China's Rocky Road to Computer Software Protection

In China, how software protection should be addressed has always been a controversial issue. In the 1980s, debates within China revolved around whether software that was appearing in China, most of which was made by US companies, should be protected. The final consensus was that although American software companies would become the biggest beneficiaries of software protection in the near future, China's fledgling software industry could not grow without legal protection. At the same time, the protection of intellectual property rights, and especially software copyrights, has been one of the top concerns of the United States in its trade relations with China. In the Sino-US negotiations over IP rights in 1989, China promised to give copyright protection to computer software in the then pending Copyright Law. With the declared legislative purpose centring on the protection of China's own software industry, the old Regulations, drafted by the Ministry and adopted by the State Council, became effective on October 1 1991. On April 18 1992, the Ministry issued the Computer Software Copyright Registration Procedures as supplemental legislation (the 1992 Procedures).

The 1991 Regulations provided the framework for software protection in China, but the protection offered fell below international standards and WTO requirements in many aspects. An example is the requirement of registration as a precondition for legal action and the short protection period of 25 years (although extendable for another 25 years). Following criticism of the legislation by the US and industry interests, the State Council in September 1992 promulgated the Implementation of International Copyright Treaties Provisions, in which foreign computer programs were given protection as literary works, the registration requirement was waived, and the protection period was extended to 50 years.

With the government's commitment to WTO accession, amendment of the 1991 Regulations began in 2000, this time headed by the Legislative Affairs Office of the State Council, together with the National Copyright Administration of China (NCAC) and the Ministry of Information Industry. Wide-ranging consultations with interested parties were undertaken. The process turned out to be one of the most controversial legislative decisions in PRC history. Heated debates over expanding copyright protection of software took place among China's top copyright experts and representatives of software associations, many of whom took part in the drafting of the 1991 Regulations. These included representatives from the judiciary, executives in the information technology industry and informed laypeople. Notwithstanding the controversies, the end result was a drastic promotion of software copyright protection in China, and many changes were made in accordance with China's international commitments. With the issuance of the revised Registration of Computer Software Copyright Procedures on February 20 2002, protection of copyrighted software has been brought to an unprecedented level. Following are some of the most noticeable changes the amendments have made.

Registration

The loosening of government control and interference with the parties' freedom of contract has been one of the trends in the new legislative campaign. The new flexibility is demonstrated in the new Regulations with the change on the registration requirements.

Under both the old and the new Regulations, software registration is applicable on two occasions: i) registration for the software copyright, and ii) registration for software transfer or license contracts. Under the old Regulations, registration of software copyrights seemed to be optional, but in fact was mandatory, because "registration was the premise for taking administrative or judicial actions for disputes over the software" (Article 24 of the 1991 Regulations). Although the Implementation of International Copyright Treaties Provisions of 1992 waived this requirement for foreign computer programs, it was an exception rather than the rule. The 2002 Regulations make software registration truly optional for all foreign or domestic software copyright holders by abolishing the "no registration, no action" requirement. Under the 2002 Regulations, copyright owners have an option to register, for a fee, their software with the NCAC-designated China Copyright Protection Centre. The Registration Certificate shall still be the prima facie evidence of the items registered, but not a necessity for legal actions.

The detailed instructions and procedures for software registration were found in the 1992 Procedures, which were recently amended on February 20 2002 by the NCAC (the 2002 Procedures). The 2002 Procedures incorporate several improvements and other noticeable changes. The NCAC, now officially in charge of software copyright registration, has designated China Copyright Protection Centre as the institution for software registration.

On June 24 2000, the State Council issued the Encouraging the Development of the Software and Integrated Circuit Industries Several Policies (鼓励软件产业和集成电路产业发展的若干政策) (the Policies), in which the NCAC was required to improve the software registration system, encourage the registration of software copyright and give priority protection to registered software.⁶

Under the 1992 Procedures, the standard of review for the application of software registration was non-substantive, and registration would be given so long as the ownership and rights were clear and procedural requirements were met. The 2002 Procedures have adhered to this standard, and made registration of software copyright more convenient for the applicants.

The numbers of registered software in China have increased steadily over the years, and reached a total of over 6,770 by June 2000. The second half of 2000 saw a two-fold increase in registrations. Now, with the improvements made by the new registration measures, we can expect to see another increase in the number of registrations in spite of the changes in the 2002 Regulations that have made software registration truly optional. This is because the applicants now have an incentive, and demand from the market, to register their software. For example, in order for a software company to take advantage of the reduced tax rate and other preferential treatments under the Policies, the company must be certified by the government first; one of the requirements for certification is that the company own at least one self-developed software product. The best proof of the company's satisfaction of this requirement is that the copyright to the software is registered under the company's own name. For this reason, other entities such as venture capital firms, beneficiaries of a security interest in the software, and business and government end users would all want to see such a registration as a safety precaution before making any investments or purchases.

Under the 1991 Regulations, the transferee of software was also required to file for the record with the registration agency within three months after the transfer contract was duly executed. Such registration typically constituted about 10% of all software registrations. The figure has increased dramatically since 2000. Under the 2002 Regulations, registration of the transfer contract has also become optional where both parties are Chinese.

Where the transferor/licensor or transferee/licensee of software is a foreign party, such transfer/license constitutes technology import or export that shall be subject to the PRC Administration of Technology Import and Export Regulations (中华人民共和国技术进出口管理条例), effective January 1 2002 (the Technology Import & Export Regulations). Under such new regulations, technologies are divided into prohibited, restricted and permitted categories, and will be barred or subject to approval or registration by the Ministry of Foreign Trade and Economic Co-operation or its local delegates (MOFTEC) for import and export accordingly. It is worth noting that the effectiveness of a contract for import of permitted technology (such as a software licence) is no longer conditional upon registration with MOFTEC under the new Technology Import & Export Regulations.⁷ MOFTEC is given authority to register rather than approve such contract. Therefore, MOFTEC is not supposed to conduct substantive review or require substantive revision of the contract submitted for registration. MOFTEC is required under the new regulations to register such contract within three days of the complete submission, presumably without overstepping its parameters. This is consistent with legislative intent to promote greater freedom for parties to contract without extensive scrutiny from authorities. However, having been accustomed to conduct substantive review of such contracts, it is expected that MOFTEC officials may continue, in the foreseeable future, to conduct quasi-substantive review and raise objections or require revisions, especially when they believe the terms in the contract are unfavourable to a PRC transferee or licensee.

Duration of Protection Extended

In TRIPS as well as generally accepted international standards, the time span of copyright protection is the author's lifetime plus 50 years after his/her death. The 1991 Regulations fell short of this standard, giving protection to software copyrights for only 25 years, ending on December 31 of the 25th year after the initial publication, and extendable for another 25 years. While the Implementation of International Copyright Treaties Provisions extended the protection to 50 years for foreign computer programs, the new Regulations addressed and solved this problem for everyone. The copyright of software comes into being upon the completion of its development. The protection for copyright of software of one natural person covers the entire life of that person, plus 50 more years after death, ending on December 31 of the 50th year. Where several natural persons develop the software together, the protection for copyright ends on December 31 of the 50th year after the death of the last natural person. Where the software is developed by an organization, the protection for copyright ends on December 31 of the 50th year after the initial publication.

Fair Use and End Users

China has a poor reputation when it comes to protection of intellectual property rights. In part this is a result of the fact that the level of development in China's domestic technology industries is still quite low when compared with more advanced economies. Infringement is particularly serious in the software industry, due to the disproportion between the huge investment costs of software development and therefore the high price of much commercial software, and the very low cost and ease of duplication and distribution of the same products, which are readily available in China. Among the legal community in China, there is an influential and widespread opinion that protection of intellectual property rights should match the stage of scientific and technological development of the country, and the primary goal of IP protection legislation should be the promotion of China's national interests. Great controversies over these issues have arisen, in particular with respect to the topics of fair use and responsibilities of end users.

Fair Use

Under the 1991 Regulations, duplicating "a small amount" of software for non-commercial uses such as classroom instruction, scientific research and discharging official government duties required no consent from, nor payment to, the copyright owners. Under the 2002 Regulations, software can only be used with payment or consent for the purposes of studying the thinking and principles of the software design, through means of software installation, display, transmission and storage. The 2002 Regulations reserve fair use for computer scientists and IT professionals, and preclude any other government bodies, schools or individuals from using computer programs for free without authorization or consent. While foreign software companies will be delighted with the sudden availability of a huge potential market of government and institutional users that is now required to pay to use their software, this amendment was viewed by some vocal opponents to the 2002 Regulations as an unnecessary restriction on millions of otherwise legitimate software users.

The 2002 Regulations, however, are not the first rules that have prohibited the government from using illegal copies of software. As early as 1995, the NCAC issued a notice prohibiting all units (including all government agencies and business entities) from using unauthorized software. This notice was confirmed by the State Council and issued to all provinces and ministries in 1999. In the June 2000 Policies, the State Council again prohibited any government agencies from using unauthorized software products in order to protect the interests of Chinese and foreign copyright owners. To implement the Policies and probably in anticipation of the 2002 Regulations, the NCAC, the Ministry of Information Industry, the Ministry of Finance and the State Development Planning Commission jointly issued a notice in August 2001 that called on government agencies to take the lead in using legal software and directed them to include software expenses in their fiscal budgets. The notice also warns that culpable persons and their supervisors will face disciplinary action should they continue using illegal copies of software after the deadline.

On December 21 2001, soon after the 2002 Regulations were released and before they came into force, the Beijing Municipal Government endorsed and disseminated to all its municipal agencies a proposal from the Beijing Copyright Administration Bureau and four other municipal agencies. The proposal stated that municipal departments are prohibited from using bootlegged software or software without licensed authorization, and are required to uninstall illegal software they have been using. Beijing also required its agencies to include software expenses in their fiscal budgets and, as a penalty for infringement, would withhold budgetary funds in the same amount that they would have spent on the legal copies of the software from those agencies that fail to uninstall illegal software by the deadline.

End Users

Under both the old and new Regulations, end users who do not know the illegality of the software in their possession are not directly liable for damages, but are required to destroy the bootlegged software. While the 1991 Regulations required destruction of bootlegged software only when "the rights and benefits of the owner of the software copyright can not be protected without such destruction", the 2002 Regulations have made this duty unconditional. As a compromise, the 2002 Regulations give the unwitting holder of bootlegged software a choice to pay "reasonable fees" to the copyright owner and continue using the redeemed copy if destroying it would cause the holder serious losses.

More Rights Created

The 2002 Regulations explicitly add two additional rights to make the copyright of software more in line with standard practices in the software industry and also taking into account the use of current technologies.

(1) Licensing, i.e., granting others the right to use the software temporarily for a fee. The 2002 Regulations call this the right to lease. Since the right to licence is not explicitly listed, "leasing" is referred to as "licensing", following the prevailing practice in the software industry.

(2) Information network transmission, which is the right to provide software to customers by downloading from the internet.

Occupational Works

Very often, companies are faced with issues over the copyrights they may claim or secure to the computer software that is developed by their employees or independent contractors.

Article 16 of the Copyright Law contains a general principle that any work created by someone in fulfilling his work assignments in an organization shall be deemed as occupational works, and the copyright shall rest with the individual author of such occupational works⁸ unless one of the exceptions apply (discussed below). This general principle, although not mentioned in the 2002 Regulations, should also apply to the copyright protection of the software developed as occupational works.

According to the same Article 16 of the Copyright Law, the organization shall enjoy all copyrights to occupational works except the authorship right (which, as a personal right, shall be enjoyed by the author) if (i) such occupational works were created using mainly the organization's material, technical resources and facilities⁹ and for which the organization takes responsibility, or (ii) the copyrights to such works shall be enjoyed by the organization according to the laws, regulations or contracts.

Under Article 13 of the 2002 Regulations, the organization shall enjoy copyrights to the software developed by its employees if one of three conditions is met. One condition essentially echoes the first exception under the Copyright Law.¹⁰ The other two conditions require the organization to demonstrate that "the software has been developed by its employees according to the objectives for development clearly set for them in their job performance" or "the software is a foreseeable or natural result of its employees' job performance".

Liabilities

Major amendments to the infringement section include creating new categories of infringements, implicitly adding unwitting end users as infringers, and providing for criminal liability for serious violators.

The 2002 Regulations split into two articles all the infringements that were contained in one article in the 1991 Regulations. Article 23 of the new Regulations includes the infringements for which the infringer can be subject to civil liability.¹¹ Article 23 also contains a catch-all clause covering all other activities infringing software copyright, in order to give the judiciary some room in enforcing the new Regulations.

Article 24 of the new Regulations deals with the more serious violations where the public interest is also endangered, some of which are newly added. They are punishable by means ranging from those for infringements enumerated in Article 23, to confiscation of illegal gains and illegal copies, destruction of illegal copies and fines. Serious offences can lead to confiscation of the equipment and material for infringement by the copyright administration, and ultimately can be punishable by criminal actions.¹² Infringements in this category include the following unauthorized activities, all of which (except for illegal duplication) are newly added by the amendments:

(1) Software Duplication

Opponents of the amendment claim that all end users have been turned into copyright infringers because of the drastic narrowing of the definition of fair use by exclusion of any non-commercial use of unauthorized software. The underlying issue is whether installation of unauthorized software constitutes duplication, which is a clear infringement. It obviously is, but the drafters of the bill would not go so far as calling all unauthorized installation as infringement; instead they came up with the catch-all clause in Article 23 and have left the ambiguity to judicial practices and interpretations.

(2) Publishing, leasing and disseminating software through information networks

This clause is meant to punish internet sites in China that illegally provide commercial software for download as an effort to generate traffic on their websites. The perpetrators, however, may seek to avoid punishment by claiming fair use under its new meaning, and the court will be expected to distinguish transmission and storage for study purposes from illegal transmission.

(3) Intentionally avoiding or destroying technological preventive measures for protecting software copyright.

(4) Intentionally deleting or changing software authorization management information.

(5) Transferring or permitting others to use software copyright.

Burden of Proof on Manufacturers and Distributors of Software Copies

The issue of proof has been one of the most difficult practical problems that claimants of software infringement must overcome. Copyright holders, especially foreign software companies, will typically have only a limited knowledge of the infringer's activities. Sometimes software copyright holders have to undertake extensive detective work in order to obtain proof of infringement. One such example is last year's largest software infringement case, in which Beida Founder sought Rmb3 million damages against its largest agent, Beijing Gao Shu Tian Li Company. The latter allegedly bundled Founder's software without authorization with the commercial laser printing equipment it was selling. In order to obtain hard evidence of infringement, Founder sent an employee to the infringer's offices. With a public notary waiting outside, the employee entered the premises disguised as a prospective client and spent over Rmb400,000 to purchase the package that included the alleged infringing software. The employee then immediately gave all the equipment and accompanying documents to the public notary outside for verification.

Under the 2002 Regulations, such an involved and time-consuming exercise can be avoided. The new Regulations explicitly put the burden of proof for legitimacy of software copies onto the manufacturer and distributor. Publishers and manufacturers of software copies who cannot show proof of legitimate authorization, or distributors and lessors of software copies who cannot provide a legal source, shall be held liable for infringement.

Damages and Fines

The 1991 Regulations did not give clear numerical guidance for damages or fines. The new Regulations have clarified this issue. For guidance on compensation to copyright owners, the new Regulations point to Article 48 of the revised PRC Copyright Law (中华人民共和国著作权法), which stipulates that compensation should be equal to the actual losses of the copyright owner (or the illegal gains where the actual damages cannot be determined), or an amount to be determined by the court that does not exceed Rmb500,000 where the damages cannot be determined or assumed, plus the copyright owner's reasonable costs for stopping the infringement.¹³ In addition, for Article 24 infringements, a fine (to be paid to the government, not to the copyright owner) can also be imposed. This can range from Rmb100 per piece or an amount up to five times the software value for less serious offences, to an amount of no more than Rmb50,000 for more serious cases.

The 2002 Regulations are commendable for recognizing the copyright that governs software use, imposing damages and prescribing monetary punishments for infringement. However, the new Regulations as a whole are not adequate and do not compare favourably with world standards. The caps of Rmb500,000 in compensation and Rmb50,000 in fines are hardly sufficient compensation to a software copyright owner or sufficient deterrent for a serious infringement undertaken by a big enterprise. More regrettably, the new Regulations stop short of awarding punitive damages to copyright owners to deter and punish infringements. This is in line with China's traditional attitudes and judicial practices, which have never favoured the idea or enactment of punitive damages. Nonetheless, the principle of full compensation that is followed by China's legislative and judicial practices in general is believed to satisfy the TRIPS requirement of minimum protection. Article 45 of the TRIPS states that the infringer can be asked to pay damages "adequate to compensate for the injury the right holder has suffered", plus attorney's fees.

New Pre-trial Relief

The substantial revision of the PRC Copyright Law (中华人民共和国著作权法) gives the plaintiff alleging copyright violations several forms of pre-trial relief in Articles 49 and 50, and the new Regulations specifically make them available for software infringement lawsuits. The copyright owner of the software can now petition the court for preliminary injunctions for "Desisting from Infringement and Property Preservation", where the plaintiff has evidentiary proof that infringement is already occurring or is impending, and will cause irreparable harm to his legitimate rights if not stopped immediately. The owner can also petition for preliminary injunctions on the grounds of "Evidence Preservation", where the evidence is likely to be lost and will be difficult to be re-obtained.

Enforcement

Enforcement of pre-existing legislation has been one of, if not the, weakest of links in China's legal system. Unfortunately, China's new Copyright Law and the new Regulations have not improved the traditional shortcomings in enforcement provisions, and rely like much other legislation too much on good intentions and not enough on stringent deterrents to illicit activity. Detailed implementation of the 2002 Regulations will still be difficult, as proving facts with concrete evidence will be the hardest hurdle to overcome. Controversies will arise regarding damages, standing and procedures. And, like everywhere else in the world, enforcement on the individual level will remain strongest in theory, not in practice.

The Supreme People's Court Interpretations

The latest Supreme Court Interpretations address some of the issues raised in the substantive copyright laws and regulations. For example, with respect to "commissioned work",¹⁴ copyright will rest with the commissioned party where the contract so stipulates, where there is no contract or where the contract is unclear. However, the commissioning party shall have the right to use the work within the stipulated scope of the contract.

More importantly, the Supreme People's Court Interpretations also clarify the courts' administration on handling copyright infringement cases. Below are a few points worth mentioning:

• the trial court will be the Intermediary People's Court;
• if the court tries a copyright infringement case that has already been handled by the Copyright Bureau in administrative proceedings, the court shall still make full investigations into the facts;¹⁵
• if the plaintiff wishes to bring a single action against multiple co-defendants, the plaintiff has a choice to file the suit with one court at one location where one of the co-defendants has committed the infringement;
• burden of proof on publishers/distributors of the lawful source of the copyrighted products under the 2002 Regulations is reconfirmed;
• anyone using software in a commercial manner without permission or beyond the licensed scope shall be held liable for copyright infringement subject to liabilities under the Copyright Law and 2002 Regulations;
• statute of limitation for bringing an action for copyright infringement is two years from the date when the copyright holder knows or should have known about the infringement;
• damages recoverable for copyright infringement include expenses and legal fees based on standards set by the government.

Endnotes

1 Promulgated by the Standing Committee of National People's Congress on October 27 2001, and effective as of January 1 2002.

2 Hereafter the Software Regulations will be referred to as either the old or 1991 Regulations (when discussing provisions of the original law), or the new or 2002 Regulations (when referring to changes made to the 1991 Regulations in the newly effective Regulations).

3 Promulgated by State Council on August 2 2002, and effective as of September 15 2002.

4 Issued by the Supreme People's Court on October 12 2002 and effective as of October 15 2002.

5 This ministry was disbanded in 1998 in an institutional restructuring, which gave rise in part to the Ministry of Information Industry.

6 For a more detailed discussion of the Policies, see Tang Zhengyu and Beth Bunnell, "New Software and Integrated Circuit Incentives Bolster Hi-tech," China Law and Practice September 2000, 14 (7), pp. 44-47. See ibid, pp. 48-57 for a full text translation of the law.

7 However, registration with MOFTEC and NCAC is still required for other purposes such as remittance of royalty in foreign exchange to the offshore transferor or licensor. To effect the MOFTEC registration, the contract information must be registered preliminarily at a government designated website (via http://info.ec.com.cn), followed by a written submission to MOFTEC including the following: application letter for Technology Import Contract Registration; duplicate copy of the contract; and transferor and transferee's legal status certificates. Against the contract, MOFTEC will register and verify the following information: contract number; contract name; technology supplier; technology recipient; technology user; general information about the contract; contract fee/price; payment method; foreign exchange settlement method; and credit method.

8 However, the organization shall have priority rights to use the occupational works within its business scope and the author shall not licence such works to any third party without the consent of the organization within two years from his completion/delivery of the occupational works.

9 Article 11 of the Copyright Implementing Regulations shed some guidance on the meaning of "material, technical resources and facilities" to denote funds, equipment or materials provided exclusively by the organization for the completion of the works.

10 The second exception under the Copyright Law, which is extremely important for organizations to secure their copyrights to the software developed by their employees as occupational works, should presumably also be applicable to copyright protection of software even though it is not mentioned in the 2002 Regulations. Therefore, an organization should always be able to remove any doubt about who owns the copyrights to the software developed by its employees as occupational works through contractual stipulations.

11 The infringers can be ordered to cease the offending activity, apologize and compensate for the financial losses sustained by the infringed parties.

12 Part 3 Section 7 of Division Two of the PRC Criminal Law deals with crimes that violate IP rights. Manufacturing computer software without authorization is punishable by imprisonment of between three and seven years for extremely large illegal gains or other extremely aggravating circumstances, and knowingly selling bootlegged software is punishable by imprisonment for up to three years where the illegal gains are extremely large.

13 According to the Supreme People's Court Interpretation, the People's Court may include as part of compensation the attorney's fees that are in compliance with the standard set by the relevant government authorities.

14 As provided for in Article 17 of the Copyright Law and Article 11 of the 2002 Regulations.

15 This is a positive direction in making the judiciary system more independent from any administrative bodies as it is implied that courts cannot just rely on the administrative authority's findings or decisions.