China: World Trade Organization: 2009 China Decisions Break Important Ground

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on International Trade & Investment–China Focus, December 2009

In 2009, two World Trade Organization (WTO) Panels issued decisions in cases to which China was a party. Both cases were initiated by the U.S. in April 2007. The first relates to Chinese measures relating to the protection and enforcement of copyrights in China, which the U.S. alleged violate intellectual property rights under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The second involves measures relating to the importation and distribution of films, Audiovisual Home Entertainment products (AVHE products), sound recordings and publications. The U.S. alleged that these measures violated Chinese commitments under the General Agreement on Tariffs and Trade (GATT), the General Agreement on Tariffs in Services (GATS), and China's Accession Protocol. This article provides a brief overview of both cases.

INTELLECTUAL PROPERTY PROTECTION S REGARDING COPYRIGHT

In the first case, Measures Affecting the Protection and Enforcement of Intellectual Property Rights, the U.S. challenged several aspects of China's intellectual property laws. The U.S. led a three-pronged attack, alleging that aspects of Chinese copyright law, customs law and criminal law violate obligations under TRIPS. The impugned copyright measures involve laws that protect rights only in those works that are authorized for publication or distribution by the Chinese government. In some cases, works are subject to a content review prior to authorization, which review is to protect the Chinese public from offensive material. In its January 2009 decision, the Panel found that this part of China's copyright law was inconsistent with certain of China's obligations. Specifically, Article 5(1) of the Berne Convention (1971), which is incorporated by Article 9.1 of TRIPS, requires the provision of rights to authors in countries other than the country of origin, and that these rights should be equal to those in the country of origin (in addition to any rights required elsewhere in the Berne Convention). The Panel held that Chinese copyright law did not protect the rights of foreign copyright holders in this way. Additionally, the Panel found that these measures constitute a violation of Article 41.1 of TRIPS, which requires parties to make enforcement mechanisms available for breaches of intellectual property rights under TRIPS.

The U.S. challenged Chinese customs measures as violating Article 59 of TRIPS, which requires parties to give authorities the power to destroy or dispose of infringing goods. The U.S. challenged measures respecting the auctioning by Chinese authorities of infringing goods seized at the border after the infringing trade-mark is removed from the item. The Panel held that Article 59 is not applicable to those measures related to goods destined for export. However, the Panel held that the Chinese measures were inconsistent with Article 59 insofar as simply removing an infringing trademark is not generally sufficient to then lawfully releasing the goods into the stream of commerce.

The U.S. also alleged that Article 61 of TRIPS, which requires parties to provide criminal sanctions for all commercial-scale copyright piracy and willful trademark counterfeiting, was breached in that the criminal offences in Chinese law for violations on a commercial scale were insufficient to satisfy China's obligations under TRIPS. The Panel rejected this argument stating that the U.S. had not met its burden on this point. In the course of this decision, the Panel did give guidance on how to determine whether a criminal threshold is appropriate in the circumstances. Thresholds cannot be set so high as to be divorced from commercial reality. Moreover, to determine what constitutes a "commercial scale", one must consider the product being sold and the market it is being sold in. Technological advances and the evolution of marketing practices must also be considered.

RIGHTS REGARDING DISTRIBUTION OF AUDIOVISUAL PRODUCTS

A WTO Panel issued a second decision involving China in August 2009. In the case of Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, the U.S. alleged that various Chinese restrictions on the importation and distribution of U.S. films, AVHE products, sound recordings and publications violate provisions of the GATT, GATS, and the Accession Protocol. The Panel found that China had indeed breached some of its obligations under these provisions. Restrictions on the distribution of publications, AVHE products and music were held to violate Arts. XVI and XVII of GATS, which require treatment no less favourable than that accorded to domestic suppliers, unless otherwise set out in the GATS Schedule. Moreover, restrictions on the distribution of foreign publications were found to violate the national treatment requirements under GATT. Finally, China was found to have breached parts of the Accession Protocol to which it agreed when joining the WTO in its prohibitions on the rights of foreign companies to import films, AVHE products, publications and sound recordings.

The Panel did not accept all of the claims by the U.S. In particular, the U.S. had argued that China violated national (i.e., non-discrimination) treatment obligations under GATT in that only two companies distribute U.S. films in China, whereas domestic films are distributed by numerous companies. The Panel recognized that there was no explicit requirement in Chinese law that foreign filmmakers use only two distribution companies. The Panel suggested that foreign companies could use other existing distributors, or apply to create new ones. The U.S. also argued that this same provision of the GATT was violated by measures which allegedly discriminated against foreign suppliers in relation to the digital distribution of sound recordings, such as distribution over the Internet. The panel held that the U.S. had not shown that the products were "like products". Specifically, the Panel ruled that insufficient evidence had been led to show that music distributed over the Internet was a "like product" to the imported hard copies.

China had argued a defence under Art. XX of the GATT, which allows for measures that would otherwise offend GATT requirements where the measure is necessary for the protection of public morals, among other things. The Panel did not accept this argument, finding that the measures were not "necessary". Interestingly, the Panel refused to rule on whether this defence was available for breaches of the Accession Protocol, or was limited to breaches of GATT. Both China and the U.S. have appealed this decision. The Appellate Panel's report is expected at the end of December 2009.

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