Revisiting China's IP Conviction Thresholds

By Professor Jeffery Atik

Among the many changes to the international IP landscape wrought by the WTO's TRIPS Agreement was the unprecedented mandate to impose criminal liability for the most egregious acts of trademark and copyright infringement. Criminal sanctions add to civil and administrative remedies to create a climate of observation of IP rights throughout the WTO space. In anticipation of its joining the WTO -- and in response to pressure from the United States -- China amended its domestic criminal law to provide for the possibility of imprisonment or fines in certain instances of IP infringement as a complement to civil and administrative remedies. Nonetheless, there remains continuing concern held by IP holders about the effectiveness of China's IP enforcement. Much of the current 'TRIPS-plus' program (including the discarded ACTA and the emerging Trans-Pacific Partnership [TPP]) is intended to indirectly influence China with regard to IP enforcement.

In 2007, the U.S. brought a three-prong challenge to China's IP system within the WTO dispute settlement system. The central part of the dispute involved a U.S. assertion that China failed to give full effect to the TRIPS criminalization mandate. Article 61 of TRIPS obligates WTO members to provide "for criminal procedures and penalties to be applied at least in cases of wilful trademark counterfeiting or copyright piracy on a commercial scale."

While China did provide for the possibility of criminal liability in many instances of counterfeiting and piracy, it did not, the United States argued, give full effect to its Article 61 commitment. China's Criminal Law (as augmented by official 'interpretations' with the status of law) sets various quantitative thresholds above which potential criminal liability attaches. By implication (confirmed by China in the course of the WTO proceedings), activity below these thresholds are subject to civil or administrative action, but can not result in conviction. In the view of the United States, some activity covered by Article 61 would enjoy an improper 'safe harbor' given the existence of China's bright-line conviction thresholds.

Within the context of its WTO action against China, the U.S. asserted the ultimately unsuccessful argument that any instance of 'commercial' trademark counterfeiting or copyright piracy should potentially attract criminal liability regardless of scale. The U.S. would have read 'scale' out of Article 61, at least in cases where there was a demonstrated commercial object. In part, the U.S. disquiet with China's conviction thresholds reflected its disappointment with the TRIPS text as concluded. In the TRIPS negotiations, the U.S. had sought a criminalization obligation that would attach to all wilful commercial trademark counterfeiting or copyright piracy -- its proposed language was rejected.

The U.S. had a better argument (although also ultimately unsuccessful) with regard to the particular thresholds set by China for criminal liability. The U.S. seemed to have persuaded the WTO panel that there might be instances of 'wilful trademark counterfeiting or copyright piracy on a commercial scale' that would fall below the particular thresholds applied by China. Commercial scale, the panel found, is to be determined on country-by-country and good-by-good bases. As a matter of WTO law, it was for the U.S. to demonstrate the existence of instances of below-threshold activity that was of a 'commercial scale', and this they failed to do.

And so the first WTO challenge to China's IP enforcement ended -- with China's thresholds undisturbed, but with various U.S. IP interests convinced that meaningful levels of IP infringement are 'invited' by the design of China's legislation.

The efforts by the U.S. to eliminate China's conviction thresholds have now moved from TRIPS to TRIPS plus. ACTA contains a refined criminalization requirement that makes clear (consistent with the U.S. negotiating posture) that commercial trademark counterfeiting and copyright piracy should fall within the coverage of criminal statutes regardless of scale. (Note this is not a demand for mandatory prosecution; rather it is an argument against impunity.)

For reasons earlier discussed here ACTA may be stillborn. But the Trans-Pacific Partnership remains alive. No official drafts of TPP have been released, but leaked drafts suggest that the criminalization requirement will follow ACTA's lead. Neither ACTA nor TPP directly affect China; it is unlikely to become a party of either agreement in the near future. But these new agreements do affect China -- in that they purport to state current 'best practices' that may influence the expectations of China's trading partners and form part of the background in a further WTO action.

This is the first in a series of posts "IP Crimes in a TRIPS-plus World."