VZCZCXYZ3855
RR RUEHWEB

DE RUEHGZ #0132/01 0622340
ZNR UUUUU ZZH
R 022340Z MAR 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6942
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHIN/AIT TAIPEI 9466
RUEAUSA/DEPT OF HHS WASHDC
RHMFIUU/DEPT OF HOMELAND SECURITY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJL/DEPTJUSTICE WASHDC
RHMCSUU/FBI WASHINGTON DC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC

UNCLAS GUANGZHOU 000132 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
State for EAP/CM - JYamomoto; EEB - AColeman, JBoger 
State for INL - JVigil 
USTR for China Office - AWinter; IPR Office - RBae; and OCG - 
SMcCoy 
Commerce for National Coordinator for IPR Enforcement 
Commerce for CIsrael 
Commerce for MAC 3204/ESzymanski 
Commerce for MAC 3043/McQueen 
Commerce for MAC 3042/SWilson, JYoung 
Commerce for NWinetke 
LOC/Copyright Office - MPoor 
USPTO for Int'l Affairs - LBoland, EWu 
DOJ for CCIPS - MDubose 
DOJ for SChembtob 
FTC for Blumenthal 
FBI for LBryant 
DHS/ICE for IPR Center - Dfaulconer, TRandazzo 
DHS/CBP for IPR Rights Branch - GMacray, PPizzeck 
ITC for LLevine, LSchlitt 
 
 
E.O. 12958: N/A 
TAGS: ETRD KIPR ECON WTRO PGOV CH
SUBJECT: Guangzhou IPR Update for Special 301 Review 
 
REF: A) STATE 9475, B) 2007 GUANGZHOU 1241 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly. Not for release outside U.S. government channels. Not 
for internet publication. 
 
¶1. (SBU) Summary: Despite a few successes in intellectual property 
rights (IPR) enforcement efforts over the last year, the overall 
climate for U.S. owners of intellectual property (IP) has not 
significantly improved.  Moreover, law enforcement cooperation has 
noticeably deteriorated since the last Special 301 review.  Local 
governments have not fully reengaged with U.S. officials or IPR 
stakeholders since China imposed a virtual freeze on all cooperation 
in summer 2007 after the United States filed a WTO case for chronic 
IP problems in China.  High-volume counterfeit production of 
consumer goods has not abated.  A few enforcement successes in 
combating optical-media infringement have not dented this kind of 
activity.  In addition, enforcement efforts by south China's local 
and provincial governments are inconsistent and often not sustained. 
 End summary. 
 
Government Cooperation 
---------------------- 
 
¶2. (SBU) Government cooperation with China's administrative and law 
enforcement agencies has become a greater challenge in south China 
since the last Special 301 review.  Requests to meet with a few 
administrative agencies, such as the Intellectual Property Office 
(IPO), were frequently approved.  However, meetings with other 
influential agencies, such as the Market Order Rectification Office 
(MORO) and most law-enforcement agencies responsible for IP matters 
were categorically denied.  Most recently, there was a last-minute 
cancellation of a joint IPR seminar, set for March 4, after the 
Chinese insisted that almost all of the costs be born by the USG and 
the U.S. Chamber.  Another noteworthy refusal was the denial of 
meeting requests by Fujian Provincial officials as part of our 
efforts to update the Provincial Review. 
 
Counterfeiting 
-------------- 
 
¶3. (SBU) South China's high-volume counterfeit production of 
consumer products has not abated and some companies report dramatic 
losses.  Procter and Gamble (strictly protect) described losses from 
counterfeiting activities that exceeded one quarter of total revenue 
for the company's China market in 2007.  P&G executives told us that 
the provincial and national governments virtually ignore requests 
for IPR enforcement support.  They estimated that the firm's total 
annual losses exceeded USD 100 million in China alone, with concerns 
that global losses resulting from counterfeit items exported from 
China could be significantly higher.  (Note: it would seem to be in 
the government's interest to crack down on pirating of P&G products 
given the amount of tax revenue provided by P&G sales.) 
 
¶4. (SBU) U.S. manufacturers' brand-protection efforts have been 
stymied in certain municipalities of south China, most notably the 
Shantou area of eastern Guangdong Province.  More than one firm told 
us that threats of violence and a dearth of police support in that 
city have made it impossible for company employees or investigators 
to conduct simple inquiries at local markets and major manufacturing 
districts.  One company identified Foshan in the western Pearl River 
 
Delta area of Guangdong province as another area of concern.  Local 
authorities in other areas, most notably in a major district of 
Guangzhou, did respond positively to firms' anti-counterfeiting 
efforts, including assigning a special IPR investigations police 
unit and other resources to help improve enforcement. 
 
¶5. (SBU) Mattel (strictly protect) complained of extensive 
trademark-infringement activities by unscrupulous manufacturers 
throughout toy-manufacturing centers in Shantou and the Pearl River 
Delta (PRD).  They described many low-end toy makers labeling their 
own products with Mattel brand names and logos, especially for sales 
in third-world countries where actual Mattel products are often too 
expensive for most consumers.  In addition, the firm's executives 
said transshipment of infringing products is another significant 
problem, especially in ports where Customs authority is less 
stringent.  Shippers circumvent Shenzhen and Xiamen ports when 
exporting their counterfeit products because Customs authorities at 
those ports have a stronger track record of cooperating with IP 
owners and detecting counterfeit products. 
 
¶6. (SBU) U.S. high-tech manufacturers also reported substantial 
damage from Chinese counterfeiters.  Two Fortune 500 high-tech 
companies that outsource manufacturing in south China reported both 
counterfeit and trademark-infringement problems on a scale 
previously unseen.  Cisco (strictly protect) received important 
law-enforcement support when U.S. and Chinese authorities realized 
the possible threat to the safety and security of major 
telecommunications networks posed by the purchase and installation 
of counterfeit equipment on both sides of the Pacific.  Chinese law 
enforcement agencies broke up a major counterfeiting ring, seizing 
high-quality fake equipment. The arrests revealed for the first time 
how sophisticated counterfeiters have become.  However, Cisco also 
reported that Chinese law enforcement support slowed significantly 
after this initial success with no new investigative breakthroughs 
for months despite multiple leads and follow-up inquiries from the 
company and U.S. law-enforcement agencies. 
 
¶7. (SBU) Motorola (strictly protect) has had difficulty getting 
local and provincial law enforcement agencies to address trademark 
infringement of their cell-phone headsets and mobile phones.  The 
company conducted thorough multi-month investigations before 
approaching Public Security Bureau (PSB) authorities with complete 
case files and prosecution-ready evidence to request arrests and 
seizure of counterfeit items.  However, the PSB has been 
unresponsive in many jurisdictions.  Motorola executives said the 
firm had more success in attracting PSB attention when it teamed up 
with other major multinationals, such as Sony Ericsson and LG 
Electronics, in targeting large counterfeiting operations. 
 
¶8. (SBU) Nike executives told us that internet-based vendors of 
counterfeit shoes and other products are increasing at an alarming 
rate.  Employing express mail services for delivery, some 
counterfeit vendors now completely circumvent traditional sales 
channels, which are often easier to interdict. 
 
Optical Media 
------------- 
 
¶9. (SBU) Despite continuing large-scale optical-media infringement 
in south China, Microsoft had an important enforcement success in 
July 2007.  Twenty-five suspects were arrested and millions of 
dollars in fake Microsoft software products were seized.  The case 
was the largest of its kind and was conducted jointly by U.S. and 
Chinese law enforcement authorities.  With raids conducted at 
multiple sites in China, they broke up an illegal software 
distribution ring valued at over USD 500 million and distribution 
reaching 27 countries worldwide.  The case is currently awaiting 
referral for prosecution in Shenzhen's PSB. 
 
¶10. (SBU) Separately, U.S. software companies and International 
Federation of Phonographic Industries (IFPI) representatives in 
south China continue to report that enforcement successes hardly 
dent south China's optical-media infringement activity.  They note 
that the problem is exacerbated by increasing use of online 
distribution channels and stores with on site facilities for burning 
optical-media products at the time of purchase.  Consulate visits to 
electronics markets and optical-media vendors revealed widespread 
sales of pirated software and entertainment media in south China. 
In addition, IFPI representatives complained of unchecked online 
distribution of copyrighted material via major Chinese websites such 
as Baidu.com. 
 
Enforcement 
----------- 
 
¶11. (SBU) IPR enforcement efforts by south China's local and 
provincial governments are often inconsistent and not sustained. 
Case transfers, convictions and sentences are applied unevenly. 
Nearly every U.S. IP owner reports coordination problems between 
local and provincial authorities.  IPR enforcement responsibilities 
remain divided among more than seven different government entities, 
with U.S. companies such as Microsoft (strictly protect) continuing 
to routinely "shop around" for action-oriented officials and 
jurisdictions when initiating new cases (ref B). 
 
¶12. (SBU) Several major U.S. manufacturers told us they had been 
successful in working with China Customs to provide 
product-identification training for Customs officers at major ports. 
 However, the cooperation was not region-wide.  Offers to provide 
training were rejected at other important ports like Shantou. 
 
¶13. (SBU) Other companies, including Motorola, DTS and Merit 
Entertainment (strictly protect) have been frustrated in efforts to 
convince administrative agencies like the Administration of Industry 
and Commerce (AIC) or Intellectual Property Office (IPO) to refer 
open cases to the PSB for criminal investigation and prosecution. 
According to U.S. companies, the administrative agencies have 
relatively little power to arrest or seize property, and instead 
rely on administrative penalties such as fines and revocation of 
business licenses as deterrents.  Firms believe these administrative 
penalties have been accepted by counterfeiters as a cost of doing 
business, with counterfeiters simply factoring the costs into their 
business plans. 
 
¶14. (SBU) Motorola (strictly protect) also complained that key 
suspects were released shortly after being arrested without official 
explanation, thereby damaging efforts to prosecute IPR violators. 
Long delays in bringing cases to trial also left Motorola executives 
skeptical about whether the released suspects would face any penalty 
at all for their infringement activities. 
 
¶15. (U) Another enforcement problem reported by nearly all U.S. IP 
stakeholders in south China focused on bureaucratic behavior by 
Chinese IP enforcement agencies.  Several companies commented that 
the PSB would almost never accept an IPR case directly, instead 
referring IP owners to administrative agencies like the AIC and IPO, 
who could later transfer the cases to PSB if they met criminal 
thresholds.  Although Chinese law defines the threshold, actual 
implementation of criminal prosecution is far from certain.  Many 
companies also said the AIC, IPO and other agencies would sometimes 
attempt to stall cases, often claiming that certain types of IP 
disputes could only be handled by particular agencies.  In other 
cases, administrative agencies would forward cases to the PSB, only 
to be rejected or "delayed to death" because of differing 
enforcement priorities, standards of evidence and investigative 
procedures.  In addition, U.S. companies generally agreed that 
sentencing in IP cases had failed to yield a deterrent effect due in 
large part to an increasing percentage of suspended sentences in the 
last year. 
 
GOLDBERG