Field Survey for Infringement of Intellectual Property Right in China
(Final Report)

June23, 2005

Ministry of Economy, Trade and Industry

In March through April of this year, the Ministry of Economy, Trade and Industry conducted the "Field Survey for Infringement of Intellectual Property Right in China" in writing to 178 companies, primarily Japanese corporations that have gained ground or are doing business in China, and received responses from 134 companies among them, with the response rate of 75.0%. This survey covers two years from 2003 through 2004. The interim report is summarized as follows.

1. Status of Use of Administrative, Criminal and Civil Procedures in China
67 companies of 134 (i.e. 50%) have used the administrative, criminal or civil procedures for remedy in case of infringement of intellectual property right in China.
Among the companies which have not used such procedures, with the exception of 30 companies which answered that there was no fact of infringement of intellectual property right, potential infringement of intellectual property right seems quite likely.

(1) Administrative Procedures
Remedial procedure most frequently used in case of infringement of intellectual property right in China is that by administrative authority. 67 companies used the remedial procedures by administrative authorities in these two years and requested 4,263 administrative measures in total, of which 4,029 cases were subject to the administrative measures, with the rate of 94.5%.
The State Administration for Industry and Commerce, responsible to prevent the trademark infringement and unfair competition, took most frequently 2,117 administrative measures, followed by 1,560 measures taken by General Administration of Quality Supervision, Inspection and Quarantine, responsible to prohibit counterfeit goods and faulty goods.

Most frequent administrative penalty is the confiscation and disposal of counterfeit goods in 3,043 cases, followed by the suspension of manufacture and sale in 778 cases. The forfeiture of illegal income and the disposal and confiscation of manufacturing facility, which are considered to be severer, are less, that is, 317 cases and 145 cases respectively.
Some companies answered that the penalty was unknown because, in some cases, no information of what administrative measure was taken were reported to them who suffered infringements.

(2) Criminal and Civil Procedures
Fewer companies used the criminal or civil procedures than remedial procedures by administrative authority. Only 139 criminal accusations and 53 civil lawsuits were raised by 29 and 16 companies respectively in these two years.
Regarding the criminal procedures, there were 139 criminal accusations, of which 114 were built as prosecutable cases by the Public Security Bureau, of which only 33 cases were actually subject to the criminal penalties. The criminal accusations are fewer because of the hurdles including criminal prosecution requirements and the difficulties to transfer a case from the administrative authority to the Public Security Bureau.
The civil procedures seem to be rarely used because lawsuit takes too much time and a prevailing party can rarely receive compensation.

2. Status of Damage from Infringement of Intellectual Property Right

(1) Status of Damage in China
18 companies gave some information of the estimated amount of damage, of which 11 companies figured the estimated amount.
Manner to calculate the estimated amount of damage may vary depending on the business form of each industry and situation of damage from counterfeit. For reference, some methods to calculate the estimated amount of damage are listed below from the responses received this time.

a %; Estimated ratio to show how much the detected counterfeit goods occupy the whole counterfeit market, which is calculated by each company. For the case 1, the estimated ratio is assumed to be 100%, which means that the detected counterfeit goods monopolize the market.

b ; Some companies adopt the price of counterfeit goods and others adopt that of proper product.

Method 1 is deemed as a manner reliable to certain extent to estimate the amount of damage, if the relation between the number of confiscated counterfeit goods and the scale of actual counterfeit market is grasped by conducting the detection of certain level and the continuous market survey.

Method 2 uses the estimated counterfeit ratio, that is, how large the counterfeit market is in comparison with the sales of proper products. Accuracy of this ratio varies according to the manner to estimate the counterfeit ratio. Amount of damage can be estimated to a considerable accuracy if the counterfeit ratio is estimated in an independent manner by conducting market survey to some extent or likewise, while it can be estimated simply without detailed market survey by using a general counterfeit ratio (*) though its accuracy remains an issue.

* For example, ICC (International Chamber of Commerce) estimates the ratio of counterfeit to the world trade amount. (Reference: "The Economic Impact of Counterfeiting" 1998 OECD)

Accuracy of Method 3 significantly varies according to the manner to estimate the sales. Though this method enables a simple estimate without market survey, it may be difficult to obtain reliable figures if the sales are overestimated or underestimated or if the difference between the estimated sales and actual sales includes compatible goods, which do not infringe the intellectual property right.

(2) Status of damage caused by outflow of goods infringing intellectual property right to third countries
Pirate edition and counterfeit goods which are manufactured in China are exported to third countries to make the situation more serious. In this survey, this type of damage was reported by 68 companies and such damage ranges all over the world including North America, Central and South America, Middle East, Europe, and Africa as well as Asian regions.
We questioned about the measures by Chinese customs that have power to prohibit the export of goods infringing intellectual property right and received many responses requesting more enhanced prohibition by the port authorities, on the other hands, some appreciation for Chinese customs were received, too.

3. Enforcement by Chinese Governmental Authority against Infringement of Intellectual Property Right

(1) Inappropriate Measures by Chinese Governmental Authority
Of the 67 companies that used the remedial procedures of Chinese governmental authorities when there was an infringement of intellectual property rights in China, 40 answered that they sensed difficulty when seeking a response from the authorities, or a lack of smooth progress.
Of these, 24 companies replied that they had specific complaints (hereafter, inappropriate cases) with the response of the Chinese governmental authorities.

(Note)

1. The following classifications are based on the cases of the 24 companies with specific complaints.
2. The number of companies does not correspond to the number of complaints because some companies reported more than one inappropriate case. Also, there were multiple rights infringements in several cases.

i. Classifications by region
The classification of inappropriate cases by region shows they were concentrated in the East China region (9 cases) and the South China region (8 cases). These were followed by the inland region (4 cases) and the North China region (2 cases). The East and South regions are where the most damage is caused by counterfeit products and pirated versions in China.

ii. Classification by the enforcement authorities
Classification by the enforcement authorities shows that the State Administration for  Industry and Commerce had the most cases with 15, followed by the General Administration of Quality Supervision, Inspection and Quarantine with five, the State Intellectual Property Office with three, the General Administration of Customs with three, and the Courts with two. The number of inappropriate cases handled by enforcement authorities are overwhelmingly concentrated in the State Administration for Industry and Commerce and the General Administration of Quality Supervision, Inspection and Quarantine.

iii. Classification by the rights infringed
The classification of inappropriate cases by the rights infringed shows that the largest number by far were trademark rights cases (21 cases), followed by patent rights cases (5 cases), design rights cases (3 cases), and acts of unfair competition (2 cases).

iv. Classification by content of the inappropriate cases
There are three classifications for the content originating from inappropriate cases:
(a) inadequacy of the system, (b) regional protectionism, and (c) the response of the Chinese authorities and their employees. The results are shown in the following. These will be explained using specific examples of inappropriate cases.

(a) Inadequacy of the system (10 cases)

• The party holding the rights must be liable for such expenditures as warehouse storage cost for confiscated items and disposition expenses.
• Unfairly low prices were used to calculate the amount of fines for administrative measures, or the amount of illegal business being conducted, which is the benchmark for determining whether to initiate criminal prosecution. Therefore, we cannot expect the infringements to be curbed because the fines are extremely low and criminal prosecution cannot be initiated.
• There are delays in trademark registration applications and the deliberation for protests filed, and the period for responding to rejections in the deliberation process is too short at 15 days.
• There was a repeat offender, but criminal charges were not filed because the monetary amount was insufficient. Repeat offenders should be regarded as malicious and we want criminal charges filed against them.

(b) Regional protectionism (5 cases)

• Cases were unfairly handled, presumably because the companies committing the infringement were influential locally. Examples include the rejection of demands for exposure, requirements to submit documents thought to be unnecessary, the failure to apply administrative measures, and the failure to initiate legal action due to the absence of the accused

(c) Response of the Chinese authorities and their employees (11 cases)

• Requests were made for administrative disposition of infringement cases, but the situation was neglected for a long time with no proceedings initiated.
• After a determination was made to confiscate or dispose of items, it actually took six months for the disposition to be performed despite repeated demands to do so.
• There was a case in which no decision on a penalty was made for as long as two and a half years after the Chinese authorities exposed the matter, despite repeated demands.
• After a claim for compensation for damages being filed in a trademark infringement case, an appeal for cancellation was instituted as a countermove. However the formal receipt of appeal was delivered only six months later, so it was not possible to show that an appeal for cancellation had been made, at the first public hearing for the trial concerning the compensation for damages.
• After a favorable verdict was received in a case against counterfeiters, an application for cancellation of the trademark held by the counterfeiters was submitted to the Trademark Review and Adjudication Board but no progress was made after more than three years had elapsed.

Japanese companies with a presence in China would welcome remedial procedures to be enhanced for intellectual property rights by Chinese governmental authorities. As shown in the foregoing, however, there remains a steady stream of inappropriate cases by the Chinese governmental authorities, and local governmental authorities in particular. An appropriate response is desired when remedial procedures are initiated.

(2) Enforcement by the Chinese Governmental Authority against Repeated Offense
We questioned about the occurrence of repeated infringement of intellectual property right by a pirate/counterfeiter against which remedial measures had been taken before. 34 companies, half of 67 which used the remedial procedures in China answered that they experienced repeated infringement. From this fact, enhancement of measures to prevent repeated infringements of intellectual property right is desired.

Contact:
Northeast Asia Division, Trade Policy Bureau
Tel. +81-3-3501-0531

Office for Intellectual Property Right Infringement,
Manufacturing Industries Bureau
Tel. +81-3-3501-1701