China Esquire

Was reading China Law Blog’s treatment of Chinese branding and trademarks here where Dan Harris takes issue with a Newsweek article, which states in part:

The simplest explanation for China’s failure to build global brands is cutthroat domestic competition. In most product categories, hundreds or thousands of firms compete for domestic market share, leaving profit margins razor thin. . . . And because foreign brands have taken much of the market’s high end, most companies are forced to compete on cost, leaving little room for investment in R&D or marketing. . . . Finally, the recent string of product recalls—including poisonous pet food and faulty tires—has left consumers wary of made-in-China goods.

Of course, I would take issue with this article as Dan does. His thoughts, and mine, after the jump.

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Stan Abrams recently did a great post at China Hearsay about trademark registration, which piggybacks on Dan’s post at CLB. So why am I so enamored with this post? Because Stan is saying something that so many attorneys wish we could say to our clients. Not because we hate our clients, but because sometimes it’s easier to give the straight talk rather than give “professional sounding” advice.

I compiled key parts of Stan’s post after the jump.
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A friend forwarded an email to me about an interesting seminar that will cover “Antitrust and Intellectual Property Economics and Litigation in China”.  Yes, sounds like a mouthful, and this could easily be a semeter-long course in law school.  But in that regard, it should prove to be really interesting.  The seminar is happening at the Palace Hotel, 2 New Montgomery Street, San Francisco, CA on April 23, 2009 at 4:30pm.  Did I forget to mention its also free MCLE?

Unlike many of the conferences I post but cannot go to, I actually plan on attending this one.  More information after the jump.

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It’s been busy at work, but its awfully hard to not post something like this when I see it.  The American Lawyer ran an article (free suscription required) called “ China Gets Litigious” and it actually sounded interesting.  (yes, I think I am a litigator at heart still…)  Wang Shengjun, the president of the Supreme People’s Court laid out the statistics before the National People’s Congress.  (and provided to Xinhua…  not that I am surprised):

Litigation activity in China is growing at a rapid pace, according to a report issued Tuesday by the nation’s top judge.

Wang Shengjun, , described the increase in court cases in a speech to the National People’s Congress. Highlights of Wang’s remarks were provided beforehand to the official Xinhua news agency.

The actual statistics after the jump.

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Like everyone else, I saw the headlines from this article at CNN entitled “ Report: China targets Web sites with ‘porn’ content“:

China has released a blacklist of 19 major online portals and Web sites, including Google and Baidu, that it claims provide and spread pornographic or obscene content, state media reported.

“The government will continue to expose, punish or even shut down those infamous Web sites that refuse to correct their wrongdoing,” Cai Mingzhao, deputy director of the State Council Information Office, said Monday at a teleconference

Authorities accused the portals, including Sina, Sohu and Netease, and the Web sites of either providing links to pornographic sites or failing to take down pornographic pictures after being notified by the China Internet Illegal Information Reporting Center.

The center said Google in Chinese had provided “a large number of links to porn Web sites” in search results for web pages and images. The center said it notified Google, but the company did not take any effective steps, according to Xinhua.

Cui Jin, a spokeswoman for Google China, told Xinhua that Google did not spread such items intentionally.

“Google is neither the owner of those Web sites and porn nor does it spread (that) information intentionally,” she said.

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Finally, part 3 of my series.  One way that plaintiffs often try to get their international copyright violations heard in U.S. courts is by alleging that a U.S. based defendant aided the infringement.  To my knowledge, there are two types of contributory infringment: vicarious and contributory.  I have not seen any cases on point within my Circuit as to vicarious. However, it appears that Subafilms (which was the basis for part 1 of this series) directly addresses contributory infringement in a way that severely limits what plaintiffs may actually get away with.

The Ninth Circuit held that it is axiomatic that activity outside the United States, “not constituting an infringement cognizable under the Copyright Act, cannot serve as the basis for holding liable under the Copyright Act one who is merely related to that activity within the United States.”  Subafilms, Ltd. v. MGM-Pathe Comm’ns Co., 24 F.3d 1088, 1093 (9th Cir. 1994) (en banc).  A party cannot be held liable for contributory infringement unless the authorized or encouraged activity itself amounted to copyright infringement.  Id. at 1092.

The Subafilms court held that a movie studio that “licensed” infringing DVD’s to international markets could not be held liable under U.S. Copyright Act.  Why?  Because the violation occurred abroad…  and not in the United States.  So even if a U.S. based defendant contributed to what would amount to infringment in China, Japan, Russia, etc., that is not sufficient to be held liable in the U.S.  The only way to get a third party on the hook is in a situation where the infringement took place in America.

Practically speaking, if there is infringement that happens abroad, Subafilms knocks out liability against the primary infringer and any contributing third parties or additional defendants.

Bottom line: unless a plaintiff can demonstrate that authorized activity fell under the Copyright Act in America, then parties may not be held liable for contributory infringement… because there is simply no copyright infringement.

For plaintiffs: You have to demonstrate that copyright infringement happened in the United States if you want to use the Federal Copyright Act.  Otherwise, you need to take the case to international courts or U.S. state courts.  The former may not yield you much because damages are low…  but then again, so are damages in the latter without statutory damages under the FCA.  Your best bet is an injunction in international court.

So if you can’t show infringement in the U.S., its a business decision: do you want to spend that much money for that little in damages?

For defendants: This is your lucky day if this happens to match your facts.  You can argue that the court has no subject matter jurisdiction over federal copyright claims, and thus, likely knock this case into international courts or U.S. state courts.  And in the state courts, plaintiffs don’t get ridiculously high statutory damage, so its a win for you.

For those of you who missed parts 1 and 2, they are here:

• part 1 (general overview of Subafilms)
• part 2 (why you cannot vest jurisdiction by EULA or shrinkwrap license)

Having said what I did in my previous post, you may be wondering if there really is anything else to follow up.  My answer: of course there is!  (that’s why this is a 3 part series, and not a one shot deal)

What happens now when there is some sort of contract or written agreement that would vest jurisdiction (and of course, venue) in the United States in such a situation?  I can imagine a number of scenarios for this.  (1) You have a shrinkwrap license that somehow makes its way overseas.  (2) You have an exclusive distribution agreement for your music in particular countries.  (3) You have an end user license agreement (“EULA”) each time you install software.  (4) Any other scenario which involves a written license or agreement…  use your imagination.

And then you have as part of that license or agreement that subject matter jurisdiction is vested in some court located in the United States.  Not just venue, but jurisdiction.  And you include in your agreement that the parties agree that U.S. copyright law should apply to any and all disputes.  Okay…  so that should make things fullproof?  That you can write your way around Subafilms and get a U.S. court to apply the federal Copyright Act?  You might think so, and it seems intuitive to some of the corporate types.   And if you’re the plaintiff, you might even argue so to the court.

My response?  You’re still out of luck.  There is a general axiom in civil procedure that a contract can’t hand jurisdiction to the courts.  Where a court lacks subject matter jurisdiction, the parties cannot simply vest it by agreement.  Kolbe v. Trudei, 945 F. Supp. 1268, 1270 (D. Ariz. 1996).  In Kolbe, the court specifically rejected an argument that a licensing agreement that contained a forum selection clause granted jurisdiction to the District of Arizona over infringing French translations.  The court held that “parties cannot agree to invest this Court with subject matter jurisdiction.  Either subject matter jurisdiction exists or it does not exist, a matter independent of the parties’ agreement.”  Id.

So, the hard work that your corporate lawyer did to ensure that jurisdiction and venue were established in the United States may still be worth something if the copyright infringement took place in America.  But if you’re overseas, then that hard work is worth nothing.  Period.

If you represent plaintiffs, don’t think that your EULA or other agreement will save you.  It won’t.  You need to get another way to connecting things to the U.S., or else, it just won’t fly in federal court.  (at least, it won’t in the 9th Circuit)

If you represent defendants, then just argue Kolbe and the general axiom.  It’s quite obvious.

Third installment coming soon!

I’ve been wanting to do this series of posts for some time now.  In fact, I’ve been sitting on the materials for this for months…  as you can tell, I’d more or less taken a brief blogging hiatus, just posting stuff here and there.  I don’t believe I can return to the sort of posting that I used to do–pretty much 1 article every day–but I will attempt to keep my posts here interesting and relevant.

That being said, one thing that often happens in representing international companies in lawsuits is that you will inevitably sue or be sued for international copyright violations.  (think of your clients’ employees downloading pirated mp3s, pirated software, or whatever else)  Now there are plenty of methods to seek redress. If those happen in the United States, of course, you can use federal copyright law.  But what if the copyright violation ultimately happens in China or Japan?  (or whatever country you can pick)  Even if the plaintiff is a U.S. based company, and the method of copyright violation occurs by broadcast signal or internet coming from the U.S., my personal take is that the plaintiff is out of luck… at least, it is in the 9th Circuit.

Violations of the Copyright Act must occur within the United States.  In general, “United States copyright laws do not have extraterritorial effect, and therefore, infringing actions that take place entirely outside the United States are not actionable.”  Subafilms, Ltd. v. MGM-Pathe Comm’ns Co., 24 F.3d 1088, 1091 (9th Cir. 1994) (en banc); Peter Starr Prod. Co. v. Twin Continental Films, Inc., 783 F.2d 1440, 1442-1443 (9th Cir. 1986).  The en banc panel reiterated that the Copyright Act’s extraterritorial limitations are an “undisputed axiom”.  Id. at 1095.  “At least one alleged infringement must be completed entirely within the United States.”  Allarcom Pay Television, Ltd. v. Gen. Instrument Corp., 69 F.3d 381, 387 (9th Cir. 1995); see also Danjac, LLC v. Sony Corp., 1998 U.S. Dist. LEXIS 22231, at *22 (C.D. Cal. 1998) (scope of injunction limited to domestic activities).  A plain reading of Subafilms ends up being fatal to would-be plaintiffs.

Further, my take is that Allarcom is pretty instructive too.  There, the plaintiff was authorized by the Canadian government to be the exclusive provider of English subscription television, which included exclusive rights to movie producers such as Paramount and Touchstone.  Allarcom, 69 F.3d at 383.  Defendant Showtime had the right to exhibit many of the same movies in the United States.  Id. at 384.  Defendant General Instrument manufactured a device that descrambled satellite television signals, which allowed unauthorized users to receive protected content, including Showtime.  Users in Canada purchased General Instrument’s device and used it to unscramble Showtime content.  Allarcom filed a complaint in federal district court against defendants for copyright infringement.  The court held that the Copyright Act did not apply to infringement in Canada.  Id. at 387.  Because the signal that was transmitted by Showtime from the United States was received and decoded in Canada, the Ninth Circuit held that “the potential infringement was only completed in Canada once the signal was received and viewed.”  Id.

Bottom line: the alleged infringment must take place in America, on American soil.  At least, that’s how I read the law to be.

So, what does this all mean for you?  For plaintiff’s counsel: do your homework.  And if you have a client who is going ballistic, wanting to sue in the U.S. in federal court even if the violation wasn’t here, then you need to tell them firmly that it won’t fly in court.  See if you can somehow tie the activities to the U.S., because you will have to do that later.

For defense counsel: It means if your client is being threatened with a federal copyright case, do your investigation.  Make sure that you know where the violation happened.  If it’s a broadcast or download situation, you may need an expert to discuss why the violation wasn’t U.S. based.  But don’t sweat it too much unless plaintiff’s attorneys are just patently unreasonable.

2 more parts coming on this shortly!

The Monterey Bay Int’l Trade Association (MBITA) is hosting their first annual Green Trade Network Summit, entitled “ When You Think Greek, You Must Think Global“.  It will be in Santa Cruz, CA, and is an all day event that runs from 8:30am – 5:30pm.  From their website, here is some interesting intro language:

The Green revolution commands a global effort from both business and government. Cleaning the air in China is just as important as it is in California. As all countries are connected through our environment, we also need to collaborate with our Green technologies, products, services and resources to meet the challenge of global warming. This global strategy will grow our companies and at the same time improve our respective economies.

The lunch presentation film also focuses on China:

. . . the Green Dragon Film, will be presented and shown by Max Perelman of Green Dragon. This documentary sheds light on the barriers and opportunities expanding China’s green building movement – one of the biggest untold stories of China’s environmental challenge.

And of course, for the lawyers, the third panel is entitled “License Green Technology in Foreign Markets and Protect Your Intellectual Property”.  Crystal Zarpas of Mann & Zarpas, LLP, will be explaining “the complicated process of protecting your intellectual property through the foreign registration process of your product’s trademark”.  Yes, it’s not earth shattering, but should be a good practice lesson for anyone dealing with China trademarks.

Registration is here.

I’m surprised no one picked up on this editorial last week from Wang Qishan, Vice Premier of the State Council, entitled, “No More Chinese Knock-Offs”.  ( h/t to China Digital Times)  It followed pretty closely after the State Intellectual Property Office (SIPO) released its 5 year IPR protection plan here.  ( h/t to China Law Practice Blog)  Wang writes:

Prior to this week’s economic talks with the U.S., the Chinese government unveiled the Outline of National Intellectual Property Rights — a new strategy to tackle the many issues surrounding IPR. This new strategy will improve IPR protection in China and attract greater intellectual resources from abroad.

Moreover, the implementation of this strategy — a milestone in the institution of China’s IPR regime — will boost innovation at home and turn China’s abundant human resources into intellectual resources, with a positive and far-reaching impact on economic and social development in China.

This is really big talk.  While I agree that China has done a lot to improve its IPR enforcement, this is a huge claim: that it will boost innovation at home and turn China into a player at the IP level.  While I don’t doubt the intelligence of the Chinese people, as many of my friends and acquaintances are far more intelligent than I, I do think it will take more than just IPR protection to boost innovation.  IPR protection will surely help innovation because there will be money to be made in invention and innovation.  But my long problem has been the fact that its China’s culture that stunts it from becoming a major innovator.  I believe IPR will help innovation.  I just think it will take a cultural shift over a generation or three to see this truly happen.

China has acceded to relevant international conventions, established IPR management and protection regimes, set up the Legal Aid Center for IPR Enforcement and the Service Center for IPR Protection, punished various IPR violations according to law, and protected the interests of IPR holders. On IPR, China has managed to accomplish in 30 years what took Western-developed countries more than 100 years.

Not to be negative, but without the Western-developed countries and their worldviews that developed IPR protection, China would never have developed this in 30 years.  China is standing on the shoulders of those who have gone before.  While I want to applaud China for doing this rapidly, I do not understand why it had to take a potential swipe at other nations.  Maybe Wang did not intend to do that, but it sounds like it.

In recent years, in order to stimulate enthusiasm for invention and innovation and to promote economic development and social progress, China has intensified IPR protection. Since 2004, a nationwide campaign for IPR protection has been carried out each year to end trademark, patent and copyright infringements — particularly in import and export and wholesale markets, trade fairs, original-equipment manufacturing (OEM), printing and reproduction.

The ongoing 2008 IPR protection campaign includes 280 measures in 10 areas. In April alone, more than 810 events under the framework of “IPR Protection Publicity Week” were staged by competent authorities in different localities to enhance public awareness. More than 1.3 million people were directly involved in these activities.

IPR protection in China has paid off. Thanks to intensified efforts to raise public awareness of IPR protection and severe penalties for IPR violations, more and more people have begun to say no to counterfeit products and pirated software; applications for trademarks and patents have multiplied; and enterprises are more aware of the importance of branding, resulting in more branded products and fewer counterfeits in the market.

While I am glad that China is getting the public involved, what I still want to see is stiffer penalties for IP infringement.  Cases like G2000 should become more common in my mind.  That will really scare infringers.  Right now, what I see is that a number of the small guys have been fined and shut down.  But its the big fish that get away with infringement who really need to learn their lesson.  I want to see greater damages in all sorts of IPR law suits.  The public is a good weapon.  It will reduce piracy.  But it will not completely eliminate it.  Call me a cynic, but even in America after the Napster lawsuits, people still continue to download mp3’s and movies.  (look at the universities)  Public awareness helps a little.  Nailing the people who are major infringers is more effective.  Scaring everyone with the threat of massive damages is possibly even more effective.

The Xiangyang Street Market in Shanghai, which was known for selling replicas of brand products, has been closed down as required by law. Meanwhile, Silk Street in Beijing, also known for its knock-offs, went through rectification and has since become a distribution center of famous brands. The number of foreign applications for patents and trademarks in China is growing rapidly. More and more multinationals have started setting up their R&D centers in China.

Yes, while this is true, I am not sure if this really feeds the Chinese innovation society argument that MNC’s are setting up R&D centers in China.  It would seem to me that it just shows that other nations are innovative and using Chinese human capital to achieve their innovations.  Again, just a quick cynical comment.

Wang offers these practical tips that he expects the SIPO and the relevant government authorities to take:

- First, we will make timely revisions to IPR legislation, including the laws on patent, trademark and copyright, as well as regulations on their implementation. We will also bring forward legislation in the areas of hereditary resources, traditional lore, folk arts and geographical marks so as to improve the overall framework for IPR law enforcement and management.

- Second, we will speed up the revision of laws and regulations on punishment of IPR infringements, and strengthen the systems of judicial protection and administrative law enforcement. We will mainly rely on judicial protection for protecting intellectual property rights. We will mete out more severe penalties, reduce the cost of IPR protection, and deter violation by raising its cost.

- Third, we will properly define the scope of intellectual property rights to prevent their abuse, ensure a level playing field, and protect the lawful rights and interests of the public. We will ensure a better mesh of our IPR policy with those of culture, education, scientific research and public health to uphold people’s rights to properly use the information and fruits of innovation in ways permitted by law in their activities in culture, education, scientific research and health, and make sure that innovation achievements are shared more equitably.

- And finally, we will launch extensive educational programs among the public to further encourage innovation, promote such moral standards as honesty and credibility, and condemn plagiarism, piracy and counterfeiting. We will raise people’s IPR awareness and foster an innovation-friendly IPR culture in which knowledge and integrity are respected, and laws and regulations are complied with.

I don’t disagree with him on these.  I want to see law take a greater role in China as much as anyone else, especially in the IP arena.  While these are all good steps, what I want to see is how #1-3 will be enforced.  I think enforcement is still the biggest problem China has right now.  Don’t get me wrong–China has done a great job working on its IP environment.  But it still a lot of work to do still.

Actually, I make no claim to be a China expert, though I am flattered to be considered one now. An expanded article of mine, originally a blog post that reviewed IP enforcement in China, is on China Success Stories. It is an expanded version because my original blog post just reviewed Professor Gruner’s article, whereas this article takes on some of the ideas there. Ultimately, I think IP enforcement is far more unpredictable than Gruner thought.

Here are the key excerpts I think:

Gruner observes that in the First China, “local authorities have strong motivations to pursue IPR enforcement as a means to both reward and enhance local innovators and to entice outsiders . . . to inject new technologies into the local economy through IP licensing.” He approximates the level of IP interest as being similar to those of highly technical western counties like the U.S.

Coastal China’s manufacturing “involves technologies originating in other parts of China or copied (often without proper IP licenses) from foreign sources. The interests of this region are thus largely tied to the . . . profitability of local manufacturing without any reciprocal concern over the lack of IP-based rewards for local innovators.” Gruner concludes about this area:

This region represents the greatest challenges for IP enforcement in China due to both its present economic interests in weak IP enforcement and the breathtaking scope of its infringement capacity in large-scale, low-cost manufacturing of unlicensed goods covered by IPR.

* * *

Second, it is increasingly difficult to try to segregate out Beijing, Shanghai, and Hong Kong (the “first tier” cities) from other major “second-tier” cities, such as Qingdao, Tianjin, or Dalian. Ironically, most of these second tier cities happen to be the Coastal Regions. Which do they fall under?

And how about a second tier city like Hangzhou? It is neither coastal nor within the direct influence of Shanghai. And yet, it is the Hangzhou Intermediate People’s Court that made headlines with the G2000 v. 2000 case. There, the court assessed damages of 20 million yuan–far beyond the damages of any of other China’s first-tier courts.

I think the first two categories are problematic to some degree. I still agree that the Beijing-Shanghai-Hong Kong triumvirate will provide greater IPR enforcement in general. But I also believe that Coastal China and China’s second-tier cities are much harder to group. Some areas will have strong enforcement while others fall directly into Gruner’s description. A better categorization would be that urbanized areas and coastal China outside of the 3 major cities fall within a sliding scale that is hard to determine. If you or your clients plan to be in these areas, then you need to do your due diligence to understand the extent of IPR enforcement.

Read the whole thing here and decide for yourself.

I have been hammering the fact that Chinese IPR enforcement–the protection of various sorts of intellectual property like patents and trademarks–has been getting better and better.  Statistics are powerful, and I don’t think these are any different.  The Economist recently did an article called “850,000 lawsuits in the Making” ( h/t Rich Brubaker at All Roads), which reads:

Since 2003 the number of trademark applications has grown by 60%; the number of patents has nearly doubled (850,000 are now active) and the number of lawsuits about intellectual property has more than doubled (see chart). The government is encouraging the trend in many ways, including signalling to the press to cheer it on.

This enthusiasm marks a dramatic change. During the Maoist era, private property of any kind was seen as theft from the masses, and so subject to just expropriation. Only in 1985 did China begin to enact laws to protect patents. It did not enforce them much until 2001, when the authorities promised to crack down in order to win admission to the World Trade Organisation.

China has since opened more than 50 courts that deal solely with intellectual-property cases, and Chinese firms are using them. Prominent litigants include a pram manufacturer protecting designs, a soya-milk producer defending an industrial process and a maker of Chinese medicines shielding a name that, roughly translated, means “mind and blood purge”.

Again, very encouraging numbers.  50 specialty courts that deal with IP?  That’s fantastic.  Sure, they are not all up to par with the Federal Circuit Court of Appeals, but I cannot complain.  Chinese judiciary specializing in IP and learning how to deal with these sorts of cases is a good thing.

As companies in China establish brands and develop products, the incentive to sue will grow, particularly because the cost of bringing a case is minimal. “If you can afford a car, you can afford a lawsuit,” says Tony Chen, who works in the Shanghai office of Jones Day, an international law firm.

In America, firms often settle intellectual-property cases out of court for fear of enormous awards by juries. That is not true in China, Mr Chen says, where a judge rules in the majority of cases and damages tend to be small. They normally cover legal costs, however, turning lawsuits into a self-funding method to battle piracy.

Well, perhaps there is an argument to be made for the British system…  that being a tangent, the British winner-takes-all approach will only allow the rule of law to grow in the early stages of IPR enforcement.  Maybe later it can hurt, but for now, including damages into legal costs will encourage more and more companies to turn to the courts for IP remedies.  That is a good thing.  Few things encourage the rule of law such as the general citizenship of a country embracing lawsuits.  And if Chinese companies can embrace them wholeheartedly, then perhaps the Chinese people will finally be able to as well.

Unsurprisingly, the main beneficiaries of the sudden interest in intellectual property are Chinese lawyers. Some reportedly earn more than $5m a year. Non-Chinese law firms sometimes provide advice on thorny cases. But they are not allowed to file patents or appear in court on behalf of a client—a proprietary process that Chinese lawyers are keen to defend.

Yes, there is a silver lining in the advancement of the rule of law: it’s that the lawyers profit most.  I guess I can’t complain.  But yes, someone will have to profit off of this sort of growth.  For most people, that’s an unfortunate fact.  But it’s a fact of life.  The more that law becomes integral to Chinese society, the more lawyers will become more important.  That’s an already established fact in America–much as lawyers are hated, they are also necessary to the functioning of everyday business.  Expect the same in China.

So onward rule of law!  Just make sure your coattails are long enough for the lawyers…