International Law

U.S.-China WTO Dispute II - customs issue

By Stan

I’ve been putting off this post, mostly because the first one (on copyright) was so lengthy, and also my schedule has not been kind lately. I will try to keep this post concise and chock full o’ quotes, saving my strength for a bit of commentary. Note that I still plan on a separate post commenting on the entire case following Part III, which at the rate I’m going will be completed sometime in mid-2010.

The issue here involves the way that the Customs authorities dispose of goods seized because of IP infringement.  A quick description of the applicable rules here:

The Regulations were formulated in accordance with the Customs Law and provide a procedure for Customs to take protective measures against goods suspected of infringing trademark, copyright and related rights and patent rights upon importation or exportation. Article 27 provides for the confiscation of goods determined to have infringed an intellectual property right and, in the third paragraph, sets out different options for the disposal or destruction of such goods. (WTO Panel Report, p. 54.)

The U.S. had several problems with the legal regime, specifically one problem with a section of the rules that allows the Customs authorities to auction off the infringing goods after "eradicating the infringing features." The issue here is that infringing goods may be released to the public (in some cases, perhaps back to the infringer itself) with only minor alterations, including removal of the infringing trademark only.

WTO law on this is the TRIPS agreement, which states in Article 59 that:

In regard to counterfeit trademark goods, the authorities shall not allow the re-exportation of the infringing goods in an unaltered state or subject them to a different customs procedure, other than in exceptional circumstances.

Note that with a patented product or copyrighted work, there is usually not a simple way of altering the good and allowing it to continue on its merry way in a "clean" state. For example, DVDs that have infringing movie files are simply destroyed. Trademarks are different; you can have a counterfeit product that includes an infringing trademark, but after that trademark is removed, the product itself no longer infringes on any IPR. The U.S. argued that under WTO law, that product (which may no longer infringe an IPR) nevertheless may not be simply released back into the chain of commerce.

At this point in the report, the Panel goes into a quite extensive discussion about whether the claim rightly applies to exports from China. To save you the pain, and a reading of a lot of contextual arguments, the answer was "no, it doesn’t," let’s just apply all this to imports.

This was a rather important point, however, so let me highlight this. The claim brought by the U.S. purports to deal with the huge trade of infringing goods involving China. You probably know, though, that the big problem here is that a lot of these goods are manufactured in China and exported to other countries. The U.S. has been flooded with the stuff for years. One would think that the main target here was exports, so the Panel’s decision to carve out all exports from this part of the decision seems to be a crushing blow to the U.S. — haven’t seen anyone comment on this point, though, so maybe I’m imagining all this.

Not to beat a dead horse on this, but let me emphasize this in another way. Remember (readers of Part I) that the copyright claim was really an excercise in academia. The issue at hand there was a rather narrow point of law that had not (to my understanding) been applied in reality, and that U.S. companies had therefore not been harmed "in real life". Maybe a potentially important issue, but the whole thing seemed rather esoteric to me and certainly not worth the time, energy, and effort needed to push a WTO dispute all the way through.

So now we have this Customs issue. Once the Panel decided that the decision would only apply to imports, it made the following (what I think rather devastating) comment:

Imports represented 0.15 per cent by value of the goods disposed of or destroyed under the measures at issue in the years 2005 to 2007. During that period, all confiscated infringing imports were either donated to the Red Cross Society of China (0.12%) or destroyed (0.02%). The volume of infringing imports that was sold to the right holder, or auctioned, was zero. (Panel Report, p. 62.)

The Panel was not editorializing, I suppose, but in my mind, they could just as easily have said "This issue is really not very important." Yikes.

Onward. The remaining discussion focuses on Article 46 of TRIPS, which spells out what government must do when disposing of infringing goods. Let’s take a look at the whole clause:

In order to create an effective deterrent to infringement, the judicial authorities shall have the authority to order that goods that they have found to be infringing be, without compensation of any sort, disposed of outside the channels of commerce in such a manner as to avoid any harm caused to the right holder, or, unless this would be contrary to existing constitutional requirements, destroyed. The judicial authorities shall also have the authority to order that materials and implements the predominant use of which has been in the creation of the infringing goods be, without compensation of any sort, disposed of outside the channels of commerce in such a manner as to minimize the risks of further infringements. In considering such requests, the need for proportionality between the seriousness of the infringement and the remedies ordered as well as the interests of third parties shall be taken into account. In regard to counterfeit trademark goods, the simple removal of the trademark unlawfully affixed shall not be sufficient, other than in exceptional cases, to permit release of the goods into the channels of commerce.

The last sentence is the one at issue here, but it is instructive to read the whole thing, particularly the parts that describe over-arching principles and the balancing that the government needs to do. Note that harm to the rights holder and providing for a deterrent to infringement are the most significant ideas to keep in mind.  Additionally, Article 59 (part of which I included above) specifically references the principles of Article 46, so these two clauses are tied together closely.

Several pages in the Panel Report focus on arguments made by the U.S. as to why infringing goods that are disposed of by donation (e.g. given to the Red Cross or other groups) violate TRIPS. All of their arguments to this effect were knocked down, with the Panel finding that donated goods were not a violation of Article 46.

The only issue left was auctioning of the infringing goods. The Panel took an issue that had potentially far-reaching consequences and narrowed it down in a huge way. That is probably the most important point to make here (i.e. the opinion is so narrow that it’s almost meaningless). Anyway, the offending legislation here is the Customs IPR Regulations, specifically:

Where the confiscated goods infringing on intellectual property rights cannot be used for social public welfare undertakings and the holder of the intellectual property rights has no intention to buy them, Customs can, after eradicating the infringing features, auction them off according to law.

OK, we are down to fairly simple terms now. TRIPS says that "the simple removal of the trademark unlawfully affixed shall not be sufficient" and Chinese law says that Customs may auction off the goods if the infringing features (e.g. a trademark) is removed. The regs therefore leave open the possibility that infringing goods may have their trademarks removed and released into commerce. For that reason, the Panel found in favor of the U.S.

One final note on the absurdity of all this. Again, we were left with infringing imports that would be auctioned. The Panel helpfully points out that "In fact, no infringing goods destined for importation have ever been auctioned under the measures at issue during the period for which statistics are available [2005-2007]. (Panel Report, p. 86.)

I fully support the Panel ruling insofar as Chinese law is inconsistent with TRIPS. In this, the U.S. was correct and won a victory. But damn, this was a heck of a tiny victory that only a lawyer with absolutely no social life would appreciate.

Well, perhaps some politicians might like the result as well . . .

NEXT: Criminal threshholds issue (who knows when, but hopefully this week).

Full post as published by China Hearsay on February 10, 2009 (boomark / email).