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On Guard for Intellectual Property

Intellectual property rights (IPR) protection that was highlighted during President Hu Jintao's four-day trip in April to the United States. As China shifts from being a world manufacturing centre to an innovation-based consumer society, with greater entreprenurial and innovative business activities and even more foreign investment, dealing with IPR issues is something that can no longer wait.

While each business in China, whether foreign or domestic, has specific obstacles it must overcome to achieve success in the market, one issue that is emerging as a concern of all, whether artists, movie-makers, software engineers or heavy equipment manufacturers, is intellectual property rights (IPR) protection.

The issue is in the headlines these days thanks to Pfizer Incorporated's high-profile victory in a lawsuit it filed against a dozen Chinese companies in China for violating its patent rights to Viagra, a drug used to treat impotence.

The verdict, announced by the Beijing No. 1 Intermediate People's Court on June 2, overturned a ruling by the patent review board of the State Intellectual Property Office (SIPO) in 2004. That ruling had invalidated Pfizer's Viagra patent rights, in response to petitions filed by Chinese drug makers. The long-awaited decision came a year and three months after the first hearing was held in March 2005.

Observers said the verdict indicates China's determination to improve its track record with regard to IPR. The ruling followed another in Shanghai in December 2005 when a judge ruled against a Chinese company that had adopted the Chinese name of the US coffee chain Starbucks and a logo similar to that of the US firm. The local company was ordered to stop infringing on Starbucks Corporation's copyright and to pay compensation of 500,000 yuan (US$62,500) to the US company.

Paul Fitzhenry, a spokesman for Pfizer, said of the Beijing ruling: "We welcome the court's decision; it reflects China's commitment to creating an effective patent-protection environment and boosts the confidence of the business community in China as an investment location."

The Pfizer ruling was seen as a landmark case to test China's willingness to protect the patents, copyrights and trademarks of foreign companies operating in China.

The rampant piracy of products from Gucci handbags to Microsoft softwares has provoked exasperation among the country's trading partners. Accordingly, China, one of the world's fastest-growing markets, has put IPR protection high on its agenda.

Chinese President Hu Jintao pledged to step up protection of intellectual property rights when he met with Microsoft Chairman Bill Gates during the first stop of his US visit in April. Hu's meeting with Gates in Seattle was to give overseas investors and firms confidence in China's determination to crack down on intellectual property violations and to strengthen their understanding that piracy can be limited through the consistent efforts of the Chinese Government.

"China is firm about protecting IPR and fighting piracy," Hu told a luncheon attended by around 600 government and business leaders on the second day of his first official US visit. "We will continue to improve the legal regime for IPR protection, step up law enforcement and crack down hard on IPR infringement to protect the lawful rights and interests of foreign IPR proprietors in China in accordance with the law."

To coincide with Hu's official visit, senior executives from Lenovo Group Limited and Microsoft Corporation signed what Lenovo Chairman Yang Yuanqing called "the largest intellectual property agreement" this April at Microsoft headquarters. Under the agreement, which involves some U$1.2 billion over the next 12 months, the two companies will join hands to promote the use, and benefits, of genuine Microsoft software products in China, as well as in some 65 countries and regions around the world. In China alone, this involves about US$200 million.

Microsoft's Gates said, "Microsoft commends Lenovo for recognizing the importance of intellectual property rights and the value of genuine software. We will continue to work with Lenovo and other industry partners to ensure that customers get the greatest value and performance from their PCs."

Prior to Hu's visit, the government announced that China has adopted regulations recently that computers made in China must be pre-installed with legitimate operating systems and imported computers sold in China must be pre-installed with legal operating systems.

To root out pirated software in its offices, Chinese Government will allocate up to 150 million yuan (US$18.7 million) for legitimate software purchases for government computers, according to Wang Ziqiang, spokesman for the State Copyright Bureau. China is also working hard to promote legitimate software use in enterprises, especially in State-owned firms where the government has more control.

Minister of Commerce Bo Xilai, while meeting European Union Trade Commissioner Peter Mandelson said that the country has strengthened its enforcement of IPR protection laws and has launched campaigns against violations at wholesale and retail markets.

"IPR claim centres are being set up across the country to help protect the interests of foreign companies," Bo said, adding that the nation is willing to strengthen cooperation with the EU in this regard.

Mandelson welcomed China's progress in IPR protection. He said protection and enforcement of IPR are “probably the most important issue in Europe's relations with China."

Landlords of Silk Street, a major Beijing retail market on Chang'an Avenue, signed a memorandum of understanding on IPR protection with European fashion and sportswear brands to crack down on infringements on June 8. According to the memorandum, if a vendor is found selling counterfeit goods, the landlord will suspend its operation; and its lease will be terminated if the offence is repeated.

This May, the China General Administration of Customs and the US Trade and Development Agency signed a cooperative agreement on IPR protection in Beijing. According to the agreement, IPR protection experts from the two countries will provide advice to China's customs staff concerning international customs rules and regulations, rules and laws concerning IPR protection in China and the US and IPR professional knowledge. Delegates representing commercial groups in the United States will also have chance to hold talks with Chinese customs staff workers to exchange views on IPR protection. Other IPR protection agreements, including research on related regulations and staff training have been reached.

But China's strategic moves concerning IPR protection do not stem from outside pressures only. The Communist Party of China has included innovation into its 11th Five-Year Programme (2006-2010) and it regards IPR protection as a key to innovation, which is considered crucial to transforming China into a nation of innovation.

Speaking in Redmond, Washington, President Hu said, "Regarding IPR protection, it's not only needed by China as it opens up more to the outside world and improves the investment environment, it is also needed as we strengthen our innovation ability."

A bad IPR situation has become an obstacle to innovation for Chinese companies, whether software or consumer product-makers, movie-makers and intellectuals of all kinds. IPR protection must precede innovation, said Ren Zhengfei, president of Huawei Technologies Company Limited, which is well-known for research and development in China. The real victims of bad IPR protection will be Chinese companies with innovation potential, instead of their western counterparts, said Ren.