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.

First off, China’s intellectual property protection for most companies is just not that bad. Yes it is horrible for companies requiring copyright protection, like software companies that sell their product on CDs and movie companies . . . . But, China’s trademark protections are actually pretty good and there are a whole slew of foreign consumer and industrial companies making money head over fist in China . . . . China’s IP protection may explain the lack of international brands in some product categories, but it does not even begin to explain the lack of Chinese brand power across the board.

The same is true of the alleged cutthroat competition. Yes, China has cutthroat competition (what country doesn’t?) and yes price is central to the Chinese consumer. But many foreign and domestic brands are thriving.

My explanation is more elemental. Most Chinese companies just do not value brands as highly as Western companies. At least not yet. For the most part, they do not understand the value in spending massive amounts of money to create positive brand name recognition in places like the United States.

I would agree with most of his statements here. TM protection isn’t all that bad, and to me, what comes to mind is Starbucks being able to enforce its trademark. Companies do okay here with trademarks. Sure, there will always be knock-offs and stuff, but every developing nation has to deal with it. Even Korea back in the days had a gray market that thrived because people tried to sell “export quality” and pirated stuff in country to ignorant tourists. But I hardly think that’s the case. Also, if this is about global brands, then Chinese companies are free to register their trademarks (and service marks for that matter) in the U.S. as well. (heck, the EU even has 1 form application that covers twenty some countries in one fell swoop) No, I don’t think the issue is IP.

And I don’t think Newsweek got it right about saying foreign brands have taken the high end. I think that’s true, but at the same time, Chinese manufacturing/sourcing has relied on the fact that it would do the low margin production work for those high end brands. And many people haven’t broken away from the sourcing mentality just yet. If and when they do, that will be downright scary. Imagine thousands of Chinese factory owners getting the bright idea that they can do better by trying to become the next Dell Computer or Mattel, etc., rather than just sourcing for large MNCs. It can happen. It’ll take time (and frankly, culture/society is a big part of it), but give some time and watch what happens.

I also don’t think its an issue of consumers being wary of Chinese safety issues. While that exists, how many people are actually affected by this? Not many. Like it or not, Made in China is here to stay. And people know that. I really don’t think its that big of a deal. (except for when the rather annoying media outlets keep saying things like “ Chinese drywall” when plenty of the stuff made in China is just fine) Unless consumers can afford to be wary (most can’t, especially in this economy), its just rhetoric and fire drills.

I like Dan’s last point a lot. Case in point: Lenovo. Who in their right mind would discontinue use of a global trademark license for what was considered the premier business/corporate laptop brand? But somehow, Lenovo opted to move away from IBM Thinkpad to Lenovo Thinkpad early. This got enough coverage, so I won’t beat a dead horse, but I think this is dead on. No one values branding, marketing, and trademarking enough there… yet. And again, it’ll take time. But it’s only a matter of time before some companies figure it out. It’s funny because trademarking is one of the simplest things and yet, companies don’t think about it because of the “expense” which isn’t much of an expense if you do the math. Seriously. It’s just not worth it… yet. But they’ll get it sooner or later I think. At least, I hope they do–blogging about their economy won’t be fun if they don’t get it sooner or later.

I compiled key parts of Stan’s post after the jump.

I know that times are tough and that legal budgets have been slashed. I don’t really care, but I am aware of this. But in many cases, we are really talking about a few hundred dollars to register a mark. Sure, if you want additional coverage for additional marks or for more products and services, or if you need to file in multiple jurisdictions, this can end up being very expensive. For many small start-ups, though, a single registration in one or two jurisdictions is all that’s necessary for the first year or so.

All those poverty stricken start-up guys out there are now saying “A few hundred dollars? That’s real money when you are building a company from scratch.”

To which I reply: bullshit. It’s one thing to say that in your opinion, you don’t feel that a trademark is all that valuable to your business. I can accept that. But to tell me that a few hundred bucks will result in your eating dog food? Sorry, I don’t believe it.

I don’t know if I’d come out quite as strong, but frankly speaking, what Stan is saying here is some good common sense. In the U.S., a TM registration is $325 per class. It’s not much money. Sometimes, I wonder why people don’t register: (1) their brand as a wordmark, (2) their slogan as a wordmark, (3) their logo without words, and (4) their logo with brand. I mean really, we’re talking about $1,300 if you do it yourself. And as I agree with Dan, I recommend going with an attorney… my old firm used to do TMs for a flat rate of $800 each, so that’s only $3,200. It’s not that much!

Anyways, I don’t want to preach to the choir too much. But really, TMs are a worthwhile investment. I rarely say that about legal fees, but TMs really are worth their weight in gold. Consider them strongly, and do it right the first time if you can.

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

The introductory email says:

US companies operating in China need counsel that is current with China’s Antimonopoly Law (AML) and intellectual property (IP) laws, and the manner in which they are being enforced.

As part of its series of seminars for counsel on the application of economic analysis to emerging issues in the areas of antitrust and IP rights, NERA is pleased to present this panel addressing the development of antitrust and IP laws and litigation in the People’s Republic of China. NERA experts Dr. Alan Cox, Dr. Fei Deng, and Dr. Gregory Leonard, who will lead the seminar, are actively involved with these issues in China and the US.

This seminar will present an overview of the unique aspects of the Chinese economy that are relevant for understanding the antitrust and IP situations in China, followed by an analysis of recent developments in China’s AML, with a focus on the recent InBev/Anheuser-Busch merger. We will also discuss trends in IP litigation and damages in China, including findings in a new paper by Dr.Cox entitled Intellectual Property Rights Protection in China: Trends in Litigation and Economic Damages.

Personally, I’m most interested in the IPR Protection in China segment.  (though the InBev merger topic should be fascinating as well)  I’d like to see what Alan Cox has to say about trends in economic damages because it is damages that will end up defining the realm of litigation in China.  No damages, not many lawsuits because no incentives.  Greater damages, get ready for a larger number of suits.   Common sense, but I’d like to see if Dr. Cox has any additional insights.

And this is a completely free event.   Registration is as simple as it gets too.  Just email: RSVPUS@nera.com.   Hope to see some of you there!

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.

Chinese courts handled 10.71 million cases of various types in 2008, up 11 percent from the year before. Of these, 768,130 were criminal cases; 159,020 individuals received sentences of more than five years, life imprisonment or death.

There were 1.14 million cases involving various financial disputes, a 15 percent increase from 2007. Fraud cases, statistics for which include both embezzlement and the production of substandard food and drugs, were up 13 percent from last year.

Not that I am terribly surprised at the increase of lawsuits.  Especially with the food and drug issues that China has been facing.  (think Sanlu)  It’s even gotten to the point where the Courts are saying that they will accept melamine cases.  Of course, like Prof. Clarke, I have strong doubts that this will actually happen.  Its already been nearly six months and nothing has happened.  (see my prior post on this)

But on the whole, this is very encouraging news that there has been an uptake of litigation at 15%.  Hopefully that means that courts are getting better at deciding cases and the people will feel more empowered to use the law.  (The cynic in me also points out: when the economy is sour, expect more lawsuits.  But I’ll have to wait until 2009 numbers to see if that really happened or not.)  I am all for the rule of law and increased of the use of the judicial system as a means of control.  I hope its happening.

Even greater increases were seen in labor disputes, which jumped 94 percent to 286,221 cases, and disputes involving health care, housing and consumer rights, which were up 45 percent to 576,013 cases. Intellectual property cases were up 33 percent, with Chinese courts concluding 27,876 of them.

In some cases, the increase in activity is likely tied to changes in the law. For instance, China introduced a new labor law last year. The tainted-milk scandal also called public attention to the courts, though suits filed against the offending dairies were not accepted by the courts until last week.

And again, a down economy, I expect more labor disputes.  94% labor dispute increase however–that’s pretty unprecedented.  I do agree that the labor law affects a lot, but can it simply be that much?  Or is it (1) the employees are using the courts to clamp down on a lot of terrible employment practices, or (2) that China is quite happy to use the court system against foreign companies doing business in China?  I prefer my options, particularly the latter…  and perhaps a combination is the most appropriate: maybe the people don’t mind using the courts against foreigners.  I don’t have the numbers, that would be a very interesting study indeed.

I am slightly disappointed about the 33% increase in IPR enforcement cases.  We all know IP is an issue here.  And the fact that it grew that little tells me that there is still much before Chinese people and China get serious about intellectual property.  It may be happening at a small scale now, but I was looking for more.

China still has a ways to go before catching up to the level of litigiousness in the United States. According to figures cited by Massachusetts Supreme Judicial Court Chief Justice Margaret Marshall in a speech last month before the American Bar Association House of Delegates, some 47.3 million cases were filed in U.S. state courts last year, not including traffic offenses, with another 384,000 hitting the federal docket.

Of course, who wants China to be as litigious as the U.S.?  I was a litigator and I don’t even want to see that happen.  I think litigation is a very good force for social change, but too much can be annoying.  I have friends who can’t even post an honest food review on Yelp without getting lawsuit threats…  so the U.S. is slightly overboard.  But if China can find a happy medium where the courts increase public safety and compliance, without being a hindrance to development, then they found the sweet spot indeed.

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.

So, it seems like even the big search engines are being targeted in this hunt for all adult related materials.  But I think one thing from the article is overlooked, which is why I bolded it: the search engines don’t own the relevant pornographic websites.  And the search engines don’t intentionally provide links for that either–it’s built into Google (and presumably Baidu) robots that scour the internet for data.  So…  what blame is there?  That’s the hard question.  Should search engines and similar web services be liable for hosting or linking other people’s offensive material?  We’re talking about a big policy issue.  I come down on the side that says no.  (Of course, my opinion doesn’t seem to matter all that much)

And of course, the implications are staggering for Chinese internet businesses if the government dramatically punished or shut down websites over materials that are not intentionally placed.  It’s like holding ISP’s liable for user data that isn’t in their realm of control due to privacy issues.  Any business that wants to deal with internet or media based services in China had better watch out…  in fact, they better hire people solely for the purpose of removing objectionable materials that the government points out to them.  So what happens to a BBS?  A web forum?  A youtube?  Xiaoneiwa?  You get the picture…  that’s a major chilling effect in my mind.  But when your government doesn’t have a sense of freedom of speech/press…

I think the implications for internet (and media) businesses could be huge if China actually decides to follow through against Sina, Baidu, Google, and company.  Let’s hope it doesn’t.

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)

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!

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 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.

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.

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.

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…

Compared to Washington, the European Union has been serene about piracy in China of its trademarks, copyright and patents. Can that last?

The EU estimates pirated goods cost EU businesses €21 billion (US$33.3 billion) in lost trade annually — about a third of current EU exports to China. But unlike the United States, it has to date not pursued any Chinese piracy cases in the World Trade Organization.

Still, the EU has put China in the category of worst violators of intellectual property. It is the only country in that category because its anti-piracy efforts are so weak that 80 percent of counterfeit goods imported into the 27-nation bloc are Chinese-made.

Again, I would like to know how that figure of 21 billion euros is calculated. As I mentioned before: if it wasn’t for piracy, I really doubt the figures many times.

I also think it can last. Why do all the dirty work of calling China out when America is already more than willing to do that? I think its the best policy.

Mandelson has repeatedly criticized blatant sales of fake goods throughout China that cost European and U.S. businesses dearly. To counter this he has nudged China into a 2007-2011 venture designed to boost enforcement of Chinese piracy laws by providing expertise and training.

“It is important to offer the Chinese all possibilities to put their house in order,” says Luc Devigne, head of intellectual property issues at the European Commission’s trade directorate. “We are not always convinced there is a willingness to stamp out piracy.”

That’s as tough as the piracy language gets at the EU.

I disagree. I think China has done a pretty good of trying to stamp out piracy. It’s true: China has not taken a zero tolerance policy, as evidenced by street vendors continuing to sell pirated products and fly-by-night stores that sell counterfeit goods. But I think the numbers are pretty good: 10% drop in software piracy in years; 76 million discs and other goods confiscated, 13,000 businesses shut down in 1 year (see here); 1.3 billion illegal publications over 20 years (though not all piracy related) (see here). Court cases being won regarding trademark, copyright, and patent. Realistically, there isn’t all that much that China has not already done in my book.

“In America, there are strong feelings of protectionism in the Congress. And the U.S.-China relationship is much more complex, more interdependent. There is America’s huge trade deficit with China. China has leverage over the U.S. because it holds significant amounts of U.S. Treasury debt. And there are security issues like Taiwan and North Korea.”

By comparison, says Innis, Europe “is much more in an appeasement mode with China.”

That is “a bad thing,” says Stuart Newman, head of the Brussels-based Foreign Trade Association whose 100 members include Europe’s biggest supermarket groups and textile importers. “We should be going after China in a tough way on intellectual property rights violations.”

While he favors legal action through the WTO, Newman does not underestimate the job of eradicating piracy in China.

I also disagree. I think the appeasement mode works better. Here’s why: (1) America will be the bad cop, while the EU can be the good cop. Good cop/bad cop works pretty well actually. And I think the EU will end up having a better image for it. Piracy will go down. America is hated. The EU is loved. That’s a win-win if I ever saw one. (2) That is how the Chinese prefer to negotiate. The government knows that IP is a problem. And the government knows that IP enforcement will be important to China’s economy in the future. China is not naive. But to throw that into their face like America does makes China defensive. And it makes China amp up the rhetoric as well. It’s just unproductive. But if the EU can dialog with China and do things in a less-blatant fashion, I think it will encourage the Chinese government to want to work with the EU. I know it sounds so offensive and ridiculous to westerners, but let the Chinese save face where you can. Really, it works.

My take: the EU should stay the course. The EU will benefit from America’s aggressiveness and still get what it wants, while maintaining the favor of the Chinese government and people.

The article, entitled “Supply Chain Security and Its Impact on IPR” reads in part:

Protecting IPR through supply chain security can occur in a number of ways, either through tangible investments or as intangible process changes. . . . Developing new or improving existing processes for business partner selection and internal communications and data flow represent typical intangible enhancements that can provide additional security. Owners have improved their IPR protections by emplying some or all of the following options.

Visibility. Making assets and products more visible throughout the supply chain can protect against cargo theft and damage and prevent products from becoming instruments of illegal trade. Companies achieve this by investing in satellite tracking systems such as GPS, product protection technology such as EPC, or RFID. These systems provide real-time location status and tamper evidence that enables their use greater control over a shipment’s chain of custody from production to point of purchase.

No argument here. However, I just want to note that these sort of systems will cost more. Not a big revelation. But when profit margins are getting thinner by the day, a number of businesses–likely SMEs–won’t want to pay for these costs. At that point, you need to think about just how valuable your IP is and make a proper business decision.

Physical protection. Businesses protect building structures and cargo handling areas by installing fences and video surveillance equipment, and by controlling access to sensitive areas by employees and visits. These measures benefit IPR by protecting product and shipment integrity while discouraging access by unauthorized personnel.

Again, no argument. However, this needs to be strictly done at all levels. Including, your Chinese manufacturers/suppliers. Sourcing from China is likely a weak link in your chain. How many factories are going to protect in this way? Not many. So be careful and make sure you trust your suppliers. I really expect most companies, even SMEs, to be doing some of these things… but only in the US and not overseas.

Standards. Many companies will benchmark processes and activities, thereby establishing minimum performance requirements . . . . Specific methods for reporting fraud and illegal pursuits have become commonplace and are required for public companies under Sarbanes-Oxley. Such process discipline leads to quicker, more assured compliance while reducing confusion and inefficiency in the movement of goods through the supply chain.

Note that this is true for companies under SOX. In other words, U.S. publicly traded companies. Not your Chinese manufacturers. Reporting requirements and processes are not easily implemented in China. It’s not the same as doing it in the U.S. or even Japan. Chinese work culture is very different. Trying to convince your satellite office employees in China to do so… that’s going to be directly related to the effectiveness of your local manager.

Business Partners. Increased scrutiny of current and potential business partners leads companies to investigate beyond financial soundness and into the previous business conduct and security measures undertaken by the potential partner. Due diligence with this investigation will ensure a secure supply of materials, prevention of unauthorized characters tainting your supply chain, and enable early detection of security breaches due to enriched communication and collaboration. . . . IPR owners benefit through cost avoidance; smoother transit means quicker time to market, allowing for decreased inventory levels and the redirecting of funds previously earmarked to compensate for potential criminal activity.

I cannot reiterate this point enough. First, due diligence–thoroughly done–is your friend, even if it costs time and resources. Do it. And of course, do it regularly… check up on your suppliers on a routine basis. Quality fade isn’t the only problem if you are trying to protect your IP. Really, intellectual property is as valuable as your weakest link. So make sure your partners are doing a good job. Drop in unannounced regularly. Second, it also means that you can’t just go onto Alibaba and expect that this is good enough. It isn’t. Don’t think you can just find someone off a directory listing or at some trade even… it’s never that simple. Whoever you go to, do your due diligence.

And of course, as many people have reiterated time and again… Register your IP in China. (Thanks Dan!)

On that note, Professor Gruner argues astutely:

The analysis of IP laws and their enforcement in China has been hobbled by oversimplifying China itself. A number of astute observers of the developing business environments . . . in China have recognized that there are at least four distinct regional situations–that is, the “four Chinas” within the [PRC]–that are developing as the country emerges into a period of greatly heightened commercial activity.

The regional characteristics . . . of the four regions fo the PRC discussed here create four very different sets of opportunities and problems for IPR holders. The impactof IP varies in different regions of the country because a combination of local differences in types of dominant businesses in local areas, variations of the local political clout of businesses that infringe IPR, and the ability of local officials to grant or withhold strong IP enforcement due to the regional nature of IP enforcement mechanisms in China.

I cannot agree more. China, while it is trying to unify its laws and enforcement of IP law (and other laws, for that matter), is a huge nation. I keep reminding people that China has a landmass that is far more comparable to the entire EU than to America. (yes, there are many geographically challenged Americans) Inevitably, there are bound to be differences. If people forum shop in the U.S. because courts are different, imagine forum shopping in a landmass that encompasses more than three times the population. I think you get the picture.

Gruner identities the Four Chinas as:

1. The municipalities of Beijing, Shanghai, and Hong Kong, and the surrounding areas under the direct control and influence of these cities, which are both commercial centers and heavily industrialized.
2. Coastal China, the areas near China’s coastline other than the major urban centers of the First China, which are often mixed economies with many large scale manufacturing activities conducted at low product cost.
3. Inner China, regions immediately inland from the coastal sections of China, which are heavily dominated by agriculture.
4. Outer China, the western provinces of China and desert areas, which consist mostly of economies of mineral and oil extraction.

Again, this should be no surprise to China watchers. The differences between the “tiered” cities mirrors some of these observations.

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.

Inner China, on the other hand, will find IP enforcement largely irrelevant except “IP-protected products or services used in agriculture.” On the whole, inner China is more like “unindustrialized portions of Africa.”

Finally, outer China also finds IPR enforcement irrelevant except where mining and oil extraction take place, because businesses “may have significant opportunities to use advanced technologies. While there may be some local innovation in these technologies . . . , these are probably outweighed by the commercial advantages of tolerating infringement.”

Given all of these facts, Gruner argues that a multi-regional view of IP in China is necessary. I agree.