VZCZCXRO8810
OO RUEHCN RUEHGH
DE RUEHBJ #2101/01 0881202
ZNR UUUUU ZZH
O 291202Z MAR 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6299
INFO RUEHCN/AMCONSUL CHENGDU 8057
RUEHGZ/AMCONSUL GUANGZHOU 2645
RUEHGH/AMCONSUL SHANGHAI 7192
RUEHSH/AMCONSUL SHENYANG 7737
RUEHHK/AMCONSUL HONG KONG 9072
RUEHIN/AIT TAIPEI 6325
RUEHKO/AMEMBASSY TOKYO 1243
RUEHUL/AMEMBASSY SEOUL 9985
RUEHMO/AMEMBASSY MOSCOW 8605
RUEHGV/USMISSION GENEVA 1709
RUEAHLC/DHS WASHDC
RUCPDOC/USDOC WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RHMCSUU/FBI WASHINGTON DC

UNCLAS SECTION 01 OF 16 BEIJING 002101 
 
SIPDIS 
 
State for EAP/CM - JYamomoto and EB/IPE - EFelsing 
 
USTR for China Office - AWinter; IPR Office - RBae; and OCG 
- SMcCoy 
 
Commerce for National Coordinator for IPR Enforcement - 
CIsrael 
 
Commerce for MAC 3204/ACelico, LRigoli, ESzymanski 
 
Commerce for MAC 3043/McQueen 
 
LOC/ Copyright Office - MPoor 
 
USPTO for Int'l Affairs -- LBoland 
 
DOJ for CCIPS - Asharrin 
DOJ for SChembtob 
FTC for Blumenthal 
FBI for LBryant 
 
DHS/ ICE for IPR Center - DFaulconer 
 
DHS/CBP for IPR Rights Branch - PPizzeck 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: KIPR ETRD ECON WTRO CH
SUBJECT: CHINA MISSION 2007 SPECIAL 301 RECOMMENDATION: 
PRIORITY WATCH LIST AND CONTINUED SECTION 306 MONITORING 
(PART ONE) 
 
REF:   (A) 2006 BEIJING 05968 
 
(B) 2006 BEIJING 10459 
(C) 2006 BEIJING 24195 
(D) 2006 GUANGZHOU 15230 
(E) 2006 GUANGZHOU 21191 
(F) 2007 SHANGHAI 1774 
(G) 2007 SHANGHAI 1866 
(H) 2006 CHENGDU 946 
(I) 2006 CHENGDU 1095 
 
--------------------------- 
Summary and Recommendation 
--------------------------- 
 
¶1. (SBU) Summary.  This is the first of two cables to 
assist Washington, DC agencies in their Section 301 
decision making for China.  This cable focuses on non- 
enforcement related IPR issues, including policy 
developments, legislative developments and patent and 
trademark prosecution.  Post recommends that China remain 
on the Priority Watch List (PWL) with Section 306 
monitoring based on the data in this and subsequent cables. 
IPR problems in China continue to outpace enforcement 
improvements.  There are increasing concerns over other 
areas where the TRIPS Agreement and other bilateral 
agreements offer little protection, such as exports of 
counterfeit goods, Internet copyright issues, trade secret 
protection, antitrust, and technology transfer.  The 
benefits of a WTO case should be weighed against any costs 
in bilateral cooperation (e.g., through Mutual Legal 
Assistance arrangements for internet issues), the delays in 
obtaining a final decision and compliance, and the 
likelihood any decision might be superseded by other 
problems.  Post also continues to encourage and support 
stronger interagency coordination as well as coordination 
with other concerned trading partners, such as the EC, 
Japan and Australia.  End Summary. 
 
------------------ ------------------------------- 
Industries Suggest Modest Improvement Has Occurred 
------------------ ------------------------------- 
 
¶2. (SBU) Industry generally reports that the enforcement 
and protection of IPR is modestly improving in China, but 
that it is still not at a sufficient level to deter 
infringing activity.  The improvements, though small enough 
to be within a margin of error, are also consistently 
revealed across different sectors. 
 
-- In its 2006 White Paper, AmCham in Beijing advised that 
 
BEIJING 00002101  002 OF 016 
 
 
of 83 companies polled, 55 percent believed that IPR 
enforcement had stayed the same in 2005, while seven 
percent believed that it had deteriorated and 37 percent 
said ithad improved.  Of 76 companies polled, 54 percent 
said the level of counterfeiting had stayed the same, seven 
percent said it had decreased, and 44 percent said it had 
increased. 
 
-- In its 2007 Section 301 Report, The International 
Intellectual Property Alliance showed static piracy levels 
of 85 percent for records and music with an increase in 
damages from 204 to 206 million USD.  Motion picture piracy 
levels had similarly decreased by two percent from 2004 to 
2005 from 95 percent to 93 percent.  Numbers for 2006 were 
not available.  The problem of keeping pace with ChinaQs 
technological growth is also evident in the statistics 
presented by the Business Software Alliance, which showed a 
drop in piracy levels from 86 percent to 84 percent from 
2005 to 2006, while at the same time alleging that losses 
increased from USD 1,554 million to USD 2,949 million. 
 
-- In its Section 301 submission, the International 
Anticounterfeiting Coalition (IACC) reports that their 
membersQ concerns about IPR enforcement in China remain 
Qby-and-large unchangedQ since 2006. 
 
--In a recent survey commissioned by the Business Alliance 
To Stop Counterfeiting and Piracy, China was reported as 
the least favorable IPR environment, among 53 countries, 
with a weighted ranking of 3.49, against the next highest 
country, Russia of 2.25.  China was rated the most 
unfavorable country for IPR 37 times.  Russian was rated 
the least favorable only 29 times. 
 
-- A survey in 2006 of members of the China-based 
multinational Quality Brands Protection Committee (QBPC) 
revealed that 30 percent of reporting members believed that 
the counterfeiting/piracy situation had worsened in 2006, 
with the majority of respondents describing the worsening 
as QmoderateQ to QsignificantQ.  By contrast, 28 percent 
reported that the problem had improved during 2006, with 
most characterizing the improvement as QslightQ to 
QmoderateQ.  Forty percent of the members believed that the 
state of counterfeiting and piracy had remained the same in 
2006 compared to 2005. 
 
-- QBPC Members also reported that the proportion of the 
market occupied by counterfeit goods in 2006 was about the 
same as in previous years.  Among respondents, 
approximately 41 percent reported that at least 11 percent 
 
BEIJING 00002101  003 OF 016 
 
 
of their products in the market were fake (19 percent 
reported 11 to 25 percent; nine percent reported 26 to 50 
percent, and 13 percent reported over 50 percent).  The 
remaining 60 percent of members reported that fakes 
occupied 10 percent or less of the market for their branded 
goods.  Estimates of lost revenue due to IP violations in 
China in 2005 decreased slightly compared to 2004.  Among 
reporting members, 88 percent advised that their lost 
revenue due to IP violations in 2005 was 15 percent or 
less, compared with 79 percent in 2004.  However, 10 
percent of members estimated revenue losses in excess of 20 
percent.  (QBPC Annual Membership Survey - 2006). 
 
-------------------- ------------------------------ 
Industries Suggest Immediate Prospects Are Not Rosy 
--------------------- ----------------------------- 
 
¶3. (SBU) Overall, industry is not optimistic about the 
future.  QBPC membersQ opinions were roughly split on the 
Chinese governmentQs commitments to addressing 
counterfeiting/piracy, with 44 percent assessing the 
government's commitment as QexcellentQ, "good" or 
"satisfactory" while 44 percent rated it as "fair".  Local 
protectionism continued to be a major concern for members, 
with over 75 percent wanting to see greater efforts made in 
this area. 
 
¶4. (SBU) In his February 15, 2007 testimony before the 
House Ways and Means Committee, Dan Glickman of MPAA stated 
that 61 percent of motion picture industry respondents 
surveyed said they believe movie piracy will continue to 
increase, while 39 percent said they believe piracy levels 
will hold steady.  No one interviewed believed that the 
market for pirated films will shrink. (Statement of Dan 
Glickman, Chairman and Chief Executive Officer Motion 
Picture Association of America, Before the Subcommittee on 
Trade Committee on Ways and Means QThe US-China Trade 
AgendaQ, February 15, 2007. )  (Note: The Mission also 
hosted a seminar on the future of copyright protection and 
market access on March 26 and hopes to report further on 
the prognosis for the copyright industries in 2007 and the 
next several years.  End Note.) 
 
¶5. (SBU) Chinese research organizations also conduct 
periodic surveys on counterfeiting and piracy.  For 
example, the Sample Investigation Report on Reading and 
Buying Inclinations of People Across China (2006) (Chinese 
Institute of Publishing Science) showed little change from 
2001 - 2005 in people's attitudes towards buying pirated 
publications.  Between 2003 and 2005, respondentsQ 
 
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inclination to purchase pirated AV products rose from 77.7 
percent to 83.3 percent, compared to drops in other 
categories.  Common publications dropped from 33.3 to 22.1 
percent; textbooks dropped from 13.2 to 9.5 percent; and 
software dropped from 12.4 to 10.3 percent. 
 
¶6. (SBU) In 2006, China Labs released a study on software 
piracy which indicated that the general piracy rate of 
computer software is 66 percent, in which, system software 
is the highest, reaching 75 percent and industry 
applications is the lowest, 31 percent.  The software that 
is pirated most seriously is: office software (84 percent) 
and operating system (81 percent).  Measured by market 
value, pirated software was worth about 140 billion Yuan, 
in which system software accounts for 47 percent, 
applications 43 percent and supporting software 10 percent. 
The piracy rate is 57 percent based on computer software 
sales, 40 percent based on the sales of software products 
(including embedded software) and 26 percent based on the 
sales of the whole software industry (including software 
service and integration, and software exports). 
 
----------------------- ------------------------------ 
2005 Review - Roundtable Identifies Continued Problems 
----------------------- ------------------------------ 
 
¶7. (SBU) In November 2006, Ambassador Randt hosted his 
fifth annual AmbassadorQs Roundtable Discussion on 
Intellectual Property Rights in China in Beijing (ref C). 
Secretary of Commerce Carlos Gutierrez and China's Minister 
 
SIPDIS 
of Commerce Bo Xilai participated in the Roundtable, which 
drew about 250 industry representatives.  Secretary 
Gutierrez cited three areas to improve IP enforcement: (1) 
lowering criminal thresholds, (2) offering greater market 
access for audio-visual products, and (3) better 
enforcement, particularly in cracking down on criminal 
organizations.  Minister Bo Xilai said that China's battle 
against IPR infringement has stepped up, including opening 
50 IPR complaint centers that have received over 15,000 
inquiries.  The China Trademark Office said that the 
Trademark Law will simplify and shorten the trademark 
examination period, limit opposition filings to cut down on 
abuses, and specify different types of infringement. 
 
¶8. (SBU) Industry representatives at the Roundtable 
unanimously emphasized market access and law enforcement as 
the most fundamental problems facing industries doing 
business in China.  Industry members specifically called 
for: (1) increasing manpower and budget to deter copyright 
infringement; (2) fostering access to China's government- 
 
BEIJING 00002101  005 OF 016 
 
 
controlled movie business and stronger IPR enforcement in 
the film business; (3) promoting legislative reform, 
transparency, and public awareness initiatives to protect 
trademarks in China; (4) addressing the Internet 
distribution of counterfeit medicines; (5) implementing 
more rapidly software legalization requirements for State 
Owned Enterprises; and (6) improving market access for game 
software. 
 
-------------------------------- 
High-tech Creates New IPR Issues 
-------------------------------- 
 
¶9. (SBU) IPR concerns are also increasingly migrating to 
higher technology areas with greater stakes for U.S. 
research and development interests, in line with ChinaQs 
increasing focus on Qself-reliant innovation.Q   Among the 
40 respondents to an ANSI survey on policy concerns in 
China, 78 percent expressed concern about ChinaQs IP and 
standardization policies, while 56 percent were Qvery 
concernedQ or considered it their Qhighest priority.Q 
PhRMAQs members estimate their damages at 34 percent of 
sales, the highest in percentage and absolute terms of any 
country reported. 
 
------------------- 
The Internet Threat 
------------------- 
 
¶10. (SBU) Although there were positive developments this 
year in Internet IPR related legislation and enforcement, 
ChinaQs rapid growth in Internet usage, coupled with 
persistently weak IPR enforcement, has caused many rights 
holders, particularly in copyright and brand sectors, to be 
concerned.  These issues were also identified in the 
AmbassadorQs IPR Roundtable which focused on Internet- 
related IPR issues. 
 
¶11. (SBU) With approximately 140 million Internet users, 
China ranks second in the world.  China also has 843,000 
websites and the number of Q.CNQ domain names increased by 
64.4 percent over 2005 to 1.8 million.  Broadband users 
increased to 90.7 million, to about two thirds of ChinaQs 
internet users.  In one survey by ChinaQs Press and 
Publications Journal, net users selected the Internet as 
their major means for getting information (85 percent). 
Seventeen million Internet users use their mobile phone to 
access the Internet, while 72 percent use the internet and 
send and receive email.  By 2008, China will have the most 
Internet users in the world. 
 
BEIJING 00002101  006 OF 016 
 
 
 
¶12. (SBU) The Internet environment is creating both 
challenges for enforcement and market opportunities. 
Changes in the entertainment software sector have been 
dramatic.  In 2006, the market value of Chinese-created 
Internet games was 4.24 billion RMB, 64.5 percent of the 
total internet game market value.  It increased 87.4 
percent compared to 2005.  The market value of mobile phone 
games was 1.48 billion RMB, a 50.2 percent increase over 
the previous year.  The market for personal computer (PC) 
games in 2006 was almost unchanged.  The sales income was 
only 65 million RMB. (Data is prepared by the Electronic & 
Internet Phonograms Publishing Department of NCAC, 
Committee of China Game Industry and IDC IntQl Data Corp.). 
Similar growth is expected in the Qnetwork musicQ market, 
which was worth 2.78 billion RMB in 2005 and is expected to 
grow by 50% in 2006. 
 
¶13. (SBU) The challenges of IPR protection in ChinaQs 
internet environment are not limited to copyright.  In its 
annual survey, the Quality Brands Protection Committee 
noted that the sale of counterfeit goods via the Internet 
is now a key area of concern for members, with 74 percent 
characterizing the problem as either QveryQ (30 percent) or 
QsomewhatQ (44 percent) serious.  IACC in its Section 301 
report tabulated the number of hits for certain brands on 
one of ChinaQs major B2B sites, taobao.com: 737,000 hits 
for Nike, 452,000 for Adidas, 171,000 for Puma, and 109,000 
for Abercrombie and Fitch, among other brands.  Among non- 
fashion brands, there were 6,100 hits each for Zippo and 
Cisco.  Of course, not all of these hits may be for 
counterfeits, but the large numbers suggest many 
counterfeit vendors. 
 
¶14. (SBU) (Note: Because investigations into parties 
offering counterfeits and pirates over the Internet is 
time-consuming and rarely achieves the goal of identifying 
the vendor, these cases require the active support of local 
authorities, especially the police and prosecutors.  End 
Note.) 
 
-------------------- ----------------------- 
Post Recommendation: Mutual Legal Assistance 
-------------------- ----------------------- 
 
¶15. (SBU) ChinaQs limited enforcement over the Internet 
raises Section 301 concerns.  For the time being, however, 
the Mission recommends pursuing Internet based cases with 
China as both a trade and law enforcement priority under 
Mutual Legal Assistance arrangements as well as through 
 
BEIJING 00002101  007 OF 016 
 
 
promoting ChinaQs cooperation with third countries (such as 
by accession to the Council of Europe Cybercrime 
Convention), in order to make further inroads into this 
important area.  If China is unwilling to cooperate in 
pursuing cases, this failure should be raised through 
higher level channels, such as the JCCT or perhaps the 
Strategic Economic Dialogue. 
 
------------------------ 
Legislative Developments 
------------------------ 
 
¶16. (SBU) In 2006, China drafted a range of new laws and 
regulations.  In addition, several important macro-level 
IPR-related policy documents were under consideration: (a) 
the National IPR Strategy, which is scheduled to be 
promulgated in mid-2007; (b) the 11th Five Year Plan 
(2006), which establishes a national goal of Qself reliant 
innovationQ; and (c) the 15 year Science and Technology 
Plan.  The first two documents were reported in last yearQs 
301 cable and other reports.  While ChinaQs goal of 
becoming an innovative society is laudable, U.S. industries 
have  increasingly expressed concern that these policy 
documents appear to support antitrust measures, patent 
abuse and patent misuse doctrines, standards policy, all of 
which could weaken the value of U.S. rights holders.  These 
concerns arise from the above-mentioned policy documents 
and other related national and local documents, such as the 
National Standards Strategy, Famous Brands Strategy, as 
well as proposals for developing ChinaQs cultural markets 
and industries. 
 
¶17. (SBU) The new laws and regulations are ChinaQs most 
significant legislative drafting effort in IPR since 
joining the WTO in 2001.  In 2006, SIPO posted the draft of 
the third revision of ChinaQs Patent Law on its website and 
solicited public comments.  A SIPO delegation visited the 
United States to discuss the draft.  The State Council 
Legislative Affairs Office (SCLAO) is reviewing the draft, 
which could be adopted as early as 2008.  Also in 2006, the 
Chinese Trademark Office initiated an effort to revise the 
Trademark Law.  The draft was also placed on the CTMO 
website for public comment.  We understand that another 
draft may be made available before the CTMO draft is 
transmitted to the SCLAO for its review and retransmission 
to the National PeopleQs Congress (NPC).  For the third 
straight year, the State Administration for Industry and 
Commerce has als been preparing revisions to the Law to 
Counter Unfair Competition.  This draft may also be 
submitted to the SCLAO for its review in 2007.  The draft 
 
BEIJING 00002101  008 OF 016 
 
 
would likely include consideration of trade secret law 
reform - an issue that has been raised at both the SED and 
in discussions regarding cooperation in commercial law 
reform under the JCCT Commercial Law Working Group.  The 
General Administration of Press and Publications has also 
advised that early stage research may also be underway by 
copyright-related ministries on copyright law reform. 
 
¶18. (SBU) In 2007 the SCLAO is scheduled to adopt a new 
regulation on patent agents, the SAIC is also considering 
rules to handle the abusive registration of trademarks.  In 
addition a new regulation on company name registration is 
under consideration which could also address abusive 
registration of company names.  An initial effort has 
already been undertaken in this regard on registration of 
trademarks by natural persons. 
 
¶19. (SBU) In 2006 the State Council adopted the Regulations 
on the Right of Communication to the Public.  In December 
2006, the NPC completed its first reading of the WIPO 
Copyright Treaty and WIPO Performances and Phonograms 
Treaty with a view towards accession in 2007.  ChinaQs 
accession to the WIPO Treaties was part of its JCCT 
Commitments and appear on track, albeit with some delay. 
 
¶20. (SBU) The Supreme PeopleQs Court adopted a number of 
new judicial interpretations (JI) in 2006, including civil 
JIs on: Unfair Competition (2007), Plant Variety Protection 
(2007), and Internet Copyright Protection (2006, revised). 
 
¶21. (SBU) There are several research projects underway that 
could assist in legislative reform.  The Mission is aware 
of several efforts to consider revising aspects of the 
Criminal Code.  The Supreme PeopleQs Court, criminal 
division, is also researching changes to ChinaQs criminal 
counterfeit pharmaceutical law and related judicial 
interpretations. 
 
¶22. (SBU) The Mission is unable to thoroughly review all 
local laws and regulations.  MOFCOM has collected many 
local laws and regulations at the ChinaQs national IPR 
website (http: double backslash www.ipr.gov.cn). 
 
---------------------------- 
IPR Prosecution Developments 
---------------------------- 
 
¶23. (SBU) ChinaQs Trademark Office (CTMO) remains the 
worldQs busiest.  According to preliminary data, the CTMO 
received over 700,000 trademark applications in 2006. 
 
BEIJING 00002101  009 OF 016 
 
 
Also, the CTMO registered 260,000 trademarks in 2006, for a 
total of 2,760,000 registered trademarks.  If 2006 data 
consistent with prior years, one can infer that 
approximately one tenth of these applications were from 
foreigners.  Chinese companies are also increasingly going 
global in their trademark applications.  According to the 
World Intellectual Property Organization, China's 
international trademark applications occupied 8th place 
overall, with 1,328 of 36,471 applications or 3.6%. 
 
¶24. (SBU) Because of backlogs and appeals, it can take 10 
years to fully adjudicate a contested trademark case 
through opposition, cancellation and appeal proceedings. 
These delays make it especially difficult to challenge 
abusive registrations in a timely fashion by companies. 
Many companies who seek to QsquatQ on another companyQs 
trademark or corporate identity are resorting to new 
abusive tactics, such  as setting up overseas shell 
companies or domestic corporations with similar sounding 
names, entering into false license agreements and even 
creating counterfeit operational corporations.  The 
narrower issue of abusive trademark registrations and 
company name registrations has increasingly caught the 
attention of Chinese agencies.  A key step to address those 
problems would be to increase resources to the trademark 
agencies to improve the efficiency and quality of trademark 
registrations, oppositions, cancellations, and appeals. 
 
¶25. (SBU) ChinaQs system for geographical indications 
(GIQs) is similar to the U.S. in its use of certification 
and collective marks.  USG enjoys good cooperation with the 
Chinese Trademark Office in exchanging views on using 
trademarks to protect GIQs, and in promoting the use of the 
TM-based GI system to Chinese and U.S. industry. 
 
¶26. (SBU) ChinaQs Patent Office, the State Intellectual 
Property Office, has responded more quickly to the 
increasing emand on its services and has experienced 
remarkable growth.  In 2006, Chinese inventors filed 
122,318 invention patents and were granted 25,077. 
Foreigners filed 88,172 invention patent applications and 
were granted 32,709 patents.  Chinese utility model 
applications totaled 159,997 of which 106,312 were granted. 
There were only 1,369 foreign utility model patents applied 
for, and 1,343 were granted.  Chinese inventors filed for 
188,027 design patents and 92,471 design patents were 
granted.  There were 13,295 design patents applied for by 
foreigners and 10,090 were granted.  (Source: 
http: double back slash www.sipo.gov.cn).  Also of note, 
of 145,300 international patents filed through the Patent 
 
BEIJING 00002101  010 OF 016 
 
 
Cooperation 
Treaty in 2006, ChinaQs filings increased 56.8 percent to 
3,910, allowing it overtake Switzerland and Sweden to reach 
eighth place in 2006.  Huawei Technologies was the 13th 
largest world-wide corporate filer.  Overall, ChinaQs top 
three patented technologies were in natural products and 
polymers, digital computers, and telephone and data 
transmission industries. 
 
¶27. (SBU) The rapid increase in IP filings suggests that 
Chinese companies have now begun to invest in ChinaQs IP 
system.  However, Chinese companies are generally not 
filing commercially valuable patents.  Design patents in 
particular are not subjected to substantive examination, 
and have been asserted for abusive purposes against 
foreigners, including U.S. companies.  There is currently 
no penalty associated with the willful filing of patents on 
anotherQs invention, or with the failure to disclose 
relevant prior art upon which the patent is based.  The 
nearly 100 to 1 ratio of Chinese applications for utility 
model patents, and 10/1 for design patents to foreign 
applications, and the higher QgrantQ rate of foreign 
invention patents, statistically demonstrates the 
challenges China faces in its efforts to become a more 
innovative economy, and the continuing paucity of high 
quality patents.  Overall currently valid foreign-owned 
invention patents with continuing validity are more than 
two times the number of Chinese-owned invention patents. We 
are especially concerned that current efforts to stimulate 
QinnovationQ by mandating that Chinese companies file more 
patents could further put pressure on Chinese agencies to 
subsidize, reward, grant and enforce patents that are not 
innovative or commercially viable.   (QAn Analysis of the 
Situation Regarding Patents Currently in Effect in China,Q 
China Intellectual Property News, March 14, 2007 at 5). 
 
¶28. (SBU) The TRIPS Agreement obliges member countries to 
provide an opportunity for a judicial authority to review 
final administrative decisions.  Currently appeals of final 
patent and trademark office decisions are made to the 
Beijing Intermediate Court.  Discussions with the Beijing 
High Court suggest a reversal rate by the civil division of 
the court of final decisions of the State Intellectual 
Property Office on the order of 30 percent, while the 
Administrative Division of the Court reverses decisions of 
the Patent office at a much lower rate (closer to 10 
percent).  These reversal rates, if true, may be a welcome 
sign of increasing independence of the courts in 
considering the validity of administrative decisions.  An 
example of such reversals that was welcomed by U.S. 
 
BEIJING 00002101  011 OF 016 
 
 
industry was the June 2, 2006 decision by the Beijing 
Number One Intermediate Court to reverse the Patent 
Reexamination Board in PfizerQs Viagra patent dispute. 
 
¶29. (SBU) The Mission, in conjunction with other USG 
agencies, is actively encouraging reform of the patent and 
trademark systems to support legislative reform, improved 
transparency and clarity in examination guidelines, better 
management of the patent and trademark offices, higher 
quality examinations, and a reduction in abusive practices 
that harm foreigners and Chinese alike.  Post is working 
with these agencies to improve judicial review of final 
office decisions. 
 
------------ 
Transparency 
------------ 
 
¶30.  (SBU) Chinese agencies, including the courts, have 
increasingly made IPR-related laws, regulations, and rules 
available, typically over the Internet.  Increasingly, 
rights holders can use the Internet to file complaints, or 
apply for patents or trademarks or Customs recordal.  The 
Mission, in conjunction with USG agencies, has been pleased 
to support these continuing efforts.  Notable efforts have 
been made by the CTMO (a searchable trademark database) and 
MOFCOMQs Electronics Business Center (which sponsors the 
site www.ipr.gov.cn), as well as the Supreme PeopleQs 
Court.  These efforts have apparently brought concrete 
improvements to our rights holders.  Both the CTMO and 
MOFCOM have also reported to the USG that U.S.-based IP 
addresses are among the most frequent users of these 
electronic information services. 
 
¶30. (SBU) The Mission also supports efforts to provide 
English language complaint forms, English language case 
referral advisors, and English language templates for 
complaints for IPR-related searching on the Internet. 
These English language resources can be especially helpful 
to small and medium enterprises that may not have Chinese 
speaking staff or a presence in China.  We have been 
pleased to see these developments underway in China and to 
support their presence throughout the Embassy and consular 
districts. 
 
¶31. (SBU) Many rights holding organizations have also 
applauded the increasing transparency of Chinese agencies 
in drafting and promulgating new laws, regulations and 
rules.  During 2006, the Mission was pleased to provide a 
forum for industry to discuss the proposed rules on 
 
BEIJING 00002101  012 OF 016 
 
 
copyright protection over information networks, as well as 
to support discussions in Washington and Beijing on 
proposed revisions to the Patent and Trademark Laws.  We 
have worked with USPTO to help the Chinese Trademark Office 
better understand trademark examination rules.  We look 
forward to supporting other laws that may be in the earlier 
stages of drafting, including the Law to Counter Unfair 
Competition, the revised implementing rules to the Patent 
Law, and a revised copyright law.  Chinese ministries have 
also increasingly expressed an interest in sharing 
experience at an early stage in consideration of new laws. 
We have also supported providing comments to the Supreme 
PeopleQs Court on proposed new Judicial Interpretations. 
 
¶32. (SBU) There have, however, been shortcomings in these 
efforts towards transparency.  The most notable of these 
include administrative agencies that refuse to issue 
penalty decisions to rights holders and judges who 
frequently meet with litigants in private.  Considerable 
anecdotal evidence exists for ex-parte communication on 
pending cases that might be considered inappropriate in the 
U.S. context.  In addition, Chinese agencies have generally 
been reluctant to actively share drafts of policies and 
judicial interpretations involving criminal IPR matters, 
the most notable example of which was the 2004 criminal 
judicial interpretation.  Finally, ChinaQs response to the 
Article 63 transparency request at the WTO was 
disappointing. 
 
----------------------- ----------------------------------- 
Standards/Antitrust/Technology Policy of Continuing Concern 
----------------------- ----------------------------------- 
 
¶33. (SBU) Industry remains highly concerned over 
intellectual property and standards policies in China.  As 
indicated, a recent survey of members of the American 
National Standards Institute (ANSI) listed IPR and 
standardization policies third among all overarching policy 
concerns in China as a "highest priority" area - behind 
certification and testing requirements, and transparency. 
It remains to be seen how pending legislation in China will 
treat intellectual property in standardization, 
particularly possible compulsory licensing of patents.  The 
Standardization Law is currently being debated in the State 
Council and is the source of much contention, according to 
a Standardization Administration of China official. 
Moreover, as detailed in USTRQs 2006 WTO Compliance Report 
and elsewhere, notwithstanding ChinaQs commitment at the 
April 2004 JCCT meeting and elsewhere to technology 
neutrality on licensing issues, industry complains about 
 
BEIJING 00002101  013 OF 016 
 
 
Chinese interference in licensing discussions.  As one 
industry association stated in the context of the 2006 
hearings: QTechnology mandates or promotion of unique 
national standards are some of the ways China seeks to 
foster the domestic development of innovative technologies 
and [intellectual property rights].  This policy is also 
implemented through direct or indirect interference by 
Chinese authorities in licensing negotiations between 
Chinese and foreign technology companies.Q 
 
¶34. (SBU) In September 2006, the NPC conducted its first 
reading of the draft Anti-Monopoly Law, legislation which 
has been in the works for nearly 20 years.  On February 27, 
in its 2007 legislative plan, the NPC committed to 
scheduling second and third readings of the draft anti- 
monopoly law this year."  There remain significant risks 
that overly aggressive use of antimonopoly law could impede 
the legitimate and fair protection and licensing of IP 
rights in China.  For example, some agencies, including 
those tasked with protecting intellectual property rights, 
have also held that an intellectual property holderQs 
refusal to negotiate a license is an abuse of its Qmonopoly 
power.Q  Although Microsoft and Intel in particular are 
frequently castigated in the government-run press, the 
greatest impediment to competition in certain industrial 
sectors, such as business software and Internet music 
delivery, may in fact be pirates and infringers.  The 
Mission appreciates the continued active support of USDOJ, 
USFTC and other agencies on the implications of ChinaQs 
Antimonopoly Law on intellectual property rights protection 
and enforcement in China and in promoting the guarantee of 
intellectual property rights as a critical incentive to 
fostering investment and innovation, which promote a 
competitive economy.  Post believes that the overall 
message that patents and IPR are generally Qpro- 
competitionQ has been delivered extremely well, 
notwithstanding defects of current law and policy in China 
and possible risks for the future. 
 
¶35. (SBU) However, post notes that the FTC/DOJ hearings and 
2003 FTC report on intellectual property and competition 
policy continue 
to be cited back to USG and others to justify a range of 
Chinese policies that may be considered anti-IPR.  For 
example, the reportQs critical view towards business method 
and software patents, and the need to improve patent 
quality in those areas has been understood to be a 
criticism of the U.S. having Qtoo liberalQ an attitude 
towards granting patents.  However, this criticism has 
limited applicability to China, which has reportedly 
 
BEIJING 00002101  014 OF 016 
 
 
granted only three business method patents (probably by 
mistake) and restricts granting software patents.  Software 
patents may be especially useful in China as some U.S. 
companies such as IBM have advocated that high quality 
software patents would also have significant value in 
providing another enforcement channel to address rampant 
end-user piracy.  Concerns over poor quality of examination 
of patents also have little relevance to the abusive 
assertion of ChinaQs design patents, which are not examined 
for substance and which are owned on a 10/1 ratio by 
Chinese rights holders.  Lack of deterrence of patent 
infringement in China also makes many of the concerns of 
the report completely irrelevant to China since the costs 
of infringement in China are very low, with damages rarely 
exceeding 500,000 RMB.  Looking at patent examination 
practice, Chinese applicants also suffer no consequences 
for failing to reveal relevant prior art, or for asserting 
claims that have a dubious legal basis against third 
parties.  A cleared position paper on the report that can 
be used in discussions in China would be useful in 
advancing the overall competitiveness and IPR agenda. 
 
¶36. (SBU) The U.S. has recently committed with the EC to 
look further at continuing technology transfer restrictions 
in China.  Apart from the IT sector, ChinaQs technology 
transfer regime has, however, received relatively little 
attention in recent years.  As part of ChinaQs WTO 
accession, WTO member states requested that the terms of 
technology transfer in China Qshould be agreed between the 
parties to the investment without government 
interferenceQ(Working Party Report, Article 48).  Upon WTO 
accession, China issued new technology transfer regulations 
(Dec. 10, 2001).  In practice, China agreed to stop 
requiring QregistrationQ of technology transfer contracts, 
and only require QrecordalQ.  However, registration may 
still be necessary according to local practice or to obtain 
any necessary licenses or approvals for a transaction, such 
as remitting foreign currency.  The U.S. Chamber and others 
continue to urge USG to Qprohibit Chinese authorities from 
directly or indirectly interfering in the negotiation of 
technology transfer and royalty agreements between foreign 
technology companies and their Chinese counterparts.Q (US 
Chamber submission in advance of April 2006 JCCT). 
 
¶37. (SBU) Apart from ChinaQs standards and antimonopoly 
regime, there are also other restrictions in place that 
affect the free transfer of intellectual property and may 
need to be considered in fully evaluating ChinaQs 
compliance with its bilateral and WTO commitments.  These 
include: local Chinese government interference in 
 
BEIJING 00002101  015 OF 016 
 
 
commercial negotiations and supervision of technology 
transfer contracts through QregistrationQ rather than 
QrecordalQ procedures;  compulsory licensing and other 
restrictive regulations in its patent regime; compulsory 
licensing under ChinaQs software protection regulations and 
copyright law for educational materials; mandatory grants 
of improvements to Chinese licensees under the 2001 
technology transfer regulations;  current  restrictions 
over out-bound licensing of Chinese technology; scope of 
confidentiality of clinical data, sample agricultural 
 
SIPDIS 
materials, feasibility studies, or other trade secret 
information provided by rights holders to Chinese 
regulatory agencies; the relationship between ChinaQs labor 
law regarding non-compete agreements and protection of 
trade secrets; and the scope of ChinaQs trade secret regime 
as it applies to fundamental research. 
 
-------------------------- 
What Does the Future Hold? 
-------------------------- 
 
¶38. (SBU) As indicated above, industry generally senses 
that the IPR environment in China has not improved 
significantly in the past year.  Although there have been 
many notable efforts at improving protection, enforcement, 
legislation and other areas, the results have been modest. 
While there is no Qsilver bulletQ to resolving these 
problems, thus far the Chinese government has resisted many 
requests for improvements in its IPR system, including 
increasing resources for criminal enforcement, copyright 
enforcement and trademark examination; strengthening 
administrative enforcement; taking more effective 
structural measures to address local protectionism and 
eyesores such as the Silk Street market in Beijing; 
reducing or eliminating criminal thresholds; and 
modernizing the criminal IPR law.  These frustrations 
undercut ChinaQs argument that it is doing all it can to 
address IPR infringement issues.  Consequently, the Mission 
strongly supports ChinaQs 306 monitoring, and continued 
placement on the PWL at this time, largely because China 
has not effectively deterred the problems and not taken the 
measures that need to be taken. 
 
¶39. (SBU) The Mission also supports an appropriate WTO case 
on IPR in the near future, as part of a coordinated 
approach on IPR issues with China.  These steps should also 
include (a) continuing efforts for a negotiated resolution 
of the case; (b) a focused request for China to identify 
any and all criminal copyright cases it has undertaken 
since WTO accession and requesting case-specific assistance 
 
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on criminal cases; (c) a clear plan for public diplomacy 
within China once the case is initiated; (d) coordination 
with non-stakeholders in the case, including the software 
sector, brand owners, and patent owners; (e) continuing to 
seek common ground with other trading partners to support 
the case; (f) continuing coordinated interagency engagement 
on other issues of concern. 
 
¶40. (SBU) In considering near term strategies, ChinaQs 
threats to withhold or deny other forms of engagement on 
IPR issues if the U.S. files a WTO case needs to be taken 
seriously.  Moreover, there is a significant risk that any 
losses from initiating a case may be imposed on industries 
other than those actively supporting a case.  A WTO case, 
if taken on criminal copyright thresholds, copyright market 
access, or the availability of an effective copyright 
remedy, would only address one aspect of the problem, even 
for the copyright industries.  Certain copyright 
industries, such as business and entertainment software, 
may not have their issues significantly addressed, while 
consumer goods/trademarks and high tech IT industries may 
be left out entirely.  ChinaQs engagement on non-WTO 
issues, such as control over exports of counterfeit goods, 
Internet-copyright protection, cyber IPR crimes, antitrust 
doctrine, and patent policy are occupying an increasingly 
significant position in overall IPR engagement and need to 
be considered as part of an overall strategy. 
 
¶41. (SBU) Finally, it should be noted that certain U.S. 
industries in China oppose a case, since they are either 
not affected by IPR issues or  believe that adequate 
progress has been made and that a WTO case could impair the 
relationships and progress made to date. 
 
¶42. (U) The next cable will discuss IPR enforcement and 
Chinese IPR coordination issues. 
 
RANDT