the authentic equipment retails at $3,000. If a company suspects counterfeiting of its products and has evidence to prove it, they generally hire a private investigator to perform a raid. However, even when the goods are removed after the raid, the individuals involved in the operation very seldom go to jail.
In December 2001, China joined the World Trade Organization and, in doing so, took the first meaningful steps towards making its counterfeit trade a thing of the past. Since then China has made and continues to make progress in reforming its laws and in enforcing intellectual property rights to stop the flow of fake products, but the Chinese producers of jia huo are prolific and stay one step ahead of anti-counterfeiting measures. Despite recent advances, China still lags very far behind developed Western nations in protecting the rights of inventors, creators, authors, composers, designers, and other innovators.
The Western Concept of Intellectual Property
Intellectual property can be thought of as any original creative work that can be protected by law, and the scope of what is considered intellectual property is immense. Intellectual property includes television shows, fashion designer logos, computer software, plant varieties, industrial processes, genetic engineering, branded consumer products, and pharmaceutical products. However abstract these artistic commercial and scientific works may be, they enjoy private property rights similar to those awarded to tangible assets.
Intellectual property rights are designed with the creator in mind by protecting the creator’s ingenuity and ensuring some sort of economic reward for the fruit of their labor as a result. From the corporate perspective, intellectual property is an important commercial asset. All companies seek to establish themselves and their products within an industry; their sales and competitive edge often depend on their name, brand and logo identity in the market at issue. Failure to protect one’s own intellectual property can be financially damaging and ruin the company’s reputation as a producer of quality products. If you try to think of McDonald’s without its golden arches, or the New York Yankees without their interlocking “NY,” you can understand how important intellectual property rights are in our society.
There are four major pillars of intellectual property rights: (1) copyrights; (2) trademarks; (3) patents; and (4) trade secrets.
Copyright protects creative works from being reproduced, displayed, or disseminated by unauthorized users. Almost all copyrights are identified by the symbol “©,” the abbreviation “Copr.,” or the word “copyright” together with the year the copyright was first established and, in some cases, the name of the owner of the copyright. The owner of a copyright is usually the author of the work, although in cases where an employee of a firm is the creator of the copyrighted work, the first owner is actually the employer under “work for hire” laws.
Original written and non-written works, including books, computer software, plays, television shows, songs, advertisements, paintings, sculptures, and movies, can be protected by a copyright. Once copyrighted, these works cannot be copied or published without permission from the creator. The copyright does not keep the works from being available to the general public; rather, like tangible property, the copyright can be sold or licensed to others, but not without providing the owner with appropriate royalties.
The protection of intellectual property rights in general has been embodied in the U.S. Constitution from the very beginning. Article I Section 8 of the U.S. Constitution, which laid the groundwork for intellectual property rights in the U.S., states that Congress is given the power “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” Current copyright protection is based on more recent legislation, namely the Copyright Act of 1976. This act establishes the time span of a copyright protecting a work created on or after January 1, 1978 as the author’s life span plus seventy years. (The duration differs for anonymous and pseudonymous works, as well as those published prior to that date.)
Letters patent, more commonly known as patents, are another kind of intellectual property right. Generally speaking, the patent is a document issued by a government which grants a special right or privilege to protect a technical innovation. In the United States, patents can be granted for improvements, discovery or innovations relating to a wide range of fields such as art, manufacturing, and even genetic engineering. In order for an innovation to qualify for a patent, the invention must be new, it must involve an inventive step, and it must be capable of being applied across the entire industry. The invention can be some sort of novel equipment, an industrial process or even a method of operation never seen or made public. Unlike copyrights, employee-inventors can be the patent holders and there is no “work for hire” law that identifies the employer as the patent holder. Like copyrights, ownership of patents can be transferred as easily as any good that can be bought or sold. Once a patent is granted, it remains effective for twenty years.
Through trademarks, we associate golden arches with McDonalds or a swoosh with Nike. Trademarks allow us to readily distinguish similar goods from one another. A trademark can be a word, sign, slogan, or just about anything that a consumer can use to identify the source of the goods and distinguish it from a competitor. Trademarks express the quality of the product and the goodwill of the owner by a mere symbol. The trademark protects this symbol by preventing others from using it. By providing exclusive use to the owner of the trademark, the only way others can use the trademark is by licensing or buying the trademark. The owner of a McDonald’s franchise, for example, would license the McDonald’s trademark for use at their restaurant. Companies can eventually lose their trademark protection. Aspirin, cellophane and escalator were once trademarks; now they are commonly used to refer to other brands of painkillers, plastic wrap, and people-moving devices.
Many people are aware that Coca-Cola does not disclose the recipe for its famous soft drink. If a disgruntled employee were to post the recipe for Coke on the Internet, the company would lose its most valuable asset: the trade secret for how to make Coca-Cola. A trade secret is a secret kept by commercial entities in order to attain or maintain their success. There are as many forms of trade secrets as there are patents, copyrights and trademarks: a formula, computer program, process, method, device, technique, pricing information, customer list or other non-public information all could be trade secrets. Trade secrets differ from patents, copyrights and trademarks in that while patents and copyrights require you to make your information public as part of the application process, trade secrets require you to actively keep the information secret by maintaining reasonable security measures. These measures can include physical means, such as keeping hard copies of relevant documents in locked cabinets and electronic copies on password-protected computers, and policies, as when employers require employees who have access to the trade secret to sign non-disclosure agreements requiring them not to release the information to unauthorized individuals and entities.
Trade-secret protection can potentially last longer than that of patents and copyrights if a company effectively prevents the disclosure of the secret. If another individual or company discovers the same information independently, they are free to produce, market, and sell a product by using that information. Similarly, if another entity acquires the knowledge or information because the company holding the trade secret failed to take reasonable measures in keeping it secret, the second entity may also use the information as they see fit. The Uniform Trade Secrets Act and the Economic Espionage Act of 1986 do, however, prohibit the theft or “misappropriation” of trade secrets.
China’s Concept of Intellectual Property Rights
Although the Chinese have historically been among the world’s most innovative inventors, the earliest Chinese effort to adopt Western intellectual property rights came only with the ratification of the Agreement on Trade Relations Between the United States of America and the People’s Republic of China of 1979 (the “Trade Relations Agreement”). According to this agreement: “each party shall seek, under its laws and with due regard to international practice, to ensure to legal or natural persons of the other party protection of patents and trademarks equivalent to the patent and trademark protection correspondingly accorded by the other party…each party shall take appropriate measures, under its law and regulations and with due regard to international practice, to ensure to legal or natural persons of the other party protection of copyrights equivalent to the copyright protection correspondingly accorded by the other party.”
After signing this agreement, China was made a member of the World Intellectual Property Organization in 1980 and the Paris Convention for the Protection of Intellectual Property in 1984. This led to the establishment of modest efforts to reform China’s trademark and patent laws.
The first generation of Chinese intellectual property laws offered considerably less protection to owner-creators than did the comparable Western laws. The Trademark Law of 1982 is the oldest of these. Based on a first-to-file system, trademarks registered under this law are valid for 10 years after approval, with a 10 year renewal option. By contrast, United States law rejects a first-to-file system and instead protects the inventor’s creation as long as he or she can prove that they were the first to complete an invention, regardless of when they filed the patent. Like the Trademark Law, the Patent Law operates on a first-to-file basis. According to Article 9 of this law, “where two or more applicants file applications for patent for the identical invention-creation, the patent right shall be granted to the applicant whose application was filed first.” Additionally, Chinese laws only provided protection for marks that were already famous, thus making it difficult, if not impossible, to protect new or relatively unknown trademarks. Moreover, the Chinese socialized many of the traditional notions of trademark and patent protection, and consequently these laws carried a distinctly socialist flavor most clearly seen in the limits exerted by the government on the rights granted by the patent and trademark laws. The Patent Law of 1984 granted patent protection to “job related invention-creation,” but it limited patent ownership to the work unit, the enterprise, or the joint-venture. These new laws were narrowly tailored and rarely enforced because they could be used only to “promote socialist legality with Chinese characteristics.”
Soon after entering into the Trade Relations Agreement with China in 1979, the United States came to the conclusion that Chinese law allowed for virtually no protection of intellectual property rights. Through measures granted by Section 301 of the Trade Act of 1974, which permitted the President to investigate and impose sanctions on countries engaging in unfair trade practices that threaten the United States’ economic interests, the U.S. attempted to force China to act more aggressively to protect these rights. A 1988 amendment to Section 301 required the United States Trade Representative (USTR) to identify foreign countries that provided inadequate intellectual property protection or that denied American goods fair or equitable market access. Furthermore, under the amendment, trade activity with the offending country could be suspended or withdrawn unless an agreement or some other accommodation between the U.S. and the offending country was made. In 1989, at the request of American business executives, the USTR placed China on its “Priority Watch List,” maintained to specify those countries whose intellectual property practices or market access barriers warrant special attention. China passed a copyright law in 1990 in response to this international pressure, but the law was more symbolic than substantive. For example, under the 1990 law foreign works copyrighted in other countries would be given no protection unless and until they first registered for copyright protection in China.
These modest and superficial attempts at dealing with intellectual property rights violations had little impact on the country’s counterfeit trade, and Western governments and business were unimpressed with China’s meager efforts to reform its intellectual property rights laws. Additional threats of U.S. sanctions likewise had no effect; the Chinese merely responded with threats of so-called “counter-sanctions.”
Some experts blame the Chinese culture for the lack of acceptance and perhaps in many cases the resistance to the concept of intellectual property rights. In “A Study into the Problem of Software Piracy in Hong Kong and China,” Kenneth Ho explains that Confucianism and its emphasis on learning through copying have influenced Chinese attitudes toward intellectual property. While Western sensibility would lead us to perceive copying as an inferior imitation of an original and even as cheating, “in many Asian nations the highest compliment one can be paid is to be copied.”
The World Trade Organization
The World Trade Organization (WTO), headquartered in Geneva, Switzerland, currently operates as the only international organization that regulates trade between nations. The WTO was formed in 1995 following the Uruguay Round of Negotiations on The General Agreement on Tariffs and Trade (GATT). GATT, founded in 1947 at the Geneva Round of Negotiations, operated as a provisional international organization focusing on international trade with the primary goal of preserving stability among nations following World War II. To accomplish this mission, GATT strove to facilitate economic recovery through the reduction of tariffs and other barriers to trade and to arrange mutually advantageous relationships between nations by eliminating discriminatory treatment in international trade agreements. Although it inherited many of GATT’s basic principles, the WTO operates as a global commerce agency with its own secretariat and the same legal status as the United Nations.
Meeting at least every two years, the Ministerial Conference of the WTO is composed of all members and operates as the main governing body of the WTO. Reporting to the Ministerial Conference is the General Council, also composed of all members. The General Council oversees the operation of the WTO between meetings of the Ministerial Conference and operates one of the most important functions of the WTO, the dispute resolution process. Subordinate to the Ministerial Conference and the General Council are the specialized standing committees, including the Council For Trade in Goods, the Council for Trade in Services, and the entity of the most interest to member countries, the Council for Trade Related Aspects of Intellectual Property Rights. These committees meet more regularly than the other bodies to discuss issues regarding international trade policies.
The World Trade Organization is vested with the power to enforce global commerce rules through the imposition of economic sanctions. The WTO’s 148 member nations are expected to raise standards of living, expand the production of trade in goods and services, and ensure that developing countries participate and consequently benefit from expanding international trade. As one objective of the WTO is to liberalize restrictive and biased home country trade policies, members of the WTO have a right to challenge other countries’ local, state and national laws if they feel the laws impede international trade. As the WTO holds judicial authority, when the organization issues an adverse ruling, a non-complying country must either amend its law to conform to WTO requirements or submit to trade sanctions. Many have criticized this sweeping power as undemocratic, especially since the power is vested only in unelected WTO bureaucrats.
The WTO’s goals have evolved from postwar economic recovery to administering WTO trade agreements, providing a forum for trade negotiations, handling trade disputes, monitoring national trade policies, providing technical assistance and training for developing countries, and collaborating with other international organizations such as the World Bank and the United Nations. Any state or separate customs territory possessing full autonomy in the conduct of external trade may apply for membership. Nations wishing to become WTO member nations must accept the results of the Uruguay Round of Multilateral Trade Negotiations and, more importantly, comply with international trade rules set forth by the WTO legislation, including the Trade Related Aspects of Intellectual Property Rights.
Trade Related Aspects of International Property Rights Agreement (TRIPS)
The Trade Related Aspects of International Property Rights Agreement (TRIPS) is the international benchmark for the recognition of intellectual property. TRIPS serves as an instruction manual for member nations of the WTO and provides direction as to how they are to protect intellectual property rights. TRIPS became effective on January 1, 1995 and covers all areas of intellectual property rights such as copyright, trademarks, patents, industrial designs, varieties of plants, layout designs of integrated circuits and undisclosed information including trade secrets and test data.
On accession to the WTO, a state must adopt or conform its laws to comply with TRIPS. TRIPS provides so-called minimum standards for the protection of intellectual property rights and procedures for enforcement of these rules, and it subjects disputes between members to the WTO’s dispute settlement procedures. The minimum standards for intellectual property right protection set forth in TRIPS mirrors Western notions of intellectual property rights. In effect, member nations must surrender their sovereignty to the WTO with respect to the standards for the creation and enforcement of intellectual property rights, and TRIPS has thus triggered an intense debate on the morality and ethics of the Western notions of intellectual property rights.
TRIPS embodies the terms of earlier agreements on intellectual property rights, namely the Paris Convention for the Protection of Industrial Property and the Berne Convention for the Protection of Literary and Artistic Works. TRIPS extracts many provisions from each of these agreements and appends additional requirements where the previous agreements were considered deficient. TRIPS also provides procedures and remedies for the enforcement of intellectual property protection. It also outlines civil and administrative procedures and remedies, provisional measures, and special requirements related to border measures and criminal procedures.
China and WTO Membership
As with all other WTO agreements, the obligations outlined by TRIPS must be fulfilled by every member of the WTO as a condition of entry. China applied for admission to GATT in July 1986 and became a member of WTO, GATT’s successor, in December 2001. During the 15-year accession process, China negotiated dozens of trade agreements with WTO members to change legal regulations and to recognize individual property rights.
Accession to the WTO became a priority for China due to the status that membership brings. WTO membership signifies that China is a growing economic power in the international community. As a member of the WTO, China has the opportunity to take part in the development of international rules on trade in the WTO. Given its immense size and market potential, China is expected to play a significant role in these negotiations.
It will not be easy to eradicate counterfeiting in China without adversely affecting the domestic economy. As of 2004, counterfeiting accounts for 8% of China’s gross domestic product. Counterfeiting is so pervasive that local government-established companies operate as outlets for the sale of phony goods. Many local governments are even afraid to step up and combat counterfeiting because it is such a crucial part of local economies. Daniel Chow, a professor at the Ohio State University College of Law, believes that the total abolition of counterfeiting would be ruinous in many parts of China:
“[I]f the Chinese were to step in and halt the counterfeit trade, which it has the power and ability to do, it would destroy the economies of Chinese towns.” From the perspective of U.S. firms, China’s membership in the WTO is a double-edged sword. China is one of the fastest growing economies over the last decade, making it very attractive for foreign firms to conduct their business there. However, a significant portion of its economy is based on counterfeiting and the violation of most intellectual property laws known to the Western world. Lax enforcement and healthy demand for Western goods, particular among the younger generation of Chinese, together with inadequate protection for intellectual property rights under the law ensures that counterfeiting remains safe and prolific. As a result, foreign firms find themselves competing with cheap, low quality imitations of their goods. This dilution compromises a foreign company’s market share and destroys the goodwill for those products that depend on reputations for good quality. In some cases, especially in the pharmaceutical product area, counterfeiters of name brand products are placing the health of consumers at risk.
Current Chinese Efforts to Protect Intellectual Property
1. General Efforts by China
China continues to rework its legal system on an ongoing basis to provide an improved environment for economic and social development. The judges of the Chinese Supreme Court have made a point of attending lectures and training courses on WTO rules, and senior justices have even been sent to study laws in developed countries. Laws and regulations that do not conform to the WTO’s standards are being either reworked, eliminated, or replaced by new legislation. The Beijing People’s High Court released a set of patent regulations in 2001 detailing different possible infringements upon patent rights. Wang Zhenqing, vice president of Beijing People’s High Court, has indicated that the new rules extend patent protection to almost all fields, including Olympics-related patents – particularly important, as China will host the 2008 Summer Olympics.
2. Efforts Pertaining to Patent Protection
Chinese patent law has recently been revised to allow the holder of a patent to petition the court to issue an injunction against the infringing party. Prior to passage of this law, patent holders did not have the right to seek injunctive relief against violators of the patent. Now that preliminary injunctions are available, the courts can expeditiously end the infringement of a patent if the patentee can prove another party is violating the patentee’s rights. It is also consistent under TRIPS to allow for the swift resolution of patent violations. The remedy of preliminary injunctive relief at the request of the patent holder is a major turning point in China’s efforts to enforce intellectual property rights, as it places enforcement in the hands of the party who was victimized by intellectual property piracy.
3. Efforts Pertaining to Trademark Protection
Within the last decade, China has made substantial progress in reforming its trademark laws. On January 22, 2002, China amended its Trademark Law to allow parties to seek preliminary injunctive relief to stop infringement and preserve evidence. Known as “Interpretation on the Issue of the Law Applicable to Stopping Infringement of Exclusive Rights in Registered Trademarks and Preservation of Evidence Prior to Litigation,” the amendments to the Trademark Law address matters such as the court with relevant jurisdiction, the matters that must be included in petitions for preliminary injunctions, the evidence that must be presented, the provision of security by petitioners, time limits for granting injunctions that courts must comply with, and time limits for instituting an action after an injunction has been granted.
China again amended its Trademark Law in 2003 to protect geographic indicators that are often important to Western companies and incorporated these changes in the Implementing Rules and Regulations. Article 22 of the regulations now protects “indications that identify a good as originating in the territory of a member region and given a quality or reputation or other characteristic that is attributable to its geographical origin.” As an illustration, if a company’s name is Pepsi Cola of America, the company has ownership of the “America” connected with the product. The law also protects the right of the sparkling wine producers of Champagne, France to call their sparkling wine “champagne” and prevents others from doing so. Chinese trademark law in the past had never given protection to such geographic indicators.
In addition to geographic indicators, Chinese law now protects well-known marks, such as the Nike swoosh or the McDonald’s arches, by specifying criteria that distinguish if a trademark should be made part of a well-established category. Articles 13 and 14 of the newly revised Chinese trademark law establish that “well-known” includes the “reputation of the mark to the relevant public; time for continued use of the mark, consecutive time, extent and geographical area of the mark, records of protection of the mark as well-known and any other relevant factors to the mark.” The new Chinese law also prohibits the imitation or translation of another person’s trademark not yet registered in China and likely to cause confusion. As intellectual property attorneys Veronica Weinstein and Dennis Fernandez note, this addition is “especially significant because China adheres to the first to file system and a race to the registration office can be crucial to establishing trademark rights.” If someone wants to file the Lacoste Alligator trademark in China, for example, and they are the first to file, they will not be able to proceed because the trademark is a well-known French trademark. A first filing does not guarantee one ownership according to this new law. This policy falls under the sphere of prior protection of rights, which has been added to Chinese Trademark Law to fall in compliance with the Implementing Regulations of the Trade Mark Law.
4. Efforts Pertaining to Copyright Protection
China also recently amended its copyright laws. Known as the “Decision of the Standing Committee of the National People’s Congress on Amendment of the Copy Right Law of the People’s Republic of China,” these new amendments govern assignments of copyright, expand the list of works that are protected, introduce collective organizations that can assert rights on behalf of their members, expand the list of rights copyright holders possess (adding, among others, the right of transmission by computer information network), and change the rules on permitted use without authorization.
Anyone who infringes on a copyright may be required to pay damages of 500,000 RMB (US $60,000) when damages cannot be determined. In addition, there have been modifications regarding Internet copyright: specifically, the “rights of Internet authors shall be listed as an individual right, and anyone who cancels or alters the author’s works without permission shall be deemed illegal.” Most of these changes effectively increased the penalties for intellectual property rights violations. Although the exact nature and severity of punishment has not yet been clarified, particularly in patent law, the language in these laws leaves no doubt that violators will face harsher penalties.
One of the more recent copyright cases that occurred in China ironically involves a famous U.S. company as the violator. Guangdong Apollo Co. accused Coca-Cola of violating its copyright by using the song that Apollo employs in its own TV beverage commercials, alleging that its commercial jingle “When That Sun Rises” has been heard in ads for the Coca-Cola beverage Sprite. The Chinese court found Coca-Cola liable for infringing Guangdong Apollo’s copyright using a sufficiently similar jingle and ordered the American beverage company to apologize and pay a fine of RMB 45,000 (US $5,437.08).
China’s Prospects Beyond the WTO
Today, China is the world’s fifth largest trading entity with exports totaling US $450 billion in 2003-2004; the country’s electronic exports account for 30% of Asia’s total exports in this sector. According to Shaun Donnelly, the Acting Assistant Secretary of the Bureau of Economic and Business Affairs of the U.S. State Department, “China’s WTO accession integrates it more firmly into the Pacific and world economies and gives China a greater stake in regional and global stability.”
However, the new markets in China that are now available to WTO members may prove to be detrimental to undercapitalized private and state owned businesses at home. Chinese goods will face new and strong competition from WTO member nations. Furthermore, unemployment in China is already a problem, and it is bound to grow even more serious as China integrates itself into the WTO community. Although the official unemployment rate was 4.3% in 2003, studies have shown the actual rate to range from 7.2% to 12.9% in urban areas between 1996 and 2001, and an additional 150 million rural workers make up a so-called “floating population” that migrates from farming to construction. These migrant workers are often unemployed and are not represented in any official unemployment rates.
China’s recent improvements to their intellectual property laws notwithstanding, many agree with the United States Trade Representative’s assessment of China’s progress as “uneven.” Professor Chow of Ohio State University noted that this is because “China has all sorts of IP laws on the books, but getting the government to enforce those rules is another matter.” The US Department of Commerce estimates that companies lose between US $20 billion to US $24 billion annually because of global piracy. In an interview with CNN, Myron Brilliant of the US Chamber of Commerce estimated that China is the source of 60% of all pirated goods in the world.
China has created a multi-agency IPR task force headed by Vice Premier Wu Yi. The job of this task force is to further help the Chinese legal system comply with TRIPS. One strategy employed by the task force does is to exercise more criminal statutes rather than administrative laws, but lack of transparency makes it difficult to find out what penalties are imposed and what individuals should be convicted. As the 2004 United States Trade Representative (USTR) report states, “Chinese law is never clear on whether an activity warrants administrative, civil or criminal enforcement.”
The criminal liability threshold is another target for reform. The thresholds are currently too high and seldom met; for instance, the 2004 USTR report states that “in order to bring a criminal action against an alleged infringer there must be evidentiary proof totaling RMB 200,000 ([US] $24,100) for enterprises and 50,000 RMB ([US] $6,300) for individuals.” This proof of sale requirement is considered futile as it does not apply to counterfeit or pirated goods not yet sold: if pirated goods were found in a warehouse, the individual who placed them there would not be penalized. The Supreme People’s Court is attempting to change this. In December of 2004, Cao Jianming, Vice President of the Supreme People’s Court, explained how the court is trying to clarify legal definitions of terms, among them “without permission of copyright owner” and “reproducing/distributing,” to make it easier to prosecute offenders. The court also plans on laying out a 7-year prison term for the worst offenders. Although violators have been fined, it remains unclear how many individuals have been jailed.
Chinese Pharmaceuticals: The Pros and Cons of Intellectual Property Rights
Anecdotal evidence of pharmaceutical counterfeiting in China abounds. According to the Shanghai Star, in July 2004 Chen Li of Taizhou in East China’s Zhejiang Province was arrested for selling counterfeit Viagra pills and sentenced to a two-year jail term and a fine of 130,000 RMB (US $15,700). Li had made 40,000 RMB (US $4,800) from the sale of 15 kilograms of the raw materials used to make Viagra the previous year and would have made 200,000 RMB (US $24,000) from the sale of the actual pills. In January 2005, a sting in Yunnan Province resulted in the arrest and prosecution of several “politically connected executives” and the seizure of US $5 million in counterfeit Viagra, Lipitor, and Norvasc. Seven months later, Chinese and U.S. authorities collaborated to raid a Viagra counterfeiting operation resulting in 12 arrests and the seizure of US $4.3 million in Viagra, Cialis, and Lipitor.
1. Background on China’s Growing Pharmaceutical Industry
The Chinese pharmaceutical industry is a growing market. It has grown by 10 to 15% in the last two decades and it is expected to triple between 2000 and 2010. Sales of prescription drugs were US $6.8 billion in 2000 and are expected to reach US $14 billion in 2005. Experts attribute this boom to the country’s expanding population, rising incomes and recent tariff cuts. Even the sales of over-the-counter drugs (OTC) are anticipated to increase as patients switch from prescriptions to OTC.  In 2004, China’s market was the world’s fastest growing, reaching sales of US $9.5 billion, a 28% increase from the previous year; it is predicted to become the world’s fifth largest market by 2010.
China has over 6,000 pharmaceutical companies and 700 of them are foreign-invested, most notably Pfizer, Roche and Merck. Some of the most popular drugs sold by these companies include Lipitor, Viagra, and the diabetes drug Metformin. The Economic Intelligence Unit states that 40 to 50 of the most popular branded drugs in China are made by foreign companies, yet they only constitute 20 to 30% of the total market value.
97% of the types of drugs and 70% of the drug volume manufactured by the Chinese pharmaceutical industry are generics produced for domestic consumption. Generic drugs may be essentially the same as a patented drug or may contain the basic form or the active ingredient of a patented drug. For example, paracetemol, a generic drug manufactured in China, shares its active ingredient with Tylenol, but paracetemol is far cheaper. An active ingredient like this can be legally copied because it is “off-patent”: in other words, its patent has expired. (Recall that in the United States, patent protection lasts for twenty years.) China is the world’s second largest producer of generic drugs, manufacturing generics of such drugs as penicillin, vitamin C, antibiotics, and Terramycin. Strong Indian drug firms such as Cipla and Ranbaxy are China’s biggest competitors in the generic drug market.
The generic market has become more attractive to traditional multinational pharmaceutical companies. The Swiss pharmaceutical company Novartis recently purchased Germany’s Hexal HG and Eon Labs, Inc. Hexal is a pharmaceutical firm that has had a successful line of generics, including a popular generic version of Zocor, a cholesterol-lowering drug. Eon Lab has experimented with generics but did not sell any at the time of its purchase. Novartis made an unprecedented strategic move in buying these companies and is now expected to be the world’s top seller of generic drugs.
2. When Is Intellectual Property Piracy Morally Wrong?
Although consumers are often inconvenienced by the poor quality of counterfeited consumer goods, creating fake medicine presents a much more serious problem. Toxins in counterfeited pharmaceuticals can cause illness, and even “harmless” counterfeits allow a sick individual’s condition to worsen in the absence of effective treatment. Phony drugs caused 192,000 deaths in China in 2001; in 2000, more than 200,000 Chinese died and 2.5 million were hospitalized after consuming counterfeit drugs they believed were legitimate. According to FBI agent and former Vice President of Corporate Security at Pfizer Inc. John Theriault, “millions of units of counterfeit pharmaceuticals and kilos of the compound to make them have been seized in recent years.” In Theriault’s opinion, the most dangerous cases occur when the fakes are intermingled with authentic products, as when a small number of “bad” pills are mixed with a larger number of “good” ones. According to Samuel D. Porteous of the security firm Kroll Associates, 40% of drugs in some Chinese cities are counterfeit. Experts consulted by the Chicago Tribune estimated that “China is involved, in one way or another, in more than 30 percent” of the world’s counterfeit pharmaceutical trade: a staggering proportion, considering that the World Health Organization has determined that between 5 and 7 percent of drugs worldwide are counterfeit. Commerce Secretary Carlos Gutierrez places the figure even higher at ten percent.
The Chinese government has begun to more closely regulate the country’s pharmaceutical industry by implementing good manufacturing practices (GMP) laws and regulations. These laws are similar to, but not as strict as, the GMP laws that the U.S. Food and Drug Administration has promulgated. China’s State Food and Drug Administration reported that in 2003, authorities closed 994 manufacturers of counterfeit pharmaceuticals accounting for US $60 million in drugs, while the World Health Organization indicated that the same year 1,300 facilities had been closed.
3. When Is Intellectual Property Piracy Morally Justified?
A drug can be counterfeited by reverse-engineering the active compound: a counterfeiter takes the known ingredients and works backward to figure out a process that produces accurate copies of the target drug. Under TRIPS, the WTO prohibits the copying of any proprietary drug under patent without the payment of an appropriate royalty fee.
However, the HIV/AIDS epidemic presents a conflict between the enforcement of Western notions of intellectual property rights and larger moral concerns. Some experts predict that 80 million Africans may die of AIDS by the year 2025. As large-scaled AIDS relief programs purchase huge quantities of anti-retroviral drugs, shortages loom for stavudine (produced and sold by Bristol-Myers Squibb as Zerit) and efavirenz (produced and sold by Bristol-Myers Squibb, and sold by Merck, as Stockrin). Some believe that to ensure that developing countries purchasing the drugs for their own citizens are able to access them, there is a need for drugmakers to make cheap generic forms of such drugs, even if the drugs are under patent. Indian pharmaceutical companies and, to a lesser extent, Chinese pharmaceutical companies have succeeded in producing cheap anti-retroviral drugs to treat HIV infection and AIDS in Africa.
Indian companies, including Cipla Ltd., have sold anti-retroviral AIDS cocktails to humanitarian groups and African countries at rates reducing its cost for one year of treatment to US $200, compared to the US $15,000 charged by Western drug makers who hold the patents. In response to accusations that India is sidestepping drug patents and violating WTO provisions by doing so, Cipla asserted that it is responding to a national emergency and feels obligated to help developing countries that cannot afford this vital medication for their citizens. However, in April 2005 India passed novel legislation that requires generic drug makers to pay royalties if the drug is still under patent. The new law radically amends India’s 1970 Patent Act and affects all products, not just pharmaceutical products. However, in view of the fact that much of the Third World relies on India to produce cheap anti-retroviral drugs to fight AIDS, the law’s greatest impact is on the drug industry: it forces manufacturers to pay licensing fees and could force prices up, placing India’s generics out of reach of those who most desperately need them.
China’s Shanghai Desano, BioPharma Co., and Xiamen McPharm Group also produce drugs to treat HIV infection and AIDS. According to Mervyn Webb from Crane Pharmaceutical Africa, because “AIDS medicine is the most expensive in the world, the material medicine from China which is not only of cheap price, but of high quality, will benefit our South African people.” There has been speculation that Shanghai Desano in particular has been reverse engineering AIDS drugs without a license. Chinese officials have warned manufacturers against copying foreign goods under patent and thereby violating WTO commitments on intellectual property rights. In response, Li Jinliang, a senior manager at Desano, told Reuters, “Our drugs are our development, but of course we have to refer to related reports from foreign sources. We couldn’t possibly do it from scratch; we refer to patents in this area.” To help combat the shortage of AIDS drugs, Indian and Chinese companies such as Orchid Chemical Ltd. and North China Pharmaceutical Corporation have established a joint venture to produce more drugs and expand their markets.
It seems inevitable that counterfeiting and violations of intellectual property rights will continue to be pervasive in China for many years. This does not mean that China is unscrupulous or a rogue: it simply means that China has not yet adopted Western notions of intellectual property rights. Once China has technology that it has created and that it deems worth protecting from counterfeiting, new laws guarding intellectual property rights will carry more meaning and may be more widely and more rigorously enforced. As Chinese companies like Lenovo Group Ltd., now the world’s third largest computer manufacturer, look to expand their markets into countries across the world, they will understand the importance of protecting their products from counterfeiting and piracy and urge their government to defend their intellectual property rights at home. As patent attorney and executive Toby Mak told The Scientist, “[China] is like Japan 40 years ago… Japan was associated with knockoffs, and the great patent infringers of the past were the Japanese. In the 1990s Japan changed to a new ideas exporter and now they’re the second biggest patent filers in the world.” The Economist agreed, asserting that “growth and home-grown invention are the most effective remedies to counterfeiting” and predicting that China will follow the historical trajectories of Japan, Hong Kong, Taiwan, and South Korea, whose then-thriving counterfeit trade encountered formidable laws and penalties when domestic industry began to experience substantial growth. As John Theriault told the Chicago Tribune, “[the Chinese counterfeiting problem] won’t get much better until China has its own intellectual property to protect.”
It is also worth remembering that blind adherence to the WTO and Western notions of intellectual property rights can be immoral, dangerous, and even deadly. The worldwide AIDS crisis challenges assumptions made by TRIPS and the Western concept of patent protection. We hold that even the United States must acknowledge the necessity of compromising on principles of intellectual property rights when millions of lives are on the line. Indeed, not so long ago our own country faced a similar dilemma when anthrax emerged as a terrorist threat. The only FDA-approved treatment for anthrax infection was Cipro, an expensive antibiotic manufactured by the German drugmaker Bayer, and so when President George W. Bush first believed the country could need huge supplies of Cipro to defend against a future anthrax attack, he threatened to override Bayer’s patent and permit the manufacture of generic versions of the drug in the United States. Should Washington seek WTO sanctions against China for the production of generic anti-retroviral AIDS drugs, the Chinese would be justified in reminding the Bush administration of their stance on Cipro and the millions of men, women, and children in sub-Saharan Africa waiting for the drugs that could save their lives.
Copyright © 2006 Daniel C. Fleming
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