Cablegate: Guangzhou Ipr Update for Special 301 Review


DE RUEHGZ #0132/01 0622340
R 022340Z MAR 08




State for EAP/CM - JYamomoto; EEB - AColeman, JBoger
State for INL - JVigil
USTR for China Office - AWinter; IPR Office - RBae; and OCG -
Commerce for National Coordinator for IPR Enforcement
Commerce for CIsrael
Commerce for MAC 3204/ESzymanski
Commerce for MAC 3043/McQueen
Commerce for MAC 3042/SWilson, JYoung
Commerce for NWinetke
LOC/Copyright Office - MPoor
USPTO for Int'l Affairs - LBoland, EWu
DOJ for CCIPS - MDubose
DOJ for SChembtob
FTC for Blumenthal
FBI for LBryant
DHS/ICE for IPR Center - Dfaulconer, TRandazzo
DHS/CBP for IPR Rights Branch - GMacray, PPizzeck
ITC for LLevine, LSchlitt

E.O. 12958: N/A
SUBJECT: Guangzhou IPR Update for Special 301 Review

REF: A) STATE 9475, B) 2007 GUANGZHOU 1241

(U) This document is sensitive but unclassified. Please protect
accordingly. Not for release outside U.S. government channels. Not
for internet publication.

1. (SBU) Summary: Despite a few successes in intellectual property
rights (IPR) enforcement efforts over the last year, the overall
climate for U.S. owners of intellectual property (IP) has not
significantly improved. Moreover, law enforcement cooperation has
noticeably deteriorated since the last Special 301 review. Local
governments have not fully reengaged with U.S. officials or IPR
stakeholders since China imposed a virtual freeze on all cooperation
in summer 2007 after the United States filed a WTO case for chronic
IP problems in China. High-volume counterfeit production of
consumer goods has not abated. A few enforcement successes in
combating optical-media infringement have not dented this kind of
activity. In addition, enforcement efforts by south China's local
and provincial governments are inconsistent and often not sustained.
End summary.

Government Cooperation

2. (SBU) Government cooperation with China's administrative and law
enforcement agencies has become a greater challenge in south China
since the last Special 301 review. Requests to meet with a few
administrative agencies, such as the Intellectual Property Office
(IPO), were frequently approved. However, meetings with other
influential agencies, such as the Market Order Rectification Office
(MORO) and most law-enforcement agencies responsible for IP matters
were categorically denied. Most recently, there was a last-minute
cancellation of a joint IPR seminar, set for March 4, after the
Chinese insisted that almost all of the costs be born by the USG and
the U.S. Chamber. Another noteworthy refusal was the denial of
meeting requests by Fujian Provincial officials as part of our
efforts to update the Provincial Review.


3. (SBU) South China's high-volume counterfeit production of
consumer products has not abated and some companies report dramatic
losses. Procter and Gamble (strictly protect) described losses from
counterfeiting activities that exceeded one quarter of total revenue
for the company's China market in 2007. P&G executives told us that
the provincial and national governments virtually ignore requests
for IPR enforcement support. They estimated that the firm's total
annual losses exceeded USD 100 million in China alone, with concerns
that global losses resulting from counterfeit items exported from
China could be significantly higher. (Note: it would seem to be in
the government's interest to crack down on pirating of P&G products
given the amount of tax revenue provided by P&G sales.)

4. (SBU) U.S. manufacturers' brand-protection efforts have been
stymied in certain municipalities of south China, most notably the
Shantou area of eastern Guangdong Province. More than one firm told
us that threats of violence and a dearth of police support in that
city have made it impossible for company employees or investigators
to conduct simple inquiries at local markets and major manufacturing
districts. One company identified Foshan in the western Pearl River

Delta area of Guangdong province as another area of concern. Local
authorities in other areas, most notably in a major district of
Guangzhou, did respond positively to firms' anti-counterfeiting
efforts, including assigning a special IPR investigations police
unit and other resources to help improve enforcement.

5. (SBU) Mattel (strictly protect) complained of extensive
trademark-infringement activities by unscrupulous manufacturers
throughout toy-manufacturing centers in Shantou and the Pearl River
Delta (PRD). They described many low-end toy makers labeling their
own products with Mattel brand names and logos, especially for sales
in third-world countries where actual Mattel products are often too
expensive for most consumers. In addition, the firm's executives
said transshipment of infringing products is another significant
problem, especially in ports where Customs authority is less
stringent. Shippers circumvent Shenzhen and Xiamen ports when
exporting their counterfeit products because Customs authorities at
those ports have a stronger track record of cooperating with IP
owners and detecting counterfeit products.

6. (SBU) U.S. high-tech manufacturers also reported substantial
damage from Chinese counterfeiters. Two Fortune 500 high-tech
companies that outsource manufacturing in south China reported both
counterfeit and trademark-infringement problems on a scale
previously unseen. Cisco (strictly protect) received important
law-enforcement support when U.S. and Chinese authorities realized
the possible threat to the safety and security of major
telecommunications networks posed by the purchase and installation
of counterfeit equipment on both sides of the Pacific. Chinese law
enforcement agencies broke up a major counterfeiting ring, seizing
high-quality fake equipment. The arrests revealed for the first time
how sophisticated counterfeiters have become. However, Cisco also
reported that Chinese law enforcement support slowed significantly
after this initial success with no new investigative breakthroughs
for months despite multiple leads and follow-up inquiries from the
company and U.S. law-enforcement agencies.

7. (SBU) Motorola (strictly protect) has had difficulty getting
local and provincial law enforcement agencies to address trademark
infringement of their cell-phone headsets and mobile phones. The
company conducted thorough multi-month investigations before
approaching Public Security Bureau (PSB) authorities with complete
case files and prosecution-ready evidence to request arrests and
seizure of counterfeit items. However, the PSB has been
unresponsive in many jurisdictions. Motorola executives said the
firm had more success in attracting PSB attention when it teamed up
with other major multinationals, such as Sony Ericsson and LG
Electronics, in targeting large counterfeiting operations.

8. (SBU) Nike executives told us that internet-based vendors of
counterfeit shoes and other products are increasing at an alarming
rate. Employing express mail services for delivery, some
counterfeit vendors now completely circumvent traditional sales
channels, which are often easier to interdict.

Optical Media

9. (SBU) Despite continuing large-scale optical-media infringement
in south China, Microsoft had an important enforcement success in
July 2007. Twenty-five suspects were arrested and millions of
dollars in fake Microsoft software products were seized. The case
was the largest of its kind and was conducted jointly by U.S. and
Chinese law enforcement authorities. With raids conducted at
multiple sites in China, they broke up an illegal software
distribution ring valued at over USD 500 million and distribution
reaching 27 countries worldwide. The case is currently awaiting
referral for prosecution in Shenzhen's PSB.

10. (SBU) Separately, U.S. software companies and International
Federation of Phonographic Industries (IFPI) representatives in
south China continue to report that enforcement successes hardly
dent south China's optical-media infringement activity. They note
that the problem is exacerbated by increasing use of online
distribution channels and stores with on site facilities for burning
optical-media products at the time of purchase. Consulate visits to
electronics markets and optical-media vendors revealed widespread
sales of pirated software and entertainment media in south China.
In addition, IFPI representatives complained of unchecked online
distribution of copyrighted material via major Chinese websites such


11. (SBU) IPR enforcement efforts by south China's local and
provincial governments are often inconsistent and not sustained.
Case transfers, convictions and sentences are applied unevenly.
Nearly every U.S. IP owner reports coordination problems between
local and provincial authorities. IPR enforcement responsibilities
remain divided among more than seven different government entities,
with U.S. companies such as Microsoft (strictly protect) continuing
to routinely "shop around" for action-oriented officials and
jurisdictions when initiating new cases (ref B).

12. (SBU) Several major U.S. manufacturers told us they had been
successful in working with China Customs to provide
product-identification training for Customs officers at major ports.
However, the cooperation was not region-wide. Offers to provide
training were rejected at other important ports like Shantou.

13. (SBU) Other companies, including Motorola, DTS and Merit
Entertainment (strictly protect) have been frustrated in efforts to
convince administrative agencies like the Administration of Industry
and Commerce (AIC) or Intellectual Property Office (IPO) to refer
open cases to the PSB for criminal investigation and prosecution.
According to U.S. companies, the administrative agencies have
relatively little power to arrest or seize property, and instead
rely on administrative penalties such as fines and revocation of
business licenses as deterrents. Firms believe these administrative
penalties have been accepted by counterfeiters as a cost of doing
business, with counterfeiters simply factoring the costs into their
business plans.

14. (SBU) Motorola (strictly protect) also complained that key
suspects were released shortly after being arrested without official
explanation, thereby damaging efforts to prosecute IPR violators.
Long delays in bringing cases to trial also left Motorola executives
skeptical about whether the released suspects would face any penalty
at all for their infringement activities.

15. (U) Another enforcement problem reported by nearly all U.S. IP
stakeholders in south China focused on bureaucratic behavior by
Chinese IP enforcement agencies. Several companies commented that
the PSB would almost never accept an IPR case directly, instead
referring IP owners to administrative agencies like the AIC and IPO,
who could later transfer the cases to PSB if they met criminal
thresholds. Although Chinese law defines the threshold, actual
implementation of criminal prosecution is far from certain. Many
companies also said the AIC, IPO and other agencies would sometimes
attempt to stall cases, often claiming that certain types of IP
disputes could only be handled by particular agencies. In other
cases, administrative agencies would forward cases to the PSB, only
to be rejected or "delayed to death" because of differing
enforcement priorities, standards of evidence and investigative
procedures. In addition, U.S. companies generally agreed that
sentencing in IP cases had failed to yield a deterrent effect due in
large part to an increasing percentage of suspended sentences in the
last year.


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