Intellectual property protection related to technology in China

Technological Forecasting & Social Change 72 (2005) 339 – 348

Intellectual property protection related to technology in China Wenqi Liu1 Faculty of Law, National University of Singapore, Singapore, 17590 Received 1 February 2004; received in revised form 12 June 2004; accepted 16 August 2004

Abstract The state of protection for technology in China is widely criticized from the point of view of incompleteness of the legal system as a whole. Much research dwells on the gap between the Chinese legal system and that in industrialized countries or international agreements. In comparison with the developed countries, China lacks core technologies. While holders of such technologies encounter serious problems in China, the Chinese government is not in an enviable position either. Due to the internal impetus and external pressure on China to strengthen protection for technology, China has made a giant stride and made a substantial progress in legislation, enforcement and other areas. However, designing an appropriate system for technology protection is so complex that China will unavoidably face many challenges. The reforms to be carried out in China will be based on the balance between economic and political consideration. D 2004 Elsevier Inc. All rights reserved. Keywords: Technology; Protection; Development

1. Introduction Intellectual property protection (IPP) has been one of the main concerns in the international commercial system. With the globalization of economic activities and the expansion of international transactions, both industrialized and developing countries have encountered new challenges in the intellectual property rights (IPR) regimes. In particular, the technically advanced countries have a

E-mail address: [email protected]. 1 Present address: 03-14, 50 Nanyang Crescent, Singapore, 637598. 0040-1625/$ - see front matter D 2004 Elsevier Inc. All rights reserved. doi:10.1016/j.techfore.2004.08.009

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large vested interest in the protection of intellectual property (IP) and call for high standards of protection at worldwide level because the majority of the world’s IP is created within their boundaries. While as for developing countries, the dilemma in IPP is encountered. On the one hand, they have to reform their IPR regime in response to new international commitments, domestic economic reforms and external pressures; on the other hand, because IPR involves a lot of public interests, it is likely that the governments will take the social welfare into their consideration when they enforce the IPP. Especially, protection of technology is the core of IP system, on the ground that the significant contribution of technologies to national and global economies has been long recognized. The protection of technology, which involves legislation, enforcement of IPP and other factors, has direct impacts on the technological transfer, trade flows, foreign direct investment (FDI), research and development (R and D) and other commercial activities. Because these activities often occur accompanied by cross-abroad flows of technology from industrialized countries to developing countries, where the IPP generally is weak, the level of IPP there becomes the primary concern of IP holders. China, due to its huge market and the lack of high technologies, is a promising and profitable objective of market expansion for oversea IP holders. However, although China has successfully joined WTO and been bound by TradeRelated Aspects of Intellectual Property Rights (TRIPs) Agreement, the imperfect system of IPR in China cannot satisfy the requirements of industrialized countries and their IP holders. Consequently, it becomes one of the biggest issues and the main barrier in international commercial activities involving technology. Moreover, the development of some domestic industries that need IPP is also a stimulus of reform in this realm.

2. The role of technology in the global economy and the Chinese economy With the development of global economy, technologies have been indispensable elements in both production and transaction. On the one hand, technologies may improve the rate of productivity which often results in more profitability. Especially, in many industrialized countries, the economic growth mainly depends on the development of technologies. Generally, for example, in the recent years, the growth of GDP in the United States, Japan, Germany and England is consistent with their ability of innovation, domestic technology level and investment in R and D. Table 1, in which the amount of Table 1 GDP, High-tech exports and R and D in some developed countriesa GDP (current US$)

United States Japan United Kingdom France Germany a

High-technology exports (percentage (%) of manufactured exports)

R and D expenditure (percentage (%) of GDP)

1990

1995

2000

1990

1995

2000

1990

1995

2000

5.75E+12 3.05E+12 9.90E+11 1.22E+12 1.69E+12

7.34E+12 5.29E+12 1.13E+12 1.55E+12 2.46E+12

9.81E+12 4.77E+12 1.43E+12 1.31E+12 1.87E+12

32.3 23.8 23.1 15.9 11.6

30.2 26 26.1 19 13.1

33.2 28.1 31 23.9 17.6

2.77 3.03 2.2 2.38 2.72

2.5 2.87 1.98 2.32 2.27

2.69 2.98 A 2.15 2.48

Source: World Development Indicators (WDI) database World Bank 2002.

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patent application and the ratio of high-technology exports to the total manufacture exports are used as the two important indicators to evaluate the nations’ ability of innovation and the domestic technology level, shows the obvious correlation between the GDP growth and the technology level in the developed countries. In addition, this table also indicates that, in the long run, the nations’ economic development and their status in the world are decided by the competence of technologies. On the other hand, technologies have become important and have become special goods in the international transaction. In the commercial practice of countries, besides the trade of pure technologies, the trade of high-technology products, which is a combination of the commodity trade and technology trade, benefits many countries. For instance, the Union Nation’s statistical database shows that, although the total amount of international technology trade was only about US$ 2.7 billion in the middle of the 1960s, it increased to US$ 40 billion in the middle of 1980s and exceeded 100 billion after 1990. Meanwhile, technology transaction may be accompanied with the capital flows as well. The typical form is FDI. In that case, technologies are transferred as same as tangible assets; and sometimes, transaction of R and D facilities and high-technology equipments in the host country may be involved as well [1]. As for the Chinese economy, technology also plays a positive role, although the technology level in China is far lower than that in developed countries. First, the role of technology can be examined from the performance in the China’s foreign trade. As we know, for a long time, China keeps a high ratio of international trade over GDP, which reflects the obvious contribution of trade flows to the Chinese economic development. Nevertheless, it should be noted that, in the era of knowledge-economy, the structure of international trade has changed gradually. In other words, at present, trade of technologyintensive products seems more valuable than trade of labor-intensive products. Fortunately, China has recognized it and been aware that the trade of technology-intensive products will not only bring more profits but also motivate the development of related domestic industries. Therefore, the exports and imports of technology-intensive products become a new concern of the Chinese government. Fig. 1 shows the performance of this item in the recent years, which reflects a good trend and indicates its more and more important role in the Chinese economy. The second, the objectives of the Chinese economy can be approached by technologies flowing into China accompanied with the project of FDI. At the current stage, one of the Chinese government’s goals is to gradually complete the transition of the domestic industrial structure—from labor-intensive industry to technology-intensive industry and

Fig. 1. The percentage of high-technology production in total import of China. Source: MOSEF.

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capital-intensive industry. Moreover, the foreign investments with advanced technologies that may spur the domestic technology-intensive production coincide with the Chinese government’s goal mentioned above.

3. The determinants of IPP in the regime of technology and China’s current state One reason the disparity exists among nations in IPP is that IPP cannot be viewed as a onedimensional concept to be measured by laws only. How to choose an optimal IPP system is a very complicated problem since the determinants of IPP are diversiform and the situations of countries are different as well. Frame has concluded that IPP system largely depends on the economic, scientific and technological capability [2]. Ginarte and Park [3] have also found that the degree of IPP is closely related to the level of technology, the openness of markets and strength of IPP in other countries. Therefore, nations must be faced with political and economic considerations to determine the level of IPP from both domestic voice and foreign pressure. At the domestic level, there are mainly two factors influencing the level of IPP in the regime of technology. Above all, the domestic industries that have an economic interest in protecting their IP press government to enhance IPP. These industries tend to be high-technology industries or be susceptible to the ease of duplication of their products. The typical examples in the United States are the pharmaceuticals industry, the computer industry and the motion picture industry. Unfortunately, the development of the industries involving high technologies in China is still at the initial stage. Although China keeps a high rate of economic growth in the recent years, the lack of high technologies is undeniable, which is reflected in the phenomena that China basically relies on import to deal with scarcity of technologies, that most of the export is labor-intensive products and that the investment in R and D is limited. In this sense, the current state of the Chinese economy destines that the domestic strength for appealing to strong IPP is weak. The second factor is the state of democracy in nations. In highly democratic societies, people are likely to have strong recognition of protecting property rights including intangible assets. For instance, the respect for property rights has long been seen as a critical foundation in western societies. Moreover, there are some possibilities that the democratic governments would be influenced by national pressure greater than the nondemocratic governments. There are five criteria to evaluate democracy: (1) Competitiveness of political participation, (2) Regulation of political participation, (3) Competitiveness of executive recruitment, (4) Openness of executive recruitment and (5) Constraints on the chief executive [4]. Based on these criteria and compared with many industrialized countries, democracy in China is not fine due to the lack of competition in political affairs and the low transparency of executive recruitment. At the international level, the governmental decision-making may be influenced by other countries and international organizations. To some extent, the bIP feverQ that struck China is the result of international pressure. On the one hand, nations that are the receipts of large amounts of trade and investment have encountered tremendous pressure from foreign governments to increase IPP. The representative example is China whose huge and opening markets have attracted amounts of foreign investment and trade. Nevertheless, foreign investors and their home countries always worry about the threat of infringement to their interests because some investment and trade heavily depend on IPP, while no sufficient protection of IPP is provided there. Therefore, in order to ensure the security of the investor’s rights and based on plural political considerations, the investors’ home governments put

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pressure on China to strengthen IPP. For example, due to weak protection and high rate of piracy and counterfeiting, industrialized countries including the U.S., E.U. and Japan have campaigned for well protection of their products and technologies in China. As a result, a number of bilateral agreements have been signed to relieve this crisis [5]. The major pressure has come from the U.S., on the facts that the U.S. is the world leader in many areas of technology and it has been one of the most important investors in China. (Table 2 which shows that the number of the U.S.’ application for industrial property is greatest among all the countries can be an indicator of its ranking position.) During 1990s, the U.S. used Section 301, which authorizes the U.S. trade representatives to retaliate against countries that have unjustifiable, unreasonable or discriminatory trade practices to exert a strong influence on IPP to approach its economic and political objectives [6]. China has ever been the important target under Section 301; for instance, it was listed as one of the priority countries under special 301 in 1991. Under the threat of trade war with the United States, the Chinese government had to take the requirements of the U.S. into account; as a result, several rounds of negotiations regarding IPP were conducted by China and the United States. In detail, the Sino-U.S. memorandum of understanding on IPR was signed in 1992. In order to realize the pledges in this agreement, China extended the scope and duration of patent protection and expanded patent holder’s rights. However, the similar disputes rose again in 1994 because the U.S. argued that the copyright protection in China was inadequate. In order to prevent the trade retaliation by both sides, an agreement was finally reached in 1995 resulting in the signing of further bilateral agreements on IPR [7]. In short, the U.S. has been a constant source of external pressure on China. On the other hand, China’s IPR system is heavily promoted by international organizations. In particular, World Intellectual Property Organization (WIPO) plays a major role at the formation stage of China’s IPP, while World Trade Organization (WTO) contributes at the perfection stage. Because China becomes a contracting country of WIPO, it has ratified a series of international conventions and agreements that are reflected in the corresponding national laws [8]. For example, the Patent Law is based on the Paris Convention and the Copyright Law is based on the Universal Copyright Convention. In this respect, the influence of WIPO on IP framework in China is significant. Again, China’s WTO membership is both stimuli and burden to strengthen IPP and steps up the enforcement of existing laws. It is well known that the TRIPs Agreement, as one of the most important agreements in the WTO system, has introduced a higher standard for IPP. Consequently, the TRIPs Agreement holds against China to make its amendments and reform in all the related regimes to comply with its obligations; otherwise, retaliation may be incurred under the dispute settlement of the WTO. Furthermore, the two organizations will

Table 2 Industrial property statistics in 2000 and 2001a Country of origin

Number of applications 2000

2001

2000

2001

United States Germany Japan United Kingdom Canada China

38,171 12,039 9402 5538 1600 579

40,003 13,616 11,846 6233 2030 1670

42.0 13.2 10.3 6.1 1.8 0.6

38.5 13.1 11.4 6.0 1.9 1.6

a

Source: WIPO statistics.

Percentage

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continue to play their roles in harmonizing the Chinese IP system with the international level in the future.

4. China’s recent progress in the system of technology protection 4.1. The current IPP system in China The IPP system in China can be viewed from three aspects—the legislative system, administrative control and judicial enforcement. Above all, China has two layers of legislative organizations which are the central government and its ministerial and provincial government organizations, respectively. Both of them have the power to introduce legislation and regulations. As for the administrative control, different IP forms are currently managed by three separate organizations under the state Council—the State Intellectual Property Organization, the Trademark Office and the State Copyright Administration. They are responsible for the examination and approval of IPR, interpretation of IP laws, supervision of IP activities and administrative settlement of IP disputes. Meanwhile, ministerial and provincial organizations under the same name cooperate with the central offices and supervise local or organizational IP activities [9]. The enforcement force also includes the State Administration for Industry and Commerce, and the Public Security Department, which are designated to separately or jointly enforce intellectual property rights. These administrative organs, which deal with IP issues, take measures to prevent infringements, impose administrative sanctions and order compensation, may often act more promptly than judicial organs; consequently, they are indispensable in the whole system of technology protection. With respect to the judicial enforcement, China has established an efficient mechanism for dealing with IPP issues. For example, the special people’s courts and specialized IP divisions within and above the Intermediate People’s Courts are designed to handle IPP disputes specially. In short, all the measures will lead to more comprehensive protection for IPR. 4.2. China’s revolutionary changes for technology protection In recent years, China has adopted wide reforms in its economy, as well as in the IPR regime. The Chinese government’s attitude is reflected through all kinds of media. For example, it is commonplace to read from official reports that we should strengthen judicial protection over IPR and create an environment favorable to encourage invention and creativity as well as to promote the prosperity of scientific, technological, educational, cultural and artistic undertakings. Accordingly, numerous changes have occurred in the legal realm. It’s worthy to note that, when paving the way to entry into the WTO, the Chinese government considers IPP as a serious problem in legislative reform and policy amendment [10], and, after that, China continues updating legal specification to comply with WTO’s regulation. As for the patent domain, the important reform occurred in 2001 when the Patent Law was revised again. Firstly, in this new version, it can be observed that the areas under patent protection are expanded, which is consistent with the rapid development of information technology, mobile communication, bioengineering environment engineering, automatic control, and so on. For example, biotechnology is patentable under the current laws. It should be mentioned that, although naturally existing gene or its DNA fragment discovered from the nature cannot be granted as patent because they are regarded as discovery, if it is the gene or DNA fragment isolated or extracted from the nature for the first time and

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the sequence of its basic group is not recorded in the prior art, then the gene or DNA fragment itself and its producing process can be granted patent right, provided that it can be precisely expressed, be valuable in industry and that its commercial exploitation is not against social moral or public interests [11]. Another example is about computer software, which generally belongs to rules and processes of intellectual activities, so it cannot be granted patent right. However, if its patent application is to solve technological problems and to achieve technological effect through technological means, it is still under protection of the Patent Law [11]. Secondly, the new Patent Law allows patent owners to prevent others from offering for sale of the patented products without their consent and stipulates specific conditions for granting a compulsory license, which are consistent with the stipulations of TRIPS Agreement [12]. Thirdly, the detailed Implementing Rules for Patent Law that were promulgated on June 2001 repeal and replace the implementing rules adopted in 1992. The new Implementing Rules increase the number of matters examined during the preliminary examination and introduce new grounds for rejecting and invalidating an invention patent and provisions on utility model searches by utility model patent holders. Meanwhile, the patent revocation procedure is removed because it was considered that the function of the revocation procedure could be fully achieved by means of the invalidation procedure. Additionally, a lengthy chapter was added on binternational patent applicationsQ made pursuant to the provisions of the Patent Cooperation Treaty [13]. All the changes will accelerate the process of approaching the goal of bjust and effectiveQ. Almost at the same time, the Copyright Law was amended to bring China’s Copyright Law in line with the Berne Convention for the Protection of Literary and Artistic Works and the TRIPs Agreement. The amendments broaden the scope of copyright items, among which rental rights in respect of computer programs and protection of databases are revised. Meanwhile, the amendments also expand the list of rights copyright holders possess and change the rules on permitted use without authorization. More importantly, some substantial improvements have been made to the remedies available to victims of copyright infringement, such as giving aggrieved parties the right to apply for preliminary injunctions to preserve assets and evidence [14]. In other words, a copyright owner may apply to a People’s Court for a preliminary injunction against an infringing act and/or an interim order for the preservation of property if it has evidence showing that another person is carrying out or will carry out an act of infringement upon his rights, and that failure to immediately halt such act would cause damage to his lawful rights and interests, which would be difficult to remedy [15]. This right is vital for right holders to obtain evidence in time, which determines the final outcome of a lawsuit and remedies. For example, in 1999, in the case of Microsoft(China), v. Beijing Yadu Science and Technology Group, which was the first case that a foreign software manufacturer bringing action against an ultimate user for copyright infringement in China, the Beijing First Intermediate People’s Court dismissed the plaintiff’s claims on the ground that there was no sufficient evidence to prove that the two engineers were actually employed by Yadu Group. However, after 3 years, in the case of Discreet Logic v Shanghai Duidiand, the plaintiff was entitled because the new Copyright Law granted right holders to preserve the evidence before litigation so that the plaintiff can collect evidence timely, which directly proved the facts of the defendant’s infringement. In such cases, because evidence can be easily ruined for IT industries, the right of preliminary injunctions may be a strong tool for striking against IP infringement and protecting IPR. Moreover, for the copyright in computer software—the hottest issue recently—the Measures for Registration of Copyright in Computer Software were promulgated by the National Copyright Administration on February 20, 2002 to further clarify the rights and obligations in the registration of copyright in software and the registration of exclusive license contracts or assignment contracts for

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copyright in software. Subject to the new Measures, the National Copyright Administration is responsible for the nationwide work of software copyright registration administration and enforcement of laws and regulations; meanwhile, software registration offices may also be established at the local level upon approval from the National Copyright Administration. This mechanism provides an efficient way to deal with kinds of affairs in registration; as a result, software that is facing with the high risk of piracy and being substituted by the like products due to the rapid development can be protected in time.

5. The challenges and perspective in the regime of technology protection in China Although China has made great efforts in the regime of technology protection, due to the limited experience and the rapid development of technology, defects still exist in the legislation and enforcement. At the same time, while strengthen the protection for technology, it is necessary for China to establish a mechanism to prevent the over monopoly caused by IPP. Firstly, the two-tier legislative system in China inevitably causes the disconnection between national laws and provincial and local government laws. Above all, because there is no specific code of practice to guide the rules and regulations stipulated by the second-tier provincial and ministerial governments, some of the second-tier regulations might contradict with the first-tier policies. Again, even at the second tier, there are also some conflicts among the rules and regulations stipulated by the provincial or ministerial government due to the lack of coordinating organs. Moreover, the ministerial and provincial governments only need to send their regulations to the central government for record, which implies that the central government carried out little supervision of the consistency of the second-tier regulations [16]. Nevertheless, despite these inherent flaws under the existing legislative modes, they can be alleviated in two possible ways. The first is to stipulate the specific code to guide the second-tier legislation to avoid the conflicts between the different legislative levels. The second, it can be considered to establish the specific coordinating organs to detect and harmonize the legislation at the same level; and, if necessary, it should report the issue to the upper system for supervision. These organs can obtain the information from the authority reports, judicial practices and comments of lawyers and scholars. The wide and reliable channels of information are helpful to discover and eliminate the defects in the legislation efficiently. Secondly, as for protecting technology and related rights, the current state of enforcement is far from the requirements of the global society. At first, some deficiencies still exist in the judicial systems. For example, China’s rules require evidence of actual sale and disregard inventory and past activities in order to calculate the infringer’s profits that are regarded as damages caused by infringement; but this method has resulted in the damage amounts being inadequate to compensate for the injury that the IP holders have suffered [12]. Another example is that courts are often found to be reluctant to pursue criminal prosecution in many piracy and counterfeiting cases, which is a cause of the weak enforcement of IPP and little fear of infringers. Again, there are also some deficiencies in the administrative practices. For instance, the limited power of local officials to investigate cases of infringement undermines the efficiency of IPP enforcement. Moreover, little attention to the repeat and willful infringement cannot prevent such illegal conducts powerfully. Therefore, if China would take stronger policies in the regime of IPP, these problems should be paid more attention to. In detail, as far as the adequate compensation is concerned, instead of the evidence of the actual sale, whether the estimate of actual sale and inventory according to the past activities, the average quantity of distribution in the market and other relevant

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information which can be used as a measurement in practice should be further investigated. On the other hand, as for the criminal prosecution involving technology infringements, the courts should strictly comply with laws without individual prejudice. Furthermore, in the administrative practices, the administrative authorities that charge with the task of IPP should refer more cases, especially those involving repeat offenders and willful piracy and counterfeiting. Of course, these reforms should be ensured by corresponding rules and regulations. Finally, in a society with the strong IPP, the Anti-trust Law is an indispensable tool to prevent the unfair market control by IP holders. Abuse of IPR is clearly and perfectly regulated in the framework of antitrust law in U.S. and E.U.; however, this realm remains a gap in China. A recent famous case may show this awkward situation. On January 24, 2003, Cisco Systems, the global network equipment giant, filed a lawsuit of complainant before the federal court of Eastern District, Texas, the United States, against China Huawei Technologies and its American branch. In this case, Cisco accused Huawei of billegally copying and using Cisco’s software (source code included), its documents relating to intellectual property and infringing its several patent rightsQ. Although Huawei rebutted the counterparty’s arguments and counterclaimed Cisco, the former’s passive position was undeniable. In fact, from another point of view, because this case involves the private protocol made by Cisco that has the characters of monopoly, Huawei could initiatively bring action in China against Cisco’s abuse of IPR that unfairly restrains competition, if China’s framework of competition law is more perfect. In this regard, it is necessary for China to supply the gap when improving the level of IPP lest the over monopoly cause unfair competition and the reduction of the whole social welfare.

6. Conclusion The challenges in the IPR regime posed by technical development for China are significant. In order to conform to the new knowledge-economy era and harmonize with the global society, China has made great effort through international commitments (e.g., multilateral and bilateral negotiations) and national measures (e.g., legislation and education). It is a matter of certainty that the level of IPP in China will be improved whether because of the external pressure currently or because of the future appeal from domestic industries in the long run. However, after all, China is a developing country at present, which must be faced when the Chinese authorities make polices relevant to IPP. Before making sure the positive effect of strong IPP on social welfare and national technical development, China will maintain a prudent attitude to it. In this sense, it can be anticipated that the further reform will be carried out gradually. Anyway, China has taken a giant stride in this area, which reflects a promising future.

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Liu Wenqi, LLB (Zheijang University at Yu Quan), LLM (National University of Singapore). She is a lecturer in Zheijang Shuren University and conducts research in the regime of international economic and IP law.