China Destroys Pirated Products of World Famous Brands
Bargaining of DVD Producers Continues
Experts Call for Better Patent Strategy
China Implements WTO Promises Steadily
Ensuring equal legal footing

China Destroys Pirated Products of World Famous Brands

Chinese customs officers in east China Monday destroyed pirated international brand-name products, including fake Rolex watches, Nike and Adidas sportswear, and Toyota and Honda automotive parts.

The destroyed fake products were later sent to a local power plant as garbage under the supervision of Ningbo customs officers.

Yao Sudong, deputy director of Ningbo Customs, said the move was part of customs efforts to protect intellectual property rights (IPR).

Ningbo Customs has seized 10 million yuan worth of pirated international brandname products in 37 cases over the past two years.

Paul Ranjard, a representative from UDF, a non-governmental French association of manufacturers, expressed his appreciation ofthe efforts made by Chinese customs departments after witnessing the destruction.

Chinese customs departments had taken all necessary measures to fight against piracy, including close contacts with manufacturers of the brandname products likely to be pirated, said Yao.

Ningbo port is an important channel for export and import products in prosperous southeast China, through which a large number of products manufactured by local companies are shipped foroverseas markets. Some have been found to be fake.

By the end of last year, Chinese customs departments had handled about 1,800 IPR-related cases involving 300 million yuan worth of pirated products, official sources said.

Bargaining of DVD Producers Continues

Negotiations on royalties continue to take place between six world major DVD technology developers (6Cs) -- Hitachi, Panasonic, Mitsubishi, Time Warner, Toshiba and JVC -- and the China Electronic Acoustic Equipment Association, despite the fact the deadline of March 31 has been missed.

Gao Wanjun, an official from the association that represents domestic DVD machine makers, said on April 1 that negotiations continue to take place and will not stop now that the deadline has passed.

6Cs and Chinese DVD machine makers are split over the amount of royalties that should be paid.

Foreign companies require domestic makers to pay one-fifth of the current price of DVD machines, which is about US$20 for each player.

The price seen as acceptable by domestic makers is US$4-5. However, 6Cs are asking for US$20 for every DVD player. On March 8, 6Cs sent an ultimatum to more than 100 Chinese DVD machine makers who authorized the association to act as their negotiators, stating that the 6Cs will conduct negotiations directly with each Chinese maker and that lawsuits will be filed against them if no agreement is reached before March 31.

Gao refused to release further details due to the sensitive nature of the negotiations.

More than 100 domestic DVD machine makers have entrusted the association to negotiate with foreign companies about royalties.

An official from the Ministry of Information Industry also confirmed that negotiations will continue, saying: "We are actively bargaining with the foreign companies."

Another alliance -- 3Cs (Philips, Sony and Pioneer) -- filed a block after this year's Spring Festival on all DVD products which have not paid royalties to European Union (EU) customs.

They delayed 10,000 DVD players at customs of EU member countries, which triggered the fear that Chinese DVD players will find no way out if similar incidents spread to other countries due to a breakdown in negotiations.

6Cs' Chinese operations declined to comment on the situation, but said they have no say in the case of royalties which is being handled by their headquarters.

After their ultimatum on March 7, the six companies reiterated their stand on March 27 in a statement, saying that if China's DVD machine makers do not respond by March 31, each of the six may take legal action separately based on their respective judgments.

The statement said the six companies provide patent licenses in a fair, non-discriminatory and open manner around the world and that the 6Cs' member firms have paid the same amount of royalties.

However, Chinese DVD makers turned down 6Cs' ultimatum.

Officials from major Chinese DVD makers said they did not reach an agreement before the deadline and as far as they know no counterparts have either.

"We still have hope in the association, who are carrying on negotiations with 6Cs," said a spokesman from Jinzheng Group, a leading DVD machine maker.

He predicted the dispute will end only with the compromise of both sides.

"We regard 6Cs' offering as too high to accept," he said.

Fan Wenjian from Shinco, another leading DVD company, said intellectual property is a trade issue and the amount of patent fees should be decided by negotiation rather than unilaterally, but the 6Cs gave no room for lowering the price.

Industry insiders say that foreign companies may hope to weaken the position of Chinese products in the international market by acquiring expensive royalties.

Chinese DVD machine makers have undercut their foreign counterparts in the overseas market backed by cheap raw materials and labor.

The price of Chinese DVD players is usually less than US$200, compared to the price of Japanese DVD players that stand at no less than US$400 in the US market.

Japanese DVD players used to sell at US$1,000 or so before Chinese products were invited in.

China exported 10.5 million DVD players last year and the global sales of DVD players reached 25.98 million at this time.

If the heavy charges are incurred, this will raise the price of DVD players in China significantly and curb the demand in the country, which is now the world's second largest DVD player market next to the United States.

DVD prices in the domestic market have plummeted to around 1,000 yuan (US$120.8) from around 3,000 yuan (US$362.3).

Gao said foreign companies need to seek a win-win solution to the problem.

"If the market becomes smaller because of higher prices, foreign companies cannot benefit from it. Domestic and foreign firms should cooperate to make the cake bigger," he said.

The sales volume of DVD players in China reached 4 million units, which was expected to double to 8 million this year.

Major events in DVD mart

In June 1999, the world's six major DVD developers -- Hitachi, Panasonic, Mitsubishi, Time Warner, Toshiba and JVC -- notified Chinese DVD makers they would have to pay for using their patents.

The six companies are referred to as 6Cs. This was followed by another alliance of DVD developers -- Philips, Pioneer and Sony -- which is known as 3Cs; and Thomson, which is known as a 1C.

More than 100 Chinese DVD player manufacturers entrusted the China Electronic Acoustic Equipment Association (CEAEA) to negotiate with the three alliances in early 2000.

6Cs published what they call a "DVD patent license encouragement program" in Beijing in November 2000.

Accordingly, enterprises that signed patent license agreements within eight months of September 1, 2000, were given a 25 percent discount.

But no Chinese makers signed agreements with 6Cs.

Some Chinese DVD players have been delayed in customs of European Union members in February this year.

3Cs filed applications for delay with EU customs on all DVD products which have not paid royalties.

On March 7, the Ministry of Information Industry, the CEAEA and related companies held a meeting in Shanghai to discuss the urgent case.

But they declined to release any information on the meeting, saying they wanted to keep the meeting secret from foreign companies.

On March 8, the 6Cs sent an ultimatum to more than 100 Chinese DVD makers represented by the CEAEA, saying the 6Cs will conduct negotiations directly with each Chinese maker and that they will file lawsuits against them if no agreement is reached before March 31.

(China Daily)

Experts Call for Better Patent Strategy

Experts said legal doubts still exist in royalty collection by foreign DVD technology developers in China, and urged Chinese enterprises to begin to enforce a patent strategy.

Tian Fuyun, a lawyer from the China Trademark & Patent Law Office, said domestic companies should work collectively, rather than a decision be made by patent owners unilaterally.

It is usually negotiated by two parties or ruled by the court according to specific details, he said, but it is a difficult and controversial issue in law practice, since a patent is hard to value.

Nevertheless, it is still high for the six companies to request 20 per cent of the sales price according to China's market situation.

Tian added royalties should be shared by manufacturers in all of the procedure, instead of only burdening the last in the production line.

Domestic makers argue they should not be wholly responsible for royalties since they have already shelled out for key parts, such as decoders and chips, from foreign companies, and the value of patent is contained in the price of these products.

Also, the collection of royalties on DVD players sold in China before patents are approved by the country's authority cannot be supported by law.

Zhu Hong, an official of the State Intellectual Property Office, said the patents of the six companies are still being examined.

A DVD player has more than 2,000 patents, most of which are owned by foreign manufacturers.

Li Mingde, a professor major in intellectual property rights, said Chinese companies have improved their legal awareness on patent protection but most have neglected to make good use of their own patents.

Trade on patents has been a large financial drain for foreign companies recently, he said.

For example, IBM received a net profit of US$1.7 billion on patent licensing compared to US$8 billion in 2000.

Trade on intellectual property rights has been one of the three largest trade fields in goods and services, Li said.

In China, foreign companies have applied 230,000 pieces of patent, according to the State Intellectual Property Office.

Some 81 per cent of patents in the information industry are controlled by foreign companies, while 87 per cent in the bio-engineering field and 90 per cent in high-definition color TV sets and chemical drug making.

Few Chinese companies have discovered the big business opportunities, and even forget to register their patents, Li said. They are then left far behind at the application of a patent strategy to make more money.

Some foreign companies will raise the issue of royalties until the industry prospers in order to gain a higher price.

Foreign DVD technology developers pledged to collect royalties in 1999 when the domestic market began to prosper - eight years after Chinese companies started to make DVD players.

If domestic companies do not pay enough attention on patent development, registration and application, they will be like employees of those foreign companies, Li warned. "They will do more, while the foreign companies earn more," he said.

China Implements WTO Promises Steadily

The Chinese government is making swift progress in implementing its commitments to the World Trade Organization (WTO) since its accession at the beginning of 2002.

In accordance with the set timetable, China has gradually pushed on with its work concerning tariff reduction, reforming administrative approving systems and improving transparency.

In January, China cut its import tariff from 15.3 percent to 12 percent, among which the industrial products average tariff rate fell from 14.7 percent to 11.3 percent, and farm goods rate (aquatic products excluded) dropped from 18.8 percent to 15.8 percent.

In regard to non-tariff measures, from January 1, China canceled quota license management of grains, wool, cottons, some chemical products, fertilizer and some kinds of tires. New regulations and temporary provisions have come out for future quota management.

Besides, China has rectified and relinquished laws and provisions that were contradictory to WTO rules. New regulations on anti-dumping, anti-subsidy and safeguard measures have taken effect since the first day of 2002.
With overseas law offices, telecommunication enterprises, financial organizations, international ocean shipping, audio products companies and travel agencies concerned, China has also promulgated new laws and provisions authorizing foreign-funding of service trades.

An official from the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) said China will formulate more detailed regulations including temporary provisions managing foreign-funded enterprises and rules concerning joint stock venture authorization.

As intellectual property right is concerned, China is now modifying detailed rules of the trade mark law, copy right law and medicine management laws, so as to meet the demand of relevant WTO rules.

The legislative branches have adjusted the three laws on joint ventures, cooperative enterprises and foreign-funded corporations, as well as their corresponding detailed rules.

Those rules involving foreign exchange balances, local proportions, export performances as well as the special high fee and double standards in charging foreigners have been changed.

In the field of transparency, the China-WTO Notification Enquiry Center under MOFTEC began its work upon the first day of China's joining the world trade body, providing WTO-related information for the public.

As a responsible country and a WTO member, China is both confident and capable of strictly implementing undertakings made during entry negotiations in line with the set timetable, said MOFTEC Minister Shi Guangsheng.

Ensuring equal legal footing

Provisions of the Supreme People's Court Concerning Jurisdiction over Foreign-related Civil and Commercial Cases (hereinafter referred to as Provisions) were adopted by the Judicial Committee of the Supreme People's Court of China on December 25, 2001 and came into effect on the first day of March, 2002.

According to the Supreme People's Court, the Provisions are intended to improve the quality of handling foreign-related civil and commercial cases by limiting the number of courts allowed by law to hear cases under this category.

The current judicial system is generally considered unfit for the trial of cases of this kind, which often involve foreign parties or foreign laws and thus pose a greater challenge to the capabilities of judges.

In the first place, there are too few qualified judges in this respect. A limited number of experienced judges capable of handling proceedings in such cases are scattered in more than 3,000 grassroots and intermediate courts across the country, which results in inefficient use of human resources and lowers the general quality of trials of such cases the of such cases.

More importantly, due to the influence of local protectionism, a fair trial may be difficult to achieve when it takes place where the defendant is located. With China's entry into the World Trade Organization (WTO), the issue has become more pressing.

With the enactment of the Provisions the number of courts having jurisdiction over the first instance trial of the cases as specified in the Provisions have been significantly reduced. Most of the grassroots courts are no longer allowed to hear these cases. The only exception is the courts of first instance located in the 20-plus State-level Economic and Technological Development Zones (ETDZs) approved by the State Council.

The reason is that most of the businesses in ETDZs are foreign-funded or foreign-related. The courts there are generally more experienced in adjudicating such cases.

In addition, it was argued that if you take away the jurisdiction over foreign-related cases from the courts in the ETDZs, there will not be enough cases to keep them busy. It may not be good news for them in a sense. As to the intermediate courts, they may not necessarily have jurisdiction over such cases under the Provisions, as they did previously.

Only those courts located in provincial capitals, municipalities, Special Economic Zones and some independently planned cities, or those specially appointed by the Supreme People's Court, may entertain and hear such cases under the Provisions. The centralization of judicial powers in this regard is aimed at directing cases to those courts which are most qualified to try them. As intermediate courts are in most cases less exposed to the otherwise powerful local authorities, local protectionism is likely to be curtailed at that level.

However, the Provisions do not apply to the trial of all foreign-related civil and commercial cases.

Article 3 of the Provisions provides that such changes of jurisdiction will only apply to cases that:

(1) involve foreign-related contractual disputes or torts;

(2) involve letters of credit disputes;

(3) involve an application for cancellation, recognition or enforcement of international arbitral awards;

(4) involve judicial review of effectiveness of arbitration clauses in foreign-related civil and commercial contracts; and

(5) involve an application for recognition and enforcement of judgments and orders rendered by foreign courts for civil and commercial cases.

Article 4, however, stipulates that these provisions shall not apply to cases involving border trade disputes that occur in provinces bordering foreign countries, foreign-related real estate cases and foreign-related intellectual property rights cases.

Foreign investors are likely to benefit from the new rules. When foreign investors come to China, one of their major concerns is whether an unfamiliar judicial system may be prejudiced against them if they have to file a lawsuit in China. The centralization of jurisdictional powers aims at ensuring the fairness of dispute settlements so that the rights and interests of the foreign parties can be as equally safeguarded as those of the Chinese.

Another issue worthy of attention is whether the Provisions would cause much more inconvenience to the parties concerned and add to their costs, as they may have to present their cases before a court located in a place where neither of them is domiciled. We believe that the centralization of jurisdiction will increase the burden of parties to only a very limited degree in view of the fast development in transportation and communication technology. In most cases, parties to a lawsuit pay more attention to the quality of the judicial system than costs of time and fees. Many businesses even go a long way to submit their disputes to international arbitral institutions to ensure a just, fair hearing.

From another perspective, the centralization of jurisdiction may prove to be more convenient to parties concerned, as courts having jurisdiction are mostly located in large or coastal cities, where most foreign-funded businesses are headquartered.

The jurisdiction changes may also have an impact on Chinese lawyers. In the past, when a lawyer was retained, an important but unspoken requirement was his familiarity with the local regulations and his personal connection with the local courts. With the centralization of jurisdiction, such a factor may be minimized. Instead, winning a suit will more than ever hinge on the experience and specialized skills of lawyers.

A senior judge of the Supreme People's Court revealed that the changes would likely be a transitional arrangement. The fairness of trials will eventually depend on the overall improvement of the quality and capability of judges in China. More training should be conducted for judges to this end. It is likely that certain special courts exclusively dealing with foreign-related civil and commercial cases will be established in the future that are familiar to judicial with practices in other countries.