Cablegate: Chengdu Ipr Judge On Foreign Company Challenges, Local Court

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OO RUEHGH
DE RUEHCN #0023/01 0281256
ZNR UUUUU ZZH
O 281256Z JAN 10
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3716
INFO RUCPDOC/USDOC WASHDC IMMEDIATE 0057
RHMFIUU/DEPT OF JUSTICE WASHINGTON DC
RUEHOO/CHINA POSTS COLLECTIVE
RUEHCN/AMCONSUL CHENGDU 4439

UNCLAS SECTION 01 OF 03 CHENGDU 000023

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DEPT FOR EAP/CM
DEPT PASS TO USTR

E.O. 12958: N/A
TAGS: ECON EIND ETRD EINV PGOV KIPR KJUS CH
SUBJECT: CHENGDU IPR JUDGE ON FOREIGN COMPANY CHALLENGES, LOCAL COURT
STRUCTURE

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1. (U) This cable contains sensitive but unclassified
information - not for Internet distribution.

2. (SBU) SUMMARY. Effective intellectual property rights (IPR)
enforcement is a continuing challenge for judges and attorneys
in Southwest China, according to a sitting judge on Chengdu's
IPR court and a former-judge-turned-attorney. While asserting
China's IPR laws had significantly strengthened, both agreed
that enforcement remains challenging, citing difficulties both
in proving losses, and in collecting damages against Chinese
companies that can quickly hide assets. Neither believed that
foreign companies are at a disadvantage in China's legal system,
but stated that they often face difficulties understanding
Chinese law and procedure. Chengdu's court structure includes
specialized IPR judges in two district courts, as well as at the
intermediate and high court levels. While the sitting judge
stated that all IPR decisions are posted on the Internet, a
review of the relevant sites indicates only a portion are
posted. END SUMMARY.

3. (SBU) On January 6, Consul General, EconOff, and ConOff met
to discuss IPR enforcement in Southwest China with Chen Ruizi, a
sitting judge on one of Chengdu's intellectual property courts,
and Wu Tao, an attorney with a Chinese law firm and a former
judge of Chengdu's intellectual property court from 2003 to 2007.

Problems with Enforcement of Chinese IPR Law

--------------------------------------------

4. (SBU) Chen and Wu both asserted IPR laws in China had
steadily strengthened, but acknowledged that enforcement
remained a challenge. Wu highlighted that proving a connection
between IPR infringement and a defendant's illegal gains is the
biggest challenge faced by plaintiffs in order to collect actual
damages. There are no regulations on how to submit expert
evidence on this issue, he noted. Thus, the courts are more
likely to rely on statutory fines, which do not require a
determination of damage, but are capped at 1 million RMB (USD
147,059). (Note: This amount was recently doubled from a cap of
500,000 RMB. End Note.)

5. (SBU) Even when damages are assessed, noted Chen, collection
is likely to be difficult. Chinese law stipulates that an
infringing company must be left with sufficient assets to
continue operations after payment of damages. If they regard
the amount as too high, the infringer will often simply transfer
most of the company's assets to third parties or shell
corporations, leaving the infringing company with just enough
capital to continue operations. As a result, the Chengdu courts
have a large backlog of open enforcement cases on their docket.

6. (SBU) Nevertheless, our interlocutors expressed optimism that
needed changes in China's IPR legal system to strengthen
enforcement were gradually being made. Wu cited the Supreme
Court's recent decision to double the statutory ceiling for IPR
infringement fines as a demonstration of greater commitment to
enforcement. (See para 4 above.) However, they did not provide
any additional concrete examples of how enforcement was being
improved.

7. (SBU) Rather, they highlighted the importance of other legal
routes for resolving IPR cases. In fact, said Chen, alternative
dispute resolution is often more effective. About 70-80 percent
of IPR cases before her court end up being settled through
mediation or arbitration before final judgment, a trend she
encourages. However, Chen admitted, enforcement of settlement
agreements is also a problem.

8. (SBU) Chen and Wu also stated that procuratorates in the area

CHENGDU 00000023 002.2 OF 003

were now more willing to bring criminal IPR infringement cases.
Facing the possibility of jail time may be a more powerful
disincentive for would-be violators than fines, they noted. Wu
mentioned a criminal trade secret infringement case, just
concluded in Chengdu, which resulted in the imprisonment of the
Japanese defendant. The defendant allegedly shared trade
secrets from his employer, a Japanese company, with a Chinese
company.

Foreign Litigants in Chinese IPR Cases:

No Discrimination, but Lack Understanding of Chinese Law

--------------------------------------------- -----------

9. (SBU) Both Chen and Wu asserted that foreign companies are
not discriminated against in cases against local companies in
Chinese courts. According to Wu, there have been about 100
cases involving foreign companies in Chengdu's Intermediate
Court over the last 5 years. Wu specifically cited cases
brought by Dunhill, Adobe, Puma, and Monolithic Power Systems
(MPS, an American/Chinese manufacturer of integrated circuits).
In a follow up memo, he noted that, since 2002, more than 30 of
these cases have involved American plaintiffs, most of whom won
their cases.

10. (SBU) Both complained, however, that foreign litigants often
do not have a good understanding of Chinese law or procedures
and, as a result, are less effective in pursuing their cases.
For example, Chen stated that accusations against a plaintiff
that has infringed two patents must always be filed as two
separate cases, however closely linked. The same concept
applies to contracts - companies can only enforce one contract
in one lawsuit, and must file a different lawsuit to enforce a
second contract. Chen said she is currently handling a case
brought by an American company involving two contracts, and thus
requiring two cases in the Chinese courts. However, the
plaintiff has so far been very resistant to dividing them, she
said. Wu also noted that foreign companies often do not follow
the correct procedures in the submission of evidence. Moreover,
foreign companies' bias toward the witness testimony, which is
not regarded as well as documentary evidence in Chinese courts,
may weaken their cases in eyes of Chinese judges, he said.

11. (SBU) Separately, Wu and Chen stressed the need for US
companies to educate the relevant authorities to increase their
ability to assist in IPR enforcement. According to Wu, Chinese
law allows customs officials to seize IPR-infringing products to
prevent their export from China. However, American companies
must educate the customs officials to show them which company is
the legitimate right-holder, and how to spot counterfeit
products. (Note: Wu's comments echoed statements made by Elliot
Papageorgiou, an IPR attorney with Rouse & Co., during a
European Chamber of Commerce event in Chengdu in October 2009.
Papageorgiou stated that customs enforcement can be a powerful
tool for IPR enforcement. However, companies must first record
their rights with customs officials, which can take up to 12
months to process, and then train customs officials on how to
identify infringing products. End Note.)

Chengdu Courts' Resources to Address IPR

----------------------------------------

12. (SBU) According to Chen, two district courts in Chengdu, the
Wuhou District Court and the court in the Chengdu High-Tech
Zone, have specialized IPR divisions. In addition, both the
intermediate and high courts in Chengdu include specialized IPR
courts. Most of these are at the intermediate level; Wu later
confirmed that there are 16 judges and three staffers working in
Chengdu's specialized intermediate-level IPR courts. (Note: Wu
reported that the entire intermediate court system in Chengdu
has a total of 178 judges and 206 support staff. End Note.)
Chen reported that her court deals with a variety of IPR cases,

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including patent cases (especially patent design cases), unfair
competition cases, internet-based IPR cases, biotech cases,
cases involving new plant species, and circuit board IPR
protection. She individually handles about 70 IPR cases a year.

13. (SBU) Comment: The numbers cited by Wu point to the low
number of support staff assigned to IPR judges in the
intermediate courts (three non-judicial staff members for 16 IPR
judges) and suggests that Chengdu's IPR judges engage in much
more of the clerical work for their cases than their colleagues.
Chinese judges in general already must manage much of the work
that is normally done by support staff and law clerks in the
United States. End Comment.

Some IPR Decisions Posted on Internet, But an Incomplete Record

--------------------------------------------- ------------------

14. (SBU) Chen stated that all of Chengdu's IPR court decisions
are posted on two websites, both on the Chengdu Intermediate
Court's website, and a website for China-wide IPR decisions.
However, Wu admitted that he had not posted his decisions on the
website during his tenure as a judge from 2003 to 2007, and
doubted that all of the decisions of the court were posted
online. Reviewing the websites later, we found that the Chengdu
intermediate court had most recently posted 24 cases for the
third quarter of 2009, which appears to be a low number relative
to their likely total case load. Chengdu's courts, however, are
well ahead of the national IPR website, where the most recent
case to be posted dates to October 2008. (See
http://cdfy.chinacourt.org for
Chengdu and http://ipr.chinacourt.org
for national IPR court decisions.)
BROWN

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