Commentary from the Center for Innovation, Trade, and Strategy
The Criminal Bias in U.S. Intellectual Property Diplomacy
Mark Cohen argues that a lack of balance created by an excessive focus in trade diplomacy on criminal remedies can manifest itself as a “bias” that disadvantages the leading role played by civil remedies in actual enforcement. He concludes that this appears to be the current situation in the United States with respect to the protection of intellectual property (IP) and warns of the risks of unbalanced trade diplomacy.
Today, “IP infringement” and “IP theft” coexist as two terms that describe different behaviors and often demand different remedies. The terms overlap but also conflate approaches to enforcing intellectual property. IP infringement covers all forms of intellectual property misappropriation. IP theft implicitly focuses on criminal remedies but also covers other actions such as hacking of computer systems and state-directed forced technology transfer. An effective IP-enforcement regime needs a robust set of remedies appropriate to the type of right and the infringing conduct. A lack of balance created by an excessive focus in trade diplomacy on criminal remedies can manifest itself as a “bias” that disadvantages the leading role played by civil remedies in actual enforcement. This appears to be the current situation in the United States.
A balance between civil and criminal remedies was at one time inherent in U.S. policy and in foundational international treaties. The standing policy of the Department of Justice accords a primacy to civil remedies. The Department of Justice manual “Prosecuting Intellectual Property Crimes” states that “prosecutors should consider the availability and use of private civil remedies in deciding whether to prosecute an infringer criminally.” U.S. data on IP enforcement aligns well with this policy. In the United States, criminal convictions for IP are often 1% or less of civil decisions. In 2018, the last year for which reliable data is available, there were 68 criminal cases charged in the United States at the federal level, mostly for trademark infringement. In 2020, there were 12,192 civil IP cases (excepting trademark) in the federal courts. By comparison, China brings an average of 67 times as many criminal cases per year than the United States. Generally speaking, data from both countries also shows a wide discrepancy between the small number of criminal cases and the much higher number of civil cases.
THE RISE OF CRIMINAL BIAS
There are numerous articles in the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) regarding civil enforcement, owing to its core role in the protection of IP (see Articles 41–50). However, there is only one article specifically addressing criminal enforcement, Article 61. Article 61 was nonetheless a major development in trade law and the international understanding of IP. No other WTO treaty has a requirement that member states provide criminal remedies to implement its disciplines. However, Article 61 is vague. For example, it requires “criminal procedures” to pursue criminal penalties but declines to define what those procedures might be. Although criminal penalties are required to be proportional, no guidance is provided regrading what proportionality entails, and imprisonment is not mandatory for a violation. Article 61 further does not require public prosecution of IP crimes. Under the TRIPS Agreement, criminal remedies are only required when trademark and copyright infringement occurs on a “commercial scale,” which is not defined. Although IP is considered to be a “private right” (see the preamble), victims’ compensation is also not required by Article 61 (see section 5).
The disappointing outcome in the IP-enforcement case that the United States brought to the WTO against China in 2007 regarding what constitutes “commercial scale” under Article 61 marked a turning point in IP trade negotiations. The WTO panel failed to conclude that China’s criminal laws and practices did not adequately criminalize commercial-scale counterfeiting and piracy. Although criminal IP enforcement had been a priority area of engagement with China, the perceived failure of the WTO to address rampant IP-related criminality led the United States to launch multilateral negotiations to conclude an Anti-Counterfeiting Trade Agreement, which enhanced criminal remedies and was signed in 2011. The skeletal and enigmatic text of Article 61 further enhanced its role in trade diplomacy as negotiators thereafter engaged in years of gap-filling through a range of trade agreements.
Since that time, criminal enforcement has played a leading role in U.S. free trade agreements and IP trade diplomacy. For example, the 2020 Special 301 Report of the U.S. Trade Representative (USTR), which covers IP-related issues, mentions “civil” 21 times and “criminal” 53 times. In the IP chapter of the phase-one trade agreement between the United States and China, “civil” appears 11 times and “criminal” 19 times. In the 2018 Section 301 report on Chinese forced technology transfer practices, there are over five times as many mentions of criminal enforcement (52 to 10). Trade officials may also favor criminal remedies because this is an enforcement mechanism that the U.S. government initiates.
THE CONSEQUENCES OF OVERRELIANCE ON CRIMINAL PROCEDURES
Balancing civil and criminal remedies does not mean weakening one at the expense of the other. Civil remedies are critical for protection of all IP rights, while criminal remedies are of critical importance in certain circumstances. U.S. trade policy may wish to emulate U.S. Department of Justice law-enforcement policy, which recognizes that criminal procedures are important in providing remedies where civil judgments might be inadequate. These can include IP infringements that affect public health and safety, utilization of government undercover investigation techniques, cross-border cases that require criminal justice cooperation, or IP infringements where the infringer is judgment proof and only incarceration can serve as a sufficient deterrent. Criminal enforcement can also lead to social deterrence, whereas low damages for civil infringement can lead to government toleration of “efficient infringement.”
Often an effective civil remedy can address behavior that otherwise might be subject to criminal sanctions. A case in point is Eli Lilly and Company and Lilly China Research and Development Co., Ltd v. Huang Mengwei, a trade-secret civil case in 2013 that was heard in Shanghai at the request of Eli Lilly USA and Eli Lilly China. In that case, the Chinese court ordered an Eli Lilly employee to “not disclose, use or allow others to use” the 21 trade-secret documents, including documents stolen from Eli Lilly USA. The case was decided within around four months of its initiation.
Balancing civil and criminal remedies does not mean weakening one at the expense of the other. Civil remedies are critical for protection of all IP rights, while criminal remedies are of critical importance in certain circumstances.
Because civil cases are initiated by the plaintiff, they present fewer risks of case rejection by the police, prosecutors, or administrative agencies. U.S. software publishers, for example, have long complained about the reluctance of oversight agencies to pursue administrative fines against software pirates. However, software publishers have generally been highly successful in pursuing civil cases against software copyright infringement. Many leading companies have success rates at or near 100%.
One of the risks of unbalanced trade diplomacy is that public prosecutions may be sought for political leverage. China’s first significant criminal copyright case was brought against two Americans who were convicted of selling counterfeit DVDs in 2005. Despite the pervasive presence of bootlegged DVDs in Chinese markets at that time, China brought cases against American citizens to demonstrate its compliance with TRIPS criminal norms. Concerns have been raised in the past about well-connected Chinese high-tech companies that pursue criminal remedies for trade-secret theft when an employee goes to work for a competing firm, where civil remedies might otherwise have been adequate. Recent amendments to China’s criminal trade-secret law would also impose higher penalties on trade-secret theft undertaken on behalf of a foreign entity.
REBALANCING TOWARD CIVIL ENFORCEMENT
Rebalancing toward civil enforcement would likely entail new substantive goals and procedures in trade diplomacy. Transparency is critical to a civil system in order to better enable rightsholders to plan a litigation strategy and should be among the highest priorities in important markets, such as China, that may be inclined to withhold information on cases. This issue, however, was not part of the phase-one trade agreement with China. A larger number of civil cases could also facilitate empirical research on the national treatment of foreign companies by local courts and diplomatic interventions where courts engage in conduct inconsistent with China’s international obligations. Although Americans complain about bias in China’s court system, there has been no systematic U.S. government investigation.
A number of civil enforcement provisions in the TRIPS Agreement could help in improving the fairness of China’s IP regime for all.
A number of civil enforcement provisions in the TRIPS Agreement could help in improving the fairness of China’s IP regime for all. For example, the United States might seek to ensure that Americans always have access to “independent counsel,” damages are “adequate to compensate,” differential procedural treatment of foreign litigants does not prejudice case outcomes, cases of “general application” are published, and administrative enforcement measures comply with civil standards, all of which are required by the TRIPS Agreement. A rebalancing might also lend itself to an increased role for practicing lawyers and judges to engage with their counterparts from the other country to support fairer solutions to the full range of IP disputes.
Patent enforcement in China today can be viewed as a natural experiment on how civil enforcement evolves in the absence of strong public remedies and without strong trade diplomacy. China, like the United States, lacks a criminal patent remedy. Nonetheless, a number of studies by Western authors show that foreigners also generally have a high “win” rate in civil patent litigation in China. Some political scientists, such as Martin Dimitrov, view the centralized and expert civil patent system as efficient and “rationalized” compared to other forms of IP protection where multiple agencies have overlapping jurisdiction. New, specialized IP courts focused on technology issues further support that conclusion.
However, the situation has begun to change. Over the last several years, China’s patent-enforcement system has increasingly been based on publicly enforced administrative patent cases, which now outnumber civil cases for the first time in years. The phase-one trade agreement, in particular, enhanced the public enforcement role by giving the Chinese Patent Office the authority to make infringement determinations that could deny market access to innovative pharmaceutical products in China. Of special concern, the Chinese Patent Office, with the support of Xi Jinping, has called for a general strengthening of its punishment authority against major infringers. Publicly oriented patent enforcement risks overwhelming the private, more market-oriented civil system and could be used disproportionately against foreigners. Professor Liu Chuntian of Renmin University cautioned several years ago that this expansion could potentially “hurt the balance of power and the rule of law by giving [administrative agencies] too much power.”
China’s ramp-up in its administrative patent system was initially described as modeled on the administrative proceedings of the U.S. International Trade Commission (USITC), which can ban infringing imports from entering the United States. In reality, the Chinese system functions mostly as a quasi-judicial system for any type of patent-infringement dispute and hears around 1,000 times as many cases per year as the USITC. The 2021 Special 301 Report from the USTR has since cautioned that there is an “undue emphasis” on administrative enforcement in China’s current patent regime.
U.S. trade diplomacy needs to strike the right balance of informed engagement to address the diverse forms of IP infringement and enforcement in China, with a particular focus on driving social change and enabling rightsholders to stop infringement and seek compensation. These two interests are synergistic, not antithetical. If trade negotiators are not careful, excessive administrative or criminal enforcement of IP could impede market reforms by supporting additional government intervention and ultimately pose new risks to the ability of foreigners to adequately protect their rights in China.
Mark Cohen is a Senior Distinguished Fellow at the Berkeley Center for Law and Technology, Director of its Asian IP Project, and a Lecturer in Law at the University of California, Berkeley, where he teaches Chinese IP law. He was formerly the first U.S. Patent and Trademark Office (USPTO) IP attaché to China (2003–7) and also served as a senior adviser to the USPTO director and as the first senior counsel, China, at the USPTO. He is the recipient of many awards for his work on Chinese IP issues, including the President’s Meritorious Service Award, the highest award in the U.S. civil service.
 USTR, “Findings of the Investigation into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation under Section 301 of the Trade Act of 1974,” March 22, 2018, https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF.
 See Mark Cohen, “Public Interest and Private Rights in the Copyright Law Amendments,” China IPR, June 7, 2020, https://chinaipr.com/2020/06/07/public-interest-and-private-rights-in-the-copyright-law-amendments.
 Rouse, “Software Copyright Litigation in China,” June 30, 2020, https://rouse.com/insights/news/2020/ciela-insights-software-copyright-litigation-in-china; and Mark Cohen, “An Update on Data-Driven Reports on China’s IP Enforcement Environment,” China IPR, July 13, 2020, https://chinaipr.com/2020/07/13/an-update-on-data-driven-reports-on-chinas-ip-enforcement-environment.
 Danny Friedmann, “Guthrie Pleads Guilty of Criminal Copyright and Trademark Infringement,” IP Dragon, January 5, 2006, https://www.ipdragon.org/2006/01/05/guthrie-pleads-guilty-of-criminal-copyright-and-trademark-infringement. See also Mark Cohen, “IPR Model Cases: Part of the Long Journey towards IPR Case Law with ‘Chinese Characteristics’?” China IPR, November 10, 2013, https://chinaipr.com/2013/11/10/ipr-model-cases-part-of-the-long-journey-towards-ipr-case-law-with-chinese-characteristics.
 Managing IP, “Why China’s Administrative Agencies Should Not Be Given New Power,” September 17, 2012, https://www.managingip.com/article/b1kc1hdhq4rx9b/why-chinas-administrative-agencies-should-not-be-given-new-power.
 Mark Cohen, David Kappos, and Randall Rader, “Faux Amis: China-U.S. Patent Administrative Enforcement Comparison,” China Patents and Trademarks, no. 4 (2016): 33, http://www.cpt.cn/uploadfiles/20170220103128979.pdf.