New Criminal Liability Standards for IP Crimes, Part II: Copyrights, Trade Secrets and Patents

That said, industry associations (including the International Intellectual Property Alliance (IIPA)), have widely criticized the interpretation for its failure to address a number of critical barriers to criminalization of copyright disputes.

In recent comments posted on the IIPA¡¦s website (www.iipa.com), industry groups have also lamented fundamental problems in the PRC Criminal Law itself. These principally include the absence of provisions in the Code facilitating prosecutions of wholesale and retail sales of pirated works and the requirement that infringers be found to have acted ¡§for-profit¡¨ (wei ying li de mu di).

Concerns have also been expressed regarding the lack of provisions in the new interpretation confirming its applicability to sound recordings, as well as for unauthorized rental, exhibition, performance, and other uses of works not otherwise mentioned in the Criminal Law. Even if the gaps in the Criminal Law and judicial interpretation were to be eliminated, local and foreign copyright owners would still suffer from the lack of political support for criminalization of copyright violations. As in most countries where piracy is rampant, the key challenge in China in the coming years will be for the appropriate central government authorities and industry (both local and foreign) to convince local police and prosecutors to accept a greater number of copyright cases and at the same time increase the deterrent impact of civil and administrative remedies.

The concerns of industry regarding both legal barriers and political commitment to criminal enforcement are likely to become the main bones of contention during upcoming consultations between the Chinese and US governments. As noted in the February edition of CLP, the entire thresholds approach to criminal liability for copyright and trademark offences dictated by the Criminal Law and the new judicial interpretation raises legitimate concerns over China¡¦s compliance with Article 61 of the TRIPs Agreement (requiring access to criminal enforcement for piracy and counterfeiting on a ¡§commercial scale¡¨). The legal barriers to prosecution of resellers and other infringers also raise questions as to China¡¦s compliance with Article 41 (requiring effective and deterrent enforcement), as well as other provisions of TRIPs. But the political appetite of industry and foreign governments to pursue a WTO dispute will probably depend in large part on China¡¦s willingness to allocate greater police resources to anti-piracy, and not just its willingness to plug holes in relevant laws and judicial interpretations.

Reproduction and First Distribution of Copyright Works

Criminal enforcement of copyrights is governed mainly by Articles 217 and 218 of the PRC Criminal Law.

Article 217 provides for jail terms up to three years and/or criminal fines for the copying or first distribution of copyright works (fu zhi, fa xing)¹ subject to satisfaction of one of two basic conditions: the infringer¡¦s illegal profits (fei fa suo de) are deemed to be ¡§relatively large¡¨ or the ¡§circumstances [surrounding the infringement] are serious¡¨. Jail terms of between three and seven years and criminal fines are applicable if the infringer¡¦s illegal profits are ¡§huge¡¨ or the ¡§circumstances are exceptionally serious¡¨.

The new judicial interpretation attempts to explain how each of these standards can be satisfied, mainly through three types of numerical thresholds: those based on a measurement of the infringer¡¦s ¡§illegal income¡¨ (fei fa suo de) (a term understood to correspond to net profits), its ¡§illegal business amount¡¨ (fei fa jing ying e) (the value of items seized and previously sold), and unit sales.

The new thresholds for reproduction and first distribution are outlined in the table below.

The method for calculating illegal business amounts for copyright cases is the same as that used for trademark counterfeiting cases. As noted in the previous article, this method is not altogether clear.

Sales of Copyright Works

The above provisions interpreting Article 217 of the Criminal Law clearly apply to cases involving parties that reproduce or are otherwise responsible for the first distribution of items violating copyright. Liability for re-sellers (xiao shou) is set out in Article 218 of the Code, which imposes liability up to three years and/or a fine for parties that knowingly sell infringing works, and provided the illegal profits generated are found to be ¡§huge¡¨. The new interpretation establishes a threshold for these purposes of RMB 100,000 (US$12,100) for individual offenders and RMB 300,000 (US$36,300) for enterprise offenders.

Regrettably, the Criminal Law does not provide other standards for criminalization apart from an assessment of infringer profits. In the absence of other criteria ¡X such as the language concerning ¡§other serious circumstances¡¨ in Articles 213 and 217 ¡X the new interpretation provides no other clear basis for prosecuting vendors of pirated works.

In practice, both IP owners and enforcement authorities have found it extremely difficult to generate evidence of the illegal profits of most infringers. In almost all cases, infringers either do not keep complete records of their transactions or they keep them well hidden. Thus, unless there is evidence that a vendor is somehow responsible for production or first distribution of the pirated item and thereby liable under Article 217 of the Code, criminal prosecution for copyright infringement by most vendors will likely remain impractical under the new interpretation.

In the past, Chinese prosecutors and courts have normally pursued resellers of pirated works under Article 225 of the Criminal Law, which prohibits ¡§illegal operations¡¨ in regulated industries ¡X including software, DVDs, and books. Under prosecution guidelines issued in 2001 by the SPP and Ministry of Public Security (MPS), action under Article 225 may be pursued where an individual has dealt in just 500 or more units of such items. However, Article 225 of the Criminal Law is vague on its face, and it is consequently considered by some observers (including the author) to raise human rights concerns.

Regardless, industry is now awaiting clarification whether it can effectively be relied upon to deal with resellers, as there is no question whether the 2001 prosecution guidelines remain valid following issuance of the new interpretation.

Unlike provisions regarding the sale of counterfeits, the new interpretation fails to clarify whether constructive knowledge is sufficient to satisfy the mens rea requirements for vendors of pirated goods under Article 218. Local courts are permitted to apply the relevant trademark provisions to copyright offenses by reference, but whether they will do so in practice remains to be seen.

Network Infringements

The new interpretation explicitly confirms that the dissemination of a work through an ¡§information network¡¨ will be regarded as a form of reproduction and distribution¡¨ under Article 217 of the Criminal Law. This provision should accordingly be useful for pursuing parties that distribute copyright works through the Internet.

Article 217 requires that offenders be found to have acted ¡§for profit¡¨, and the new interpretation clarifies that websites that generate revenues through advertising would satisfy this requirement. However, it would appear that an infringer who engages in file sharing or other dissemination of copyright works through the Internet, and thereby causes enormous harm, would not be criminally liable without other evidence that he intended to generate profits from the infringement.

End-User Liability

The new interpretation does not clarify whether unauthorized use of software by end users violates the Criminal Law. Presumably, a corporate enduser that uses over 5000 copies or an individual using over 1000 would risk criminal prosecution based on the new provisions.

Repeat Offenders

As with trademark counterfeiting offenses, the new interpretation permits the aggregation of ¡§illegal business amounts¡¨ where an infringer has been the subject of multiple administrative actions, provided that no administrative penalties have been imposed for the earlier violations.

The new interpretation is also silent as to whether a copyright infringer who has previously been the subject to two or more administrative penalties may be prosecuted upon a third or subsequent violation. Such a provision appeared in the 1998 judicial interpretation on copyright offenses, as well as the 2001 prosecution standards on counterfeiting offenses, and its absence in the new interpretation suggests the intent of the SPC to eliminate the rule entirely.

Indeed, some SPC judges have recently indicated that, in the course of soliciting input from regional judges on the draft of the interpretation, there was strong objection to a repeat-offender rule. Many judges expressed the view that infringers subjected to administrative fines had already paid their debt to society and should not be penalized more heavily for subsequent offences. This view arguably defies logic, since experience proves that an offender who continues to infringe after one or more administrative sanctions will normally continue infringing copyrights in the absence of a credible threat of stronger criminal penalties.

Some have questioned whether the 1998 SPC interpretation, which deals not only with copyright but other publishing-related offenses in the Criminal Law, might still be valid, and that the repeat-offender rule therein might therefore still be relied upon.

Absent more deterrent administrative penalties (which have to date been sorely lacking in China), a repeat-offender rule appears to be the only effective way to deter piracy by retailers and smaller wholesalers that do not qualify as ¡§distributors¡¨ under Article 217 of the Criminal Law. Consequently, China will likely come under increasing pressure to amend Article 218 of the Code.

TRADE SECRETS

Article 219 of the PRC Criminal Law provides for prison terms and fines for violations of trade secrets, provided the violation results in ¡§serious losses¡¨ to the rights holder (up to three years imprisonment) or ¡§exceptionally serious consequences¡¨ (three to seven years). The new interpretation defines ¡§serious losses¡¨ for individual offenders as those exceeding the threshold of RMB 500,000 (US$60,500). This is the same threshold as was set out in the April 2001 SPP and MPS prosecution guidelines. The new interpretation defines ¡§exceptionally serious consequences¡¨ as losses exceeding RMB 2.5 million (US$302,500).

That said, the interpretation imposes a threshold that is three times the above amounts, if the offender is an enterprise, thereby ultimately resulting in a substantial increase in the threshold adopted in 2001.

Companies that have in the past attempted to pursue trade secret violations with Chinese police have encountered resistance in many cases, due to the absence of evidence of actual commercialization of the secrets by the infringer. Rights holders have attempted, generally without success, to convince police to commence investigations based on a suspicion that secrets have been commercialized and also on the theory of attempt. But for the most part, Chinese police have been unwilling to intervene, absent convincing evidence that harm has already been caused by the violation, and they have instead recommended rights holders refer to administrative enforcement authorities for assistance under China¡¦s Anti-unfair Competition Law.

PASSING OFF OF PATENTS

Chinese law does not provide criminal sanctions for infringement of patents issued by the PRC Patent Office. However, Article 216 of the Criminal Law provides for prison terms up to three years and/or a fine against parties that ¡§pass off the patents of another¡¨. Criminal liability may be pursued only if the circumstances are deemed to be ¡§serious¡¨.

The passing off of patents is a crime that appears unique to China. The new interpretation clarifies the types of behavior covered by this offense, but it does not set numerical thresholds for liability.

Prohibited behavior mainly includes the use, without permission, of a patent number belonging to another on goods or packaging, or otherwise on advertising or contracts, such that it leads others to believe that the patent belongs to the offender. It also covers the forging or falsification of patent certificates, patent applications, or other patent documentation, e.g., by replacing the true applicant¡¦s name with the offender¡¦s name.

Satisfaction of the above conditions will probably not result in automatic liability under the Criminal Law, and the courts retain the discretion to determine whether the circumstances surrounding a violation are sufficiently ¡§serious¡¨.

Note

1 The Criminal Law does not clearly explain the difference between ¡§reproduction and/or distribution¡¨ in Article 217 and ¡§sales¡¨ (xiao shou) in Article 218. The 1998 SPC judicial interpretation on copyright offences defined ¡§reproduction and distribution¡¨ to cover ¡§reproduction and/or distribution¡¨, thereby suggesting that mere distribution would be sufficient to impose criminal liability. Commentators in China have further noted that the PRC Copyright Law does not distinguish between ¡§distribution¡¨ and ¡§sale¡¨, and as a consequence, mere vendors are held civilly and administratively liable under provisions prohibiting unauthorized ¡§distribution¡¨. All that said, SPC judges have informally suggested that, while the lack of a clearer definition of ¡§distribution¡¨ in Article 217 of the Criminal Law is regrettable, common sense dictates that the legislature did not intend it to cover mere sales, that ¡§distribution¡¨ can best be understood to mean distribution by a party that has commissioned replication or is otherwise responsible for the reproduction of the work. Assuming this is the case, what remains unclear is the exact behavior a wholesaler must exhibit in order to be held liable as a ¡§distributor¡¨. Clearly, a distributor who places an order for new product from a replicator would be held criminally liable. But what if a distributor found with a large quantity of pirated works refuses to disclose the source of the goods? Should the law presume in such cases that he obtained them directly from the replicator?