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This is to certify that the

thesis entitled

INTELLECTUAL PROPERTY RIGHTS IN SOFTWARE:
THE U.S. VS.CHINA'S POSITION

presented by

Emmanuel White

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1/” COMM“

INTELLECTUAL PROPERTY RIGHTS IN SOFTWARE:
THE U.S. vs. CHINA’S POSITION

By

Emmanuel White

A THESIS
Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF ARTS
Department of Telecommunication

1998

ABSTRACT

INTELLECTUAL PROPERTY RIGHTS IN SOFTWARE:
THE U.S. vs. CHINA’S POSITION

By

Emmanuel White

This report critiques literature discussing Intellectual Property Rights (IPRs) in
China. It provides a framework for understanding the significance, and difficulty of
curtailing software piracy in the Socialist country due to its unique social, political,
economic, and legal environment. Thus, a contextual analysis is developed and compared
to the U.S.

The analysis reveals that China suffers for nonmtive dislocation, and extra-legal
practices that are associated with its culture. It concludes that China is on the right track
toward developing a strong anti-piracy regime, but requires more time, as well as
economic, and legal assistance from developed states. Findings also reveal that IPRs
camlot exist in the absence of strong enforcement mechanisms, and wide-spread
collaboration among individuals and regimes that cooperate to better serve their own

interest.

This publication is dedicated to those who have struggled to lay claim to their own
“intellectual creation(s)”. For those who have fallen, may they one day rise to reap the full
benefits of their givens. Should they rightfully seek the world’s most precious

possessions, they will surely reject its peculiar ways.

Renae Kushner, 1996.

iii

ACKNOWLEDGEMENTS

I would like to express my gratitude to the director of my thesis committee, Dr.
Thomas F. Baldwin. His patience and enthusiasm for exploring the implications of
Intellectual Property Rights and sofiware piracy in China was a constant source of
encouragement. Most importantly, his commitment to promoting the advancement of his
students was demonstrated through unwavering support.

I would also like to acknowledge the support of Dr. Thomas Muth (Ph.DJJ.D.).
His guidance toward the development and final reading of this thesis is greatly
appreciated. Finally, I would like to thank my wife, Vangie Bryant White. Her

encouragement, patience and intellectual contribution was immeasurable.

iv

TABLE OF CONTENTS

Page
LIST OF TABLES .......................................................................... vii
CHAPTER
I. Introduction ......................................................................... 1
1. The Software Industry ........................................................ 1
2. U.S. Pressure on LDCs ....................................................... 3
3. China in Transition ............................................................ 3
11. Overview of China’s Legal Framework ........................................... 6
1. Administrative Law ............................................................ 7
2. China’s Changing Economy ................................................ 10
3. Patent Law .................................................................... 11
4. Trademark Law .............................................................. 11
5. Copyright Law ............................................................... 13
6. Authorship Rights Law ...................................................... l4
7. Summary ...................................................................... 17
HI. Definition of Intellectual Property and Its Importance ...................... 19
1. In What Ways Can We Understand Intellectual Property? ............ 19
2. Patents ......................................................................... l9
3. Trademarks and Service Marks ............................................ 20
4. Copyrights ..................................................................... 21
5. Trade Secrets ................................................................. 21
6. Definition of Software ....................................................... 21
B. Is IPRs Important and Why ................................................... 23
1. U.S. Position on Intellectual Property .................................... 23
2. General System of Preference ............................................. 25
3. Section 301 ................................................................... 25
4. Shortcomings in Section 301 ............................................... 26
5. U.S. Copyright Act .......................................................... 27
6. What is WIPO? .............................................................. 29
7. WTO and GATT ............................................................. 31
8. Problems with Technology Transfer ....................................... 32
9. Microsofi in China ........................................................... 33
10. Summary ...................................................................... 34

IV. What Transnationals are Saying About IPRs ................................... 37

l. Necessary for Growth and Protection ....................................... 38
2. Increased Profitability ......................................................... 38
3. Trade-off Alternatives ......................................................... 39

B. What Nation States are Saying About IPRs .................................... 41
l. Costly ............................................................................. 41

2. Limits Domestic Productivity ................................................. 42

3. Constrains Competition ....................................................... 42

4. Increases Dependency ......................................................... 43

5. Increases Grth Opportunity ............................................... 43

C. Why China is Positioned to Resist Global Cooperation ....................... 45
1. Domestic Production Capabilities ............................................. 45

2. Trade Surplus ................................................................... 45

3. Market Size ..................................................................... 46
4. Cheap Labor .................................................................... 47

5. Summary ......................................................................... 48

V. What China Must Do to Establish & Enforce IPRs ............................ 50
1. Establish a Timetable for Objectives ......................................... 50
2. State Council’s Working Conference ....................................... 51

3. 1995 Action Plan ................................................................ 53

4. How Far is China from Global Cooperation? ............................... 58

B. System of Checks and Balances .................................................. 63
1. Shortage of Legal Experts .................................................... 63

2. Legal Autonomy ................................................................ 65

3. Penalty Imposition .............................................................. 65

C. Incentive-Based Cooperatives ................................................... 67
1. Design Engineering ............................................................ 67

2. Alliances Among Software Retailers ....................................... 68

3. Alliances Among Software Publishers ...................................... 69

4. Alliances Among End-Users and the Government ........................ 71

5. Summary ....................................................................... 71

VI. Other Issues to Consider ........................................................... 74
1. Cultural Barriers ................................................................ 74

2. Biases in Reporting ............................................................ 76

3. Methodology for Determining Loses ........................................ 76

4. Accuracy of Information ...................................................... 77

5. Summary ........................................................................ 78
VII. Thesis Statement and Summary ................................................... 79

LIST OF TABLES

APPENDIX

A. BSA Software Loss and Piracy Estimates by
Country for 1994 .......................................................... 86, 87

CHAPTER I

Introduction

For more than 100 years, the impact of Intellectual Property Law has been subject
for considerable debate. At the center of the controversy are ongoing questions like:
What constitutes Intellectual Property? Who should enforce Intellectual Property Rights?
How should the rights be enforced? And perhaps the most important issue of all: Who
stands to benefit most? Questions such as these underlies the perennial challenge for
highly industrialized and less developed countries, as well as transitional corporations,

especially manufacturers of packaged software.

The Software Industry

The software industry is among the fastest growing sectors in the world. Hailed as
one of the greatest business success stories in recent history, increases in the sale of both
lmrdware and software are expected throughout the current century. However, piracy
threatens the industry's economic future (Blumenthal, 1995; BSA, 1996).

According to the Business Software Alliance (which is a consortium of software
publishers), global software pirates accounted for more than $291.5 million each week in
1996 (BSA, 1996), while much of the activities leads to giving away the software
(DeLoughry, 1994). Because software is a major input factor in computer operations, it is
important for any country to observe a multitude of domestic practices that are off-set or

affected by policy shifts in communication, and information technology. Thus, policies that

impact software will necessarily affect technology transfer, communication policy,
educational goals and a host of other areas (Bag, 1987; Schware, 1992).

Traditionally, software manufacturers have relied on their own ability to protect
their intellectual creations. Efforts to develop tamper proof products are rmde, but to
little or no avail. Publishers soon realized that benefits derived through independent
efforts were short-term because pirates are becoming more sophisticated in their
operations and ability to replicate the unique signatures (holographic images, trademarks,
Service Marks, etc.) of manufacturers. Additionally, manufacturers were penalized as
efforts to control theft through internal mechanisms such as cryptography caused
decreases in sales (Furger, 1995).

Software manufacturers initiated special licensing agreements by collaborating with
retailers. The publishers also aligned themselves with special interest organizations
(Business Software Alliance, Software Publishers Association, International Intellectual
Property Alliance, Computer Professionals for Social Responsibility, etc.), and demanded
that governments (both foreign and domestic) enact strict policies to eradicate piracy
(Borzo, 1992; BSA, 1996; Fisher, 1994B; Furger, 1995; King, 1992; Lawrence, 1995).
For the most part, this approach has been fairly successful.

Since the early 1990's, collaboration has allowed U.S. software manufacturers and
retailers to recover substantial amounts of money (Borzo, 1992). However, this incentive-
based approach does not stop the illicit activities altogether. Consequently, since 1984,
Intellectual Property-related issues have been linked to trade among industrialized nations

(Borzo, 1992; Sun, 1995).

U.S. Pressure on LDCs

The U.S. increased pressure on Less Developed Countries (LDCs) by threatening
to invoke unilateral sanctions through Trade Related Aspects of Intellectual Property
Rights (TRIPS) in accordance to the General Agreement on Tarifi‘ and Trade (GATT)
(Davis Jr., 1991; Masterson, 1994; Sun, 1995). Developing nations have responded to the
added pressure by adopting aggressive, proactive measures to deter the theft of software
and other "soft technologies" (such as CD-ROM (CDs), Laser Disks (LDs), satellite
transmissions and films). However, these efforts alone are not enough because developing
nations are often too slow or unwilling to enforce existing laws that deter Intellectual
Property Rights (IPRs) infringements.

Governments of LDCs are usually hard-pressed to find solutions to software
piracy. They generally take a nationalistic approach toward IPRs (Merrirnan, 1991;
Stanberry, 1990 a&b; Weinstein, 1985). These decisions are usually accompanied by
substantial capital requirements for IPRs protection, weak domestic and international
enforcement mechanisms, as well as technological constraints on domestic software

production capabilities. In lieu of these circumstances, China is in a unique position.

China in Transition
China has long been criticized for its unwillingness to protect the interest of
transnational software manufacturers. Leaders of Socialist states are often accused of
being in compliance with pirates as violators either go unpunished or are subject to weak
penalties (Awanohara, 1992; Fleming, 1994). Generally speaking, LDCs argue that

information and ideas are flee-flowing forms of expression which can not be owned by an

individual. Thus, soft technologies such as software should not be viewed as property
(Branscomb, 1994; Stanberry, 1990). This concept is deeply rooted in China’s culture and
is symptomatic of more than a half century of social, political(Declet Jr., 1997; McCall,
1996). and economic reformation.

Since 1984, China has made significant strides to better its stance on Intellectual
Property (Intellectual Property) in the eyes of the world community. In 1992, it signed a
Memorandum of Understanding with the U.S., which was designed to modernize its
Intellectual Property legislation. Subsequent agreements in 1995 and 1996 were designed
to encourage the Socialist state to enforce its existing laws. By the end of 1996, China
was undergoing rapid legislative reform and had a bilateral trade surplus of $39 billion and
rising, second only to Japan's. Furthermore, they are vying for a spot in the World Trade
Organization and Most Favored Nation status. Thus, their position on the protection of
packaged software (and other soft technologies) may be paramount to the country's long-
term economic stability, particularly if China is to be in the forefront of the information
technology revolution (Laris, Clemetson, Lieu and Hirsh, 1997).

Our practical interest in China stems fiom two fairly recent developments. The
first is America’s international trade deficit consequences with respect to virtually every
aspect to the economy. This has made the U.S. reorient its way of thinking about China.
Although the Socialist state is not wealthy by Western standards, relatively small per-
capita sales can amount to significant business. The second reason we have become
oriented toward China, and its Intellectual Property Laws, is politically motivated.

Approximately two decades ago, Sim-American relations were virtually non-existent.

Thoughts of transacting business with China was considered pointless, even by the most
aggressive American companies (Sobel, 1989).

During the early 1970’s, China opened its doors to both sides of the Pacific,
making trade between them and the U.S. a reality. For American companies,
understanding how China’s social, political and legal environment impact software
nunufirctures is crucial, particularly considering the increasing significance of international
consumer markets. Furthermore, comprehending how cultural norms will necessarily
affect the Socialists state’s position on IPRs is critical for all highly developed countries
(Come, 1997; Sobel, 1989).

This paper critiques the literature discussing global IPRs. It provides a fiarnework
for understanding the significance of IPRs for the protection of packaged software, strong
enforcement mechanisms, and wide-spread cooperation by comparing China’s laws to
those of the United States. The report also critiques China’s position on IPR
infiingements; how punishment is imposed and to what degree it is efi‘ective, given its
current public policy. It examines how China could establish an administrative body to
settle disputes surrounding property rights violations (as they relate to international
standards), and attempts to determine the feasibility of China's decision to adopt such
public policies. The paper will also discuss the steps that are necessary for China's success
by briefly examining the efforts and progress of countries (Taiwan, Singapore, South
Korea, etc.) with similar problems and policies. Finally, the report will discuss how other

nations could assist China.

CHAPTER 11

Overview of China’s Legal Framework

In contemporary China, economic modernization dictates reality. Since 1949,
China’s market socialism is both flexrble and pragmatic. Around 1949, when the Chinese
Communist Party came into power, the government denounced custonmry Confucian legal
norms and created a Socialist legal system inundated with Western legal norms (Book of
Six Codes, 1982; Come, 1997; Ramjerdi and D’Amato, 1995). (The Book of Six Codes
refers to an entire body of law including the constitution, criminaL civil, and cormnercial
law.)

The extent to which these norms have affected traditional practices is highly
questionable. However, they do have practical implications because their adoption tends
to placate foreign investors. In the wake of these changes, the laws as they currently exist
may be nothing more than a facade, given the Socialist state’s local administrative
implementation and enforcement of such normative public practices (Come, 1997;
LaKirtz, 1997).

According to Peter Corne (noted scholar and legal practitioner on Chinese law),
China suffers fiom normative dislocation and is bound by the promises and failures of
Chinese socialism. He further asserts that Maoist philosophy has, over time, weakened
traditional Confucian norms, while its failure to fulfill its goals of Socialist utopia has left
many Chinese disillusioned (Come, 1997). Imported Western cultural norms are

juxtaposed with local norms to exacerbate the normative vacuum caused by China’s

Cultural Revolutions (see Chapter VI.), and has equally discredited Maoism (Come, 1997;
LaKirtz, 1997).

Administratively, government oflicials charged with the responsibility to draft,
implement, and enforce new laws are flee to apply provincial norms under the guise of
carrying out their constitutional duties (Come, 1997). In an atmosphere of legal
dislocation, extra-legal norms such as wide-spread corruption and nepotism are poorly
sanctioned and are able to flourish. For Corrie, such administrative problems are at the
root structural and stems from a variety of internal weaknesses, ideological constraints,

and inadequate legal reform (Corne, 1997; LaKirtz, 1997).

Administrative Law

In Chim, administrative law concerns the specification, implementation and
enforcement of central laws by various state organs. Since all law in China is public law,
administrative law also regulates China’s vast economy, as well as the relationship among
its various actors (Come, 1997; LaKirtz, 1997). Administrative law forms the largest
branch of Chinese law, and comprises a multitude of legal concerns. Among them are
organic law, civil servants law, administrative supervision, the law of administrative acts,
and sectorial hw. Of the five subcategories, sectorial law encompasses foreign
investment, public security, industry, customs, fashion, finance, advertising, transportation,
health, insurance, environmentaL natural resources, labor, quality, culture, and patents.
Although all the former subcategories of legal arms are important, this report will
primarily focus on culture and patents (Come, 1997; LaKirtz, 1997; Ramjerdi and

D’Amato, 1995).

Administrative law’s centrality is a function of China’s constitutioml design
whereby power flows downward. In practice, law making in China is difi'used (Come,
1997; Declet Jr., 1997; Ramjerdi and D’Amato, 1995). Central power organs such as the
National People’s Congress (the highest level of legislative authority), its standing
committee, and certain local people’s congresses have the power to draft, present,
examine, adopt and promulgate law. The law is specialized, and implemented by
administrative organs such as the State Council’s various departments, and local people’s
government (Come, 1997; LaKirtz, 1997; Li, 1978; Ramjerdi and D’Amato, 1995).

Unlike their Western counterparts, administrative organs in China possess both
inherent and conferred authority to draft rules and regulations. Consequently,
administrative organs wield tremendous authority power in the Chinese legal system,
acting as legislative, interpretive and enforcing bodies (Come, 1997; Li, 1978; Ramjerdi
and D’Amato, 1995). The possession of inherent lawmaking power by administrative
organs is the consequence of the 1982, People’s Republic of China Constitution, which
reforms rather than replace China’s preexisting central planning mohanism (Come, 1997).

In an effort to calibrate socialism, and maintain central control over China’s vast
economy, lawmakers adopted a rationale that lends itself to the creation of laws that are
inherently flexible, so that they may be adjusted to the vagaries of hurmn behavior (Come,
1997; Declet Jr., 1997; Li, 1978). Central policy decrees, roughly disguised as laws,
permit administrative organs to flexibly adjust Western legal norms to fit with local reality.
Devolution of quasi-legislative power to administrative bodies creates a system of law in
which rules, regulations, and other normative documents often diverge and contradict one

another (Corne, 1997; Li, 1978).

Each administrative organ spins a complex web of measures, opinions, orders,
circulars, rules, regulations, notices and provisions. The effect of said policy is currently
uncertain under Chinese law. Additionally, the meaning given to a particular document
will greatly depend on whether or not the document is circulated internally, attached to an
interdepartmental circular or issued to the public (Come, 1997).

Administrative specialization, or the process by which the law is brought down to
local reality by administrative interpretation and legal revision by lower administrative
units is demonstrated by China’s method of attracting foreign investment. The Joint
Venture Law, created in 1979, allowed the country to benefit fiom the free flow of capital
without restrictions. Neither the Joint Venture Law, as promulgated in 1979, nor its
Implementation Regulations, as issued by the State Council, imposed any restrictions on
the amount of money to be invested. However, application of investment practice is
severely regulated (LaKirtz, 1997; Ramjerdi and D’Amato, 1995).

The Ministry of Foreign Trade and Economic Cooperation (MOFTEC), in
reviewing and approving all foreign contributions of machinery, industrial property and
proprietary technology place limitations at fifteen to twenty five percent of registered
capital. It is worth noting, however, that a long standing internal MOFI'EC decree
specifies that such contributions may not exceed twenty percent of registered capital for
joint ventures (LaKirtz, 1997 Ramjerdi and D’Amato, 1995). Consequently, the Joint
Venture Law becomes familiar enough on its face to attract foreign investments, but
remains loose enough to allow continued application of another set of nornmtive values

more familiar to officials charged with regulation. The aforementioned (hidden) practices

has expedited China’s movement toward a market-driven economy since the mid 1970’s

(Mch 1996; Ramjerdi and D’Amato, 1995).

China ’s Changing Economy

Following the death of communist leader Mao Zedong in 1976, China’s new
leaders decided (once again) to recognize limited private property rights as a means to
accelerate economic growth. (McCall, 1996; Ramjerdi and D’Amato, 1995). The new
leader, Chairman Deng Xiaoping, believed that increased application of modern
technology to all sectors of the economy was needed for China to reach economic equality
with the West. During the 1980’s, the Socialist state modified its Marxist economy in
favor of a dual system consisting of a one-party, autocratic political system, and a
government-assisted, fiee market economy. This system reflected, not the adoption of
capitalism, but rather, a return to Confucianism, which is the traditional philosophy of
China (Come, 1997; LaKirtz, 1997; Ramjerdi and D’Amato, 1995).

Where capitalism supports self-gain, independent of social gain, Confucianism
allows for the opportunity of self-gain only if it primarily helps society as a whole (Come,
1997). China began to construct and enact its Intellectual Property Laws to coincide with
its economic system by reorganizing private property rights. Between 1983 and 1990, the
People’s Republic revised its Patent, Trademark and Copyright Law (Chuanjie, 1989;

Declet Jr., 1997; Ramjerdi and D’Amato, 1995).

10

Patent Law

China began working on and passed its newly revised Patent Law in 1984. By
mid-August of 1989, the patent office received a total of over 108,000 patent applications,
22,000 of which were filed by foreigners. By 1989, the Chinese Patent Office had granted
27,000 patents, including 1,800 to foreign applicants. Eighty-three percent of those
granted were Utility Patents, which covers “any new and useful process, machine or
composition of matter” (Masterson, 1994). Since the passage of the revised Patent Law,
increases in applications could be seen throughout the decade (Chuanjie, 1989; Ramjerdi
and D’Amato, 1995).

Article 11 of the Chinese Patent Law provides that after the grant of a patent for
an invention or a utility model, no entity or individual may exploit the patent by making
use of, or selling the product’s process for commercial purposes (Ramjerdi and D’Amato,
1995). The article further provides that after the Patent Office grants a Design Patent, no
entity or individual may exploit the patent by making or selling the product by
incorporating the patented design for commerc'ml purposes (Chuanjie, 1989; Ramjerdi and
D’Amato, 1995). In either case, ascertaining permission fiom the patentee is required to

avoid infiingement.

Trademark Law

Since 1983, China has made significant strides toward improving trademark
protection. In 1988, China revised its Implementation Regulations, placing emphasis on
trademark enforcement. By November 1, 1988, the Socialist state adopted the

International Classification of Goods legislation (Chuanjie, 1989). According to the law

11

and the new Implementation Regulations, any person may lodge a complaint with, or
report an ofl‘ense to the competent administrative authority when infiingement of an
exclusive right occurs. China also promulgated detailed implementation rules under the
trademark legislation.

The revised set of rules advocate the use of advanced technology to spur economic
development. It also closes legislative gaps by addressing related 'Bsues in the area of
trademark application processes, enforcement, and protection, which also includes
remedies for counterfeiting and infringement (Chuanjie, 1989). However, China has a
serious problem with enforcing these laws (see page 33-36). The country’s apparent
willingness to develop progressive legislation is almost meaningless unless it is willing to
back-up the statues with strong enforcement mechanisms (Declet Jr., 1997; Li, 197 8;
Stanberry, 1990a).

The most severe problem with China’s trademark legislation exists in the area of
penalty imposition, because the punishment is not severe enough to deter pirates.
Remedies includes having the offender proclaim his or her crimes publicly through self
criticism; cancellation of the trademark; fines of less than 20 percent of the illegal
turnover, or less than twice the amount of illegal profit; seizure of the false marks; and
compensation. Generally speaking, stiff fines and harsh criminal penalties are considered
to be necessary deterrents to trademark infiingement (Declet Jr., 1997; Li, 1978;

Stanberry, 1990a).

12

Copyright Law

The absence of specific copyright statue lead foreigners to believe that there is no
protection available in China for material that other countries protect by Copyright Law.
However, this is not the case. Current copyright protection is available under two areas of
Chinese law: (1) provisions of both Constitutional and general issues of intellectual and
other property and (2) administrative regulations for practices focusing upon author’s
right’s and closely related subjects (Shen, 1989).

China’s Constitution provides that: Citizens of the People’s Republic of China
have the fieedom to engage in scientific research, literary and artistic creation, and other
cultural pursuits (Shen, 1989). The state encourages creative endeavors conducive to the
interests of the people when made by citizens engaged in education, science, technology,
literature, art, and other cultural work.

Article 118 (of China’s Constitution) provides that where the rights of the author,
citizen, or legal person are infiinged by such acts as plagiarizing, altering or passing off, he
or it has the right to demand that infringements be ceased, its effects be eliminated and,
any loss be compensated. Concomitant to these same measures, the People’s Republic of
China’s Economic Contract Law recognizes the validity the authors have with publishers.
China’s inheritance law permits an author’s heirs to inherit an interest in such agreements
(Shen, 1989).

Additional regulations supplement the general provisions described above. Many
are promulgated publicly, while others are reserved for internal circuhtion only. Both

kinds of regulations govern the relationship between authors, publishers and end-users

(Shen, 1989).

13

Authorship Rights Law

The Authorship Rights Law is arranged in six parts, containing a total of 56
articles. It’s both sophisticated and progressive, because it afl’ords some protection to
software manufactures across a broad spectrum of authorship rights. Reflective of the
Beme Convention, it guarantees authors of creative works both economic and moral
rights over their creations (Declet Jr., 1997). Inclusive in these rights are:

(1) The right of publication, and/or whether or not to make a work public;

(2) The right of aflixation of one’s name, and right to demand acknowledgment of the
author’s identity in order to afix one’s name to a work;

(3) The right of revision or to authorize others to revise a work;

(4) The right of protection of integrity of a work and from misrepresentation and/or
distortion;

(5) The right to use and receive remuneration in the events one’s work is photocopied,
broadcast and/or projected, exhibited, distributed, televised, recorded or video, filmed,
performed and/or adapted, annotated, edited, and the like.

Just as in U.S. Copyright Law, the Authorship Rights Law provides protection to
an author and heirs for a period of 50 years beyond the author’s life. It specifies injunctive
relief, and defines specific remedies for copyright infringements while dividing them into
categories. Infiinging acts such as publishing a person’s work without proper
authorization requires the violator to compensate the owner of said work for losses
(Declet Jr., 1997).

More harmful infringements, such as wide-spread cormnercial piracy, plagiarism,

and publication of pirated work(s) have criminal penalties such as fines, confiscation of

14

work(s) and imprisonment associated with the activities (Declet Jr., 1997; Li, 1978). In
1994, China went further to provide up to three years of imprisonment for large scale
piracy with a possible maximum prison stay of up to seven years for seriously large scale
pirating Operations.

Although the Authorship Rights Law is fully modernized by any standard (Declet
Jr., 1997) (on the surface), it has been subject to substantial criticism. First, the legislation
provides little in the area of economic redress. Secondly, it ofl’ers little to no protection
for non-Chinese rmde products. Against this backdrop, the U.S. and China signed a
Memorandum of Understanding on Intellectual Property in 1992, which required China to
accede to the Beme Convention (Ramjerdi and D’Amato, 1995). The Beme principle of
national treatment supersedes the discriminatory treatment accorded to foreign authors not
published in China.

Although the Authorship Rights Law includes the protection of software, the
Software Regulations section of the doctrine is by far more crucial for the protection of
software products (Sobel, 1989). The Software Regulation section of the Authorship
Rights Law accords the following rights to software authors:

(1) The right of publication or the right to decide whether or not to make the software
public;

(2) The right of arbitration as a developer or the right to identify and the right to aflix the
developer’s name to the software;

(3) The right of exploitation or right to use one’s own software through such means as
reproduction, reevaluation, distribution, revision, translation, and annotation, provided

that the exercise of such rights shall not harm the public interest;

15

(4) The right to license and receive remuneration or the right to license others to use one’s
software by part or all of the means enumerated in item (3) and to receive remuneration
for granting such license; and

(5) The right to assign or the right to assign others the exploitation rights and the licensing
rights provided in item (4) and (5) (Software Regulations).

It is worth noting that the rights accorded under the Authorship Rights Law are
not equal to those under the Software Regulations. The Software Regulations places
more emphasis on economic rights, and less on moral rights (Declet Jr., 1997). Rights of
attribution and publication are personal rights, and are therefore accorded unlimited
duration. However, the rights of exploitation, licensing, and assignment are economic
rights, and is protected for 25 years, and renewable for up to a maximum of 50 more years
(Declet Jr., 1997, Simone, 1990; Ramjerdi and D’Amato, 1995). If a person receives the
right to exploit someone else’s software, but fails to register with the Software
Registration Administration within three months, the software will lose all protection,
irrespective of whether or not its covered by copyright. (Declet Jr., 1997).

An inherent shortcoming in China’s Software Regulation section of the Authorship
Rights Law is that the “fair use” provisions nullifies any protection the legislation could
potentially offer transnationals. The provision provides for the re-use of incremental
quantities of software for “such non-commercial purposes as classroom teaching, scientific
research and carrying out the official duties of state agencies.” Because so many of
state’s organs are either partially or fully controlled by China, this provision could easily
be utilized by well connected pirates for wide-spread, government sanctioned theft (Declet

Jr., 1997).

16

Summary

China’s 50 year transformation from a Socialist state based on Confucianism, to
one that includes Western norms, was spurred by the need to modernize and strengthen its
economy. Accordingly, its government revised existing public policies to establish a legal
fi-amework that accommodates the vagaries of its people by adopting loosely interpreted
rules that are thinly veiled as public policies or laws (Come, 1997; Declet Jr., 1997;
Ramjerdi and D’Amato, 1995). The so-called laws appeared progressive and lends
credence to the nation that China is serious about Intellectual Property protection.
However, close examination of the revised laws can only support a “prirna-facie” case at

best.

State organs facilitates national objectives by encouraging foreign investment

through laws (such as the Joint Venture Law and Implementation Regulations) that
reduces skepticism abroad. While the Joint Venture Law appears to indicate China’s
willingness to attract foreign interest, the law itself is in direct opposition to a long
Wing decree that was drafted to contain foreign investments. Tactics such as these
have allowed the Socialist state to advance its domestic, economic agenda (Declet Jr.,
1 997).

China’s 1984, Patent Law allowed the country to realize a record increase in new
patents, while Tradenmk registrations also soared to new levels from 1984 to 1989
(Le-rig, Clemetson, Liu and Hirsh, 1997). It is also worth noting that the laws played a
key role in increasing innovation, stimulating commercial and scientific research,
teeliltiology transfer, and accelerating modernization through economic growth. However,

p1t5t>l<=ms with China’s newfound initiative are apparent.

l7

The Authorship Rights Law is designed to benefit Chinese nationals only.
Although the Software Regulation section (under China’s Authorship Rights Law)
appears extremely progressive, allowances were made for the appropriation of a creator’s

work through highly subjective decrees. Thus, the “fair use” provision only serves to

00th any sincere efforts to advance the nation state toward full IPRs protection

practices.

l8

 

CHAPTER IH

Definition of Intellectual Property and Its Importance

In What Ways Can We Understand Intellectual Property?

Generally speaking, “intellectual property rights is the ownership of the right to
posses or otherwise use, or dispose of products created by hurmn ingenuity” (GAO
Report, 1995). With regards to Intellectual Property, piracy may be defined as “any
unauthorized and uncompensated reproduction of someone else’s creative intellectual
achievement.” This broad definition of Intellectual Property creates tremendous
opportunities for producers to lay claim to a vast group of globally produced materials.

Intellectual Property covers everything from computer software and hardware to
pharmaceuticals, movies, toys and the like. However, the scope of this report is limited to
pirated software, and to a lesser degree, related “soft technologies” such as CD ROM,
satellite transmissions and/or films. (Field, 1995a; Masterson, 1994; Oflice of U.S. Trade,

1995). Intellectual Property in the U.S. is distinguishable by several forms, among them
are patents, trademarks and Service Marks, copyrights, and trade secrets (Field, 1995b;

Oflice of U.S. Trade, 1995).

Patents

Utility Patents in the U.S. have a term of 17 years form the date of the grant, 35
U-S.C. 154; Design Patents have 14 years fi'om the date of the grant, 35 U.S.C. 173. Only
the U.S., the Philippines and Jordan have patent systems based on a "first to invent"

standard, which means that the known creator of a “useful process, machine or

19

composition of matter” is protected under U.S. Patent Law if he or she can prove that
they were the first creator of the process or product in question (Field, 1995b; Masterson
Jr., 1994; Oflice of U.S. Trade, 1995; WIPO, 1995). All other national patents systems
employ a "first to file" standard.

There are two primary international patent conventions. The Paris Convention for

the Protection of Industrial Property (providing national treatment and a one year priority

period for the filing of patent application in other Paris convention member states, but no

required subject matter protection of minimum term). The second is the Patent

Cooperation Treaty (permitting the filing of single international patents application which
is then reviewed by the patent offices of individual countries) (Field, 1995b; Masterson Jr.,

1 994; Oflice of U.S. Trade, 1995; WIPO, 1995).

Trademarks and Service Marks
In the U.S., trademarks and service marks have a renewable term of 10 years.

Prior to 1988, as a result of the Trademark Law Revision Act, there were 20 years
pr‘otection granted to trademarks and service marks. However, two conditions must be
Illet. Themksmustbemuseminterstatecormnercemndaspecimenprovmgusemmt
be provided to the Patent and Trademark Oflice in Washington, DC. The Paris
COnvention for the Protection of Industrial Property is the primary international
e<>Zt1vention protecting trademarks (Field, 1995b; Masterson Jr., 1994; Office of U.S.

Tl‘ade, 1995;w11>o, 1995).

20

Copyrights
Copyrights, at least in the U.S., are used to protect artistic works. As of the first
of January, 1987, the artist's work is protected for up to 50 years after the artists death.
Unlike patents and trademarks, which requires filing in other countries in order to obtain
protection in those countries, U.S. copyrighted works are automatically protected in all
signatory countries to the Berne Convention for the Protection of Literary and Artistic
Works (WIPO, 1995; Office of U.S. Trade, 1995). Beme Convention works tint have a
country of origin other than the U.S. are exempted from requirement that copyrights be
registered at the Copyright Oflice before an infiingernent suit can be brought. These same

rules currently applies for all works originating in the U.S. (Ofice of U.S. Trade, 1995).

Trade Secrets
In the U.S., trade secrets are creatures of the state. Each state has a body of law
governing trade secrets. However, a number of states have adopted the Uniform Trade
Secrets Act. Unlike patents, trade secrets do not authorize rights exclusively, but are
dependent on the organization’s ability to maintain secrecy. To compound the problem of
international trade, many countries do not have laws protecting trade secrets (Oflice of

U - S. Trade, 1995; Masterson Jr., 1994).

Definition of Software
Software encompasses a range of copyright-prone elements. Computer users are
1‘a-‘Zlfliljar with two basic categories of software applications. These are the business and

e(illcational programs that makes computers useful, and operating systems, which interacts

21

with hardware, and enable the programs to run. A more fimdamental distinction is

between “source code” and “object code” (Declet Jr., 1997)

Computer programmers, writing in languages like COBOL and Visual Basics

create software which constitutes source code. The source code must then be translated
into binary machine language. Microcode is object code, which is incorporated directly
into the central processor (as oppose to object code, which is typically located on the
magnetic disk drive). In the U.S., case law makes provision for the protection of images
and the interaction there of on computer monitors. They create a unique feel and look

which creates intangibles that when combined, may be protected under Copyright Law

(Declet Jr., 1997).

22

Is IPRs Important and Why?

U.S. Position on Intellectual Property
Safeguarding against software piracy proves increasingly diflicult as the
proliferation, diffusion and convergence of microcomputers blurs the distinction between
the various communication technologies (McDowell, 1995). Because software is a major
input factor in computer operations, it is important for any country to observe a multitude
of domestic practices that are off-set or effected by policy shifts in communication
technology (Haq, 1987).
The U.S. is the world’s most technologically advanced nation, and leads developed
countries in progressing toward a post-industrial, information-based economy (Declet Jr.,
1 997). Despite its tremendous overall trade deficit, America is the worlds leading
exPorter of Intellectual Property, with advanced technology and computer software
comprising a vital component of this high-tech trade (BSA, 1998; Endeshaw, 1996;
Hershey, Jr., 1996). The fact that its Intellectual Property exports constitutes a rare bright
Spot in the overall trade circumstances makes the U.S. especially sensitive to Intellectual
Property theft abroad (Field, 1995a).

In 1996, the U.S. software market reached an all time high of $102.8 billion,
making it the third largest industry in the U.S. economy; contributing $15.1 billion in
taxes, and $36.4 billion in wages. In addition the "ripple effect" of the software industry
cT'~“?—aated more than 2 million jobs, and $83.7 billion in wages. Growing at an average rate

of 12.5 percent annually, the software industry is clearly a critical segment to the overall

stl‘ength of America’s economy (BSA, 1998).

23

The International Intellectual Property Alliance estimates that American software
nunufacturers lost more than $322 million in China alone 1993 (Goldstein, 1994), while
the Business Software Alliance estimated that $596 million were lost in the same market
for the same year. (BSA, 1996; Goldstein, 1994). In 1991, the Software Publishers
Association estimated that lmlf or $2 billion of the $4 billion U.S. software industry is lost
to global pirating activities annually (Wasch, 1991).

In striving for a better environment for the protection of IPRs, American firms
have made a significant impact both domestically and internationally. At the international
level, the most successful achievement was to make IPRs a major aspect of international

legislation and negotiation (Davis Jr., 1991; Masterson, 1994; Sun, 1995). In 1986, when

the trade ministers of the world launched the Uruguay Round Multilateral Trade
Negotiations to the General Agreement on Tariffs and Trade, they added Intellectual
Property, service, investment and the like to the international trade agenda (Declet Jr.,
1 997; Sun, 1995).

Because of the issue of sovereign irmnunity, American firms have traditionally
encountered difficulties when seeking remedies against foreign govermnents, and their
Subsidized business entities. This was especially the case when the source of infringement
took place outside of U.S. jurisdiction. Compounding the issue was that complaints that
tlle State Department would not provide “diplomatic protection” on behalf of industries

fiDr political concern (Sun, 1995).

24

General System of Preference

Consequently, the U.S. Congress enacted a series of provisions in the trade law
using the granting of Generalized System of Preference (GSP) status, and the threat of
lmilateral trade sanctions (Section 301 Provisions) as leverage to induce policy or practice
change from other countries. This, in turn, has resulted in strong and negative reactions
from almost every region of the world. From time to time, it intensified international

relations with the threat of a trade war looming (McCall, 1996; Sun, 1995).

Section 301

The purpose of Section 301 is to provide domestic counterpart to the General
Agreement on Tariffs and Trade consultation and dispute settlement procedures, as well as
U.S. domestic authority to impose restrictions as retaliatory actions. If necessary, it can
In used to enforce America’s rights against unjustifiable, unreasonable, or discriminatory
foreign trade practices that burden, or restrict commerce (Masterson, 1994; Sun, 1995).
Actions lmder Section 301 may be taken on a nondiscriminatory basis, or solely against
the products or services of the country involved, and with respect to any goods or sector,
irrespective of whether they were involved in the particular act, policy or practice (Davis

Jr- , 1991; Masterson, 1994; McCall, 1996; Sun, 1995).

China is currently listed under Section 301, which is also referred to as the
“Priority Watch List”, and often called the “Priority Foreign Country List.” (BSA, 1998;
Davis, 1991; McCall, 1996; Sun, 1995). This means that they are known, and continued
ofl‘erlders of IPRs. According to the Business Software Alliance, in 1996, they were the

only country listed (BSA, 1998; McCall, 1996).

25

If the U.S. Trade Representative determines that action is to be taken in the from
of restrictions, it must give preference to tariffs over other forms of import restrictions,
and consider substituting on an incremental basis an equivalent duty for any other form of
import restriction imposed. Any action with respect to export targeting must reflect the
filll benefit level of the targeting over a period during which the action taken has an effect
(Davis, 1991; Masterson, 1994; Sun, 1995). However, Section 301 under General

Agreement on Tariffs and Trade has severe shortcomings.

Shortcomings in Section 3 01

The U.S. is limited in the actions it can take on trade issues, because voting
consumers enjoy the import of cheap Chinese goods. Import companies rely on imported
products fi'om China to create jobs that are extended by powerful corporations seeking to
expand their marketability. During a trade crisis in June, 1996, the U.S. threatened to
invoke Section 301 to the tune of $2 billion in the wake of wide-spread pirating of CD
ROM technology in China Maintaining that it was in substantial compliance with a 1995,
special agreement (to be discussed later) on Intellectual Property protection, the Chinese
government countered by threatening reciprocal trade tariffs on American exports (Declet
Jr., 1997; McCall, 1996).

The two sides ultimately reached a compromise. However, the conflict did raise
the issue how much “teeth” Section 301 actually had, particularly when domestic markets
Incomes saturated. Compounding the issue was the possibility that economic expansion
into the largest potential consumer rmrket in the world would be cut-ofl‘ (Declet Jr., 1997;

McCall, 1996).

26

Legal scholars and practitioners note that Section 301 is nothing more than a
“paper tiger”, because it lacks substantial retaliatory means to curtail Chinese piracy
(Davis, 1991; Stanberry, 1990a). As the most recent trade crisis indicates, the proposed
tariffs on China represented approximately 4% of the total China/U.S. $50 billion in trade
for 1996 (Declet, 1997). Furthering the notion that the U.S. is somewhat short-sighted in

its approach toward software protection is the fact that the technology is only protected

by Cepyright LaW-

U.S. Copyright Act.

Theoretically, software could be protected by a separate doctrine, specifically
designed for the protection of the technology itself (just as China’s Authorship Rights Law
includes a section on Software Regulation). It could also be covered by a patent, or as it
is in this case, copyright legislation. The fact that section 102 of the Copyright Act omits
specific language to cover software creates problems. Included in the Act is protection for
sound recordings, motion pictures, dramatic, literary and musical works, which include
pantomime and choreography (Sobel, 1989; Ofliee of U.S. Trade, 1995).

To interpret that software is covered within the Copyright Act, one must refer to
the legislation’s unique definition of “literary work”. It is within this definition that the
inclusion of works ...... expressed in “works, numbers or other verbal or numerical
symbols, irrespective of material objects. . .(including) tapes, disks or cards, in which they
are embodied.” Those ah'eady filmiliar with the nature of computer programs may

interpret “literary works” to include software (Sobel, 1989).

27

Another section of the act explicitly references the issue of copying material by
stating that “despite a copyright owner’s exclusive right to reproduce the copyrighted
work, it is not an infi-ingernent for the owner of a computer program to make another
copy of that program” under certain circumstances (Sobel, 1989). Quite obviously, the
preceding statements suggests that the Copyright Act may be used to protect software.
However, the fact that software is covered by legislation designed to protect works of
expression and ideas raise a serious issue.

Software is a utilitarian tool, designed for specific functions for tasks that are
usually well defined. Thus, the technology leaves little doubt as to whether or not it
creates expression or ideas. Here is where the real problem emerge. In deciding
infi'ingement lawsuits the courts are required to apply legal principles that were developed
with dramatic, literary, and artistic works in mind, because the U.S. does not have a
separate Software Directive or legislation. (Sobel, 1989; Wu, 1989). This forces the
courts to misapply or distort the principles during the review or argument process. The
results of this application leads to a clear dichotomy of ideas and expression (Sobel,
1989).

This dichotomy has no useful purpose in software infiingement cases, because
software does not embody ideas in any traditional sense. Yet, the U.S. is compelled by its
own limitation to apply a principal, which lends substantive value toward protecting core
elements of software, to define the technology in terms of ideas in order to distinguish
them fi'om expressions. The results are formalistic and threatens to damage the value of

the idea/expression dichotomy for future cases (Sobel, 1989; Wu, 1989).

28

Proponents for strong Intellectual Property Rights protection are vying for a global
solution. Thus, observers say that the answer lies in China’s willingness to align itself with
regimes such as the WIPO, World Trade Organization and/or General Agreement on
Tarifi’s and Trade. Needless to say, this creates special challenges, because the
international organizations have specified, mandatory remedies for IPRs infi'ingement that

the Socialist state has yet to apply (Declet Jr., 1997; McCall, 1996; Stanberry, 1990a&b).

What is WIPO?

The World Intellectual Property Organization originated in 1883, when the Paris
Convention for the Protection of Industrial Property was adopted, and to 1886, when the
Beme Convention for the Protection of Literary and Artistic works was adopted. Both
conventions provided for the establishment of a secretariat to encourage the protection of
Intellectual Property globally (Merriman, 1991; Rozek, 1978; Stanberry, 1990a).
However, the nature of the World Intellectual Property Organization, as a secretariat,
limits its ability to apply pressure to those who infi'inge upon the IPRs of others, because it
lacks the necessary enforcement mechanisms (Merriman, 1991; Rozek, 1978; Stanberry,
1990a&b; Stith, 1997).

In December, 1996, two treaties were approved by delegates to the World
Intellectual Property Organization’s Diplomatic Conference in Geneva Switzerland. The
first was entitled “World Intellectual Property Organization Provisional Treaty on
Protection of Literary and Artistic Works” (Copyright Treaty), updates to the Berne

Convention by expressly recognizing computer programs as literary works and by

29

recognizing the rights of reproduction, communication, and making them available to the
public (Stith, 1997).

Because the U.S. already recognized these laws, no changes were necessary. The
copyright legislation also included language described by critics as “fuzzy”, which many
say was designed to prevent the development of technologies that circumvent protection
against unauthorized copying. For example, it is unclear if double deck VCRs would be
prohibited, because the primary use of the technology is for unauthorized copying of
videotapes (BSA, 1998; Stith, 1997). In the U.S., such technology is currently allowed,
because the device also support legitimate business practices (BSA, 1998).

Another important aspect that the World Intellectual Property Organization
Diplomatic Conference overlooked was the adoption of any agreements relating to
database protection. The European Union adopted a “Database Directive”, which
extended protection to compilations of data, such as the names and addresses in a
telephone book. They also lobbied unsuccessfully in favor of extending the directive
world-wide through a database treaty. Although the idea of a world-wide treaty was
rejected, the European Union was successful in extending protection on arrangements,
which by reason of selection or arrangement of their contents, constitutes “intellectual
creations.” However, this protection does not extend to the data or material itself (Stith,

1997).

30

WTO and 6.417"

Since 1986, China has been seeking admission to the World Trade Organization,
and its predecessor, the General Agreement of Tariffs and Trade, which the U.S. has
blocked. Observers say that America’s willingness to accept the Socialist state into the
internatioml regime would accelerate its movement toward the adoption of strong
Intellectual Property protection and trade practices. Additionally, it would further the
United State’s goal of fostering free trade, which Section 301 decidedly does not protect
(Declet Jr., 1997; Sun, 1995).

Allowing China to join the World Trade Organization, and General Agreement on
Tariffs and Trade would cause China to be bound by the Trade Related Aspects of
Intellectual Property Rights Agreement. Thus, providing a standard of protection offered
by member states, with their principles of national treatment, prescribed dispute resolution
settlement processes, and minimal standards of Intellectual Property protection (Declet Jr.,
1997). The General Agreement on Tariffs and Trade solution includes bringing together
high-level ofiicials who can place the issue in a “trade” context, tie it into other investment
issues, and take actions which will be binding. It also offers significantly enhanced
remedies against infi'ingement, including a requirement that member sates provide criminal
penalties for commercial piracy (Declet Jr., 1997; Sun, 1995).

With regard to infringement of copyrights, China’s provisions for criminal
sanctions against piracy already meets the Trade Related Aspects of Intellectual Property
Rights standards for criminal remedies. Permitting China to accede to an international
accord requiring strict penalties for piracy would transform discussions about weak

enforcement mechanisms; fiom a struggle among two nations with diverging interests into

31

a multinational question of China’s willingness to comply with its obligations under

international law (Declet Jr., 1997).

Problems with Technology Transfer

The flooding of international markets with Chinese-made counterfeits of CD-ROM
software, which are sold using authentic packaging such as forged holograms, and illegal
trademarks equates to enormous losses for software manufacturers (BSA, 1996;
D'Alessio, 1995; Greenberg, 1995). The high profit margins, and relative ease with which
the CDs can be copied, and smuggled are responsrble for the boom in this illegal trade.
Pirates of packaged software are becoming more sophisticated (Blass, 1992; BSA, 1996;
Greenberg, 1995; King, 1992). In fact, they are so well organized and professional about
their operations, their replicated programs quite often fool the legitirmte manufacturers
themselves (Blass, 1992). This presents special challenges for American firms.

Transferring technology to, or within any environment where the protection of
Intellectual Property is uncertain pose significant risks to an innovating firm’s ability to
collect rents (Chaunjie, 1989; Ramjerdi and D’Amato, 1995; Vishwasrao, 1994). When
host countries are unwilling, or unable to protect the interest of transnational software
publishers, special challenges are presented for both the manufacturer and hosting nation
state (Wu, 1989). A good example is Microsoft’s ordeal with Chinese pirates and

oflicials.

32

Microsoft in China

The Microsoft Corporation hired a private investigator to track down a software
counterfeiter creating fake products that looked so much like the original, it was hardly
detectable. The investigator, Steven McVeigh, was able to trace the source of the product
to the Shenzhen Reflective Institute of Southern China, which is an arm of China's
Shenzhen University. McVeigh found that the pirated holograms, used for Microsoft's
software exclusively, were being transported to the Pacific-Rim area (Blass, 1992;
Goldstein, 1994; King, 1992).

A Microsoft salesperson uncovered the tip of a software counterfeiting ring in a
software store in Taipei, Taiwan (Quellette, 1995). The thieves proved to be a wide-
ranging organization, and had distributed pirated versions of Microsoft's MS DOS 5.0
operating system in English, French, German, Italian and Swedish. Microsoft initially felt
secure that its latest version of operating systems could not be duplicated (Betts, 1995;
Browing, 1992; King, 1992 Quellette, 1995).

After a two year legal battle the State Administration of Industry and Commerce,
which is the agency charged with overseeing trademark and copyright protection in China,
ruled in Microsoft's favor. The Chinese institute was found guilty of shipping 220,000
fake holograms to Taiwan-based counterfeiting rings. Microsoft sought damges in the
sum of $22 million, based on an average packaged software cost of $100.00 However,
they were awarded $250.00, which was subsequently increased to $2,500.00 (Fomey,
1996; Goldstein, 1994).

Further investigation revealed that the State Administration of Industry and

Commerce discovered documents suggesting that at least 650,00 holograms were shipped

33

from the Taiwan-based operation, while 3 million additional orders had been placed.
Although Microsoft vigorously pursued the counterfeiting ring for years, they were willing
to settle for less than “their fair share” of monetary compensation in the interest of
establishing legal precedence (Goldstein, 1994). However, this was not to come.

It is worth noting that the U.S. has unsuccessfully tried pressuring the Chinese
government into closing its CD factories by threatening to impose 100% tariffs on Chinese
erqrorts (D'Alessio, 1995). Equally important is the fact that none of the violators were
subject to harsh criminal punishment or fines, although Microsoft is a signatory to the
Berne Convention (McCall, 1996). It’s quite possrble that the pirates were well connected
with various state organs. Thus, the “fair use” provision in the 1991, Authorship Rights
Law could also have been interpreted in their best interest. Even if that was the case the
relatively recently revised Authorship Rights Law of 1994 requires that wide-spread

commercial pirates face up to three years in prison.

Summary

This clmpter provided a definition of Intellectual Property toward establishing a
fi'amework for understanding the importance of IPRs. It also demonstrated the need for
strong enforcement mechanisms to protect packaged software. The U.S. obviously has
significant economic stakes in this matter because software comprises an increasing and
vital part of the American economy. However, it is besieged by ineffective, domestic laws
with useless unilateral provisions. The mere imposition of Section 301 on China may
cause more harm than good to the U.S. economy. Compounding the problem is the fact

that America must rely on the loose interpretation of its Copyright Act to protect a

34

technology that, at its core element, is arguably not necessarily included under U.S.
Copyright Law (McCall, 1996).

Proponents for strong IPRs enforcement mechanisms argue that China’s
acceptance into a global regime would accelerate its compliance under international law,
thereby, eliminating the fundamental U.S. vs. China conflict. But this argument does not
always hold true, particularly when considering the nature of global regimes such as the
World Intellectual Property Organization. Because the World Intellectual Property
Organization is a secretariat, it lacks the necessary enforcement mechanisms to combat
software piracy (McCall, 1996). In addition, the regime has done little to better its
position toward protecting software globally.

During a 1996 Diplomatic Conference in Geneva Switzerland (McCall, 1996;
Stith, 1997) the World Intellectual Property Organization failed to incorporate specific
language relevant for the protection of software in its “Provisional Treaty on Protection
of Literary and Artistic Work”. Instead, the treaty inveigles with “fuzzy” language that is
subject to multiple interpretation. Furthermore, unlike the European Union, the World
Intellectual Property Organization completely ignored the possibility of including
copyright protection for computer databases under the “Database Directive” (Stith, 1997).
Thus, setting the stage for further litigation and prolonged settlement disputes among its
signatories.

China’s accession to the World Trade Organization would more likely eliminate
much of the debate regarding enforcement mechanisms, and prescribe remedies such as
mandatory jail time for commercial pirates. This is because under the General Agreement

on Tarifi‘s and Trade, prescribed negotiations would necessarily bring trade and

35

investments into the equation. Thus, providing stronger protection to companies such as
Microsoft when doing business in traditionally unregulated environments. However, even
China’s acceptance to the World Trade Organization cannot stop the illicit activities
completely.

The case involving Microsoft revealed inherent problems with the Socialist states’
attitude toward penalty imposition. Harsher punishment should have been applied because
China is a signatory of the Beme Convention, and has a Memorandum of Understanding
with the U.S. which should afford fair and equal treatment for all American firms. Thus,
China’s acceptance to the World Trade Organization may only serve to shift the balance of
power in favor of transnationals, and their respective governments, but it would not

necessarily change the Socialist country’s practices, nor the attitudes of its people.

36

CHAPTER IV

What Transnationals are Saying About IPRs

Leaders of transnational software firms are quick to point out that the most severe
shortcoming with protecting IPRs in China is in the area of penalty imposition (Stanberry;
1990a; Stith, 1997). Because most Socialist and Southern Nations are poor, and tend to
be less developed, they typically align themselves with regimes with inherently weak
enforcement nechanisms (Stanberry, 1990a&b; WIPO, 1995; Human Development
Report, 1995). The obvious purpose for this is to create an illusion of being in compliance
of IPRs globally.

Transnationals advocate for stronger IPRs protection for more practical reasons.
Among them is its necessity for growth and continued protection. Another is to assure
profitability and finally, the manufacturers suggest alternatives strategies for both
governnrents and transnational firms to consider.

Among the 128 World Intellectual Property Organization sigmtories as of April
30, 1992, only five (Angola, Liberia, Somalia, Sierra Leone and Yemen) or roughly 4%
were non-members of the Paris Convention while twenty-six (Angola, Bangladesh,
Burkina Faso, Burindi, Central Afiican Republic, Chad, Gambia, Guinea, Guinea-Bissau,
Haiti, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Niger, Rwanda, Somalia,
Sierra Leone, Sudan, Togo, Uganda, Yemen, Zaire, Zambia) or approximately 21 percent

Were among the poorest nations ( Human Development Report, 1995) on the planet. Of
the remaining nations, a majority are disproportionately located on the African Continent,

P‘EICific-Rim and in the South (WIPO, 1995; Human Development Report, 1995).

37

From the perspective of the firm, a LDC's position toward a particular regime
strongly suggests its sentiments toward IPRs, and how enforcement is to be carried out.
To this end, signatories of the World Intellectual Property Organization may offer some
degree of comfort to transnational firms because their membership suggests that they are
open to the possibility of protecting the “intellectual creations” of others. In practice,
however, sigmtories of WIPO only, and no other convention, tend to create environments
where piracy flourishes (Rozek, 1987; Stanberry, 1990a&b; Weinstein, 1985).

Circumstances such as these tend to discourage domestic software development.

Necessary for Growth and Protection

Software manufacturers claim that IPRs are necessary to foster free trade and
growth. They further assert that by allowing technological piracy, developing countries
stifle indigenous innovation. The supporting notion is that if developing nations would
protect Intellectual Property, long-term benefits would be realized through increased flow
of fi'ee ideas, information technology unto the developing country, greater rents for
economic development and over time, benefits would surpass short-term costs of

complying with Intellectual Property protectionism (Stanberry, 1990a&b).

Increased Profitability
The American software industry is a global industry that supports a vibrant
STOWing trade system and endorses the principles of fi'ee and flair trade. Approximately 70
Percent of the U.S. software industry's revenues are generated from foreign rmrkets --

mking equitable trade practices a critical tool in ensuring the industry‘s continued

38

viability. By the year 2000, China’s population is expected to reach 1.25 to 1.3 billion,
and will continue to be the single largest population on the planet for any nation (Ernst
and Young, 1994). Needless to say, this presents tremendous opportunities for American
software firms wishing to expand, thereby, increasing their profit potential (BSA, 1996;

Ernst and Yormg, 1994; Ramjerdi and D’Amato, 1995).

Tracie-o]?r A lternatives
Several possibilities exist for multinational firms and developed nations to assist

China with efforts to combat piracy abroad. Among the many possibilities, the strongest
arguments could be made for the following initiatives:

(1) An obvious strategy would be to involve local creative industries in foreign markets in
the fight against piracy. Many foreign industries benefit from Intellectual Property Laws,
and are natural allies of the U.S. and international advocates lobbying for stronger anti-
piracy enforcement (Stanberry, 1990a).

(2) Where there is no local industry creating Intellectual Property, interests in stronger
protection could be created by selecting a few of the foreign country’s most successful
pirates and appointing them “authorized distrrhutors”. Thus, pirates would become stake
holders interested in the adoption of enforcement of effective Intellectual Property Laws
(Stanberry, 1990a).

(3) Another way to develop local stake holders would be for developed states to bid on
the rights to license locally created Intellectual Property. Royalty payments could be split
among the local creator and his or her government. Thus, both the creator and host

government would have direct interest in protecting IPRs (Stanberry, 1990a).

39

(4) Another possible approach for developed nations and industries is to help the local
economy during the period of adjustment after the adoption of Intellectual Property Laws.
This type of assistance would have more usefulness in small, LDCs that are not yet highly
involved in international trade. However, it could still be done in larger states by setting
prices at an affordable level for consumers in foreign markets, thereby, facilitating the flow
of innovative technologies. Although lower prices will not necessarily reduce piracy, it
will rebut the government’s assertion that piracy is needed to provide the local citizenry

with a product that is needed and out of their cost range (Kitch, 1994; Stanberry, 1990a).

40

What Nation States are Saying About IPRs

Nation states that are eager for economic development fear that protecting
Intellectual Property will leave them at a permanent disadvantage, facing prohibitively high
prices for technologies, and creative works needed to modernize (Li, 1987; Rozak, 1978;
Stanberry, 1990b; Sobel, 1989). Contrary to conventional wisdom, prices are not
autonmically higher where Intellectual Property is protected. In some instances,
environments with strong IPRs enforcement mechanisms in place will encourage new
entry by competing firms. The competition, in turn, will lead to lower prices.

Extraordinary high prices tend to encourage theft while discouraging domestic
development. If prices are extremely low, there is less chance of piracy. However, lower
prices equate to reduced profit margins and minimize the firm's competitive advantages,
because economic barriers (usually discouraging entry by new firms) have been removed

(Romk, 1978; Stanberry, 1 990b).

Costly

When permitted, pirates do not sell at prices less than the market will bear. In
areas where illicit activities prevents new entry by competing firms, pirates often charge in
excess of monopoly prices. In markets where Intellectual Property is protected,
competition keeps legitirmte sellers from taking advantage of their protected status.
Thus, they can’t charge more than the market will bear or they will lose sales, because
My products will have substitutes. Any abuse of prices is best addressed through pro-

coIllpetition laws that enables a country to remedy each allegation of abuse on a case-by-

41

case basis. If prices increase, that’s society’s cost for rewarding risk-taking innovations

(Rozak, 1978; Stanberry, 1990b).

Limits Domestic Productivity

The apparent advantages of theft are more an illusion than real. By encouraging
the development of Intellectual Property and protecting against its unauthorized use, any
nation can and should be regarded as investing in “knowledge capital”. By failing to adopt
their own domestic knowledge producing capabilities, most LDCs stifle future generations
with lower quality and less diversity of goods, inflated prices, lower labor productivity and

competence (Stanberry, 1990b; Subramanian, 1991).

Constrains Competition

China shares with other nations certain disincentives to vigorously enforce IPRs.
Developing nations typically view Intellectual Property Laws as a restriction on their
ability to obtain and use the technological information necessary for their economic
development. They also argue that technological informtion should be easily accessible
and provided at a nrinirnal cost, because knowledge is the common heritage of mnkind
and because “Third World development is in the interest of all nations.” The Chinese also
views the importation of Intellectual Property as the Developed World’s means of
dominating and exploiting developing countries and the payment of royalties as fostering a

negative balance in trade (McCall, 1996; Stanberry, 1990b).

42

Increases Dependency

Less Developed Countries argue that accepting technology from transnationals
creates perpetual dependency. The underlying belief is that to legitimately support the
objectives of the firms, LDCs must adopt strong IPRs regimes, develop legal and
technological infi'astructures, increase educational goals and a host of other areas (Haq,
1987; Schware, 1992). Thus, foreign capital will also be needed. The acceptance of
foreign capital brings forth its own set of problems and objectives for both the host state
and transnational firm. However, not all LDCs hold the same view about IPRs. Rather
than fearing the possibilities of becoming perpetually dependent on developed nations,
some LDCs accept assistance in hope of stimulating their own economy and gaining
greater autonomy through successful trade relations. This was the case with Singapore

(Stanberry, 1990b; Subramanian, 1991).

Increases Growth Opportunity

A report by the International Intellectual Property Alliance in 1984, called
Singapore the “world’s capital of piracy”. Today, Singapore is a success story (Stanberry,
1990a). The country’s willingness to base its’ economy on the high-technology industry
prompted it to pass a comprehensive Copyright Law in 1987, which replaced existing
policies from the colonial period (Ernst and Young, 1994). It increased penalties by two
and a halftimes, fi'om two years to five years in jail and $900.00 (U.S.) to $45,000.00
(U.S.) in penalties for copyright infringement. Although Singapore’s Copyright Law is
not fully enforced today, Western pressure, particularly in the area of computer software,

film, video tape and the like remains strong (Stanberry, 1990a).

43

Singapore adopted efl‘ective Intellectual Property protection reform without
economic downtru'n. This was a classic example of a country that protected its domestic
film industry, but failed to provide protection for foreign products until the U.S. and Great
Britain arranged bilateral deals to protect their products (Ogan, 1988). As a result, its'
music, movie, computer and software industry is vibrant. According to the Business
Software Alliance, in 1994, Singapore had one of the lowest piracy rates of all countries at
58 percent (BSA, 1998; Stanberry, 1990b) (see Appendix A & Chapter VI. under
Methodology for Determining Loses).

It is worth noting that not all Pacific-Rim basin countries were as successful as
Singapore. Both Taiwan and South Korea adopted similar laws, but were unsuccessful,
because they failed to back them with the proper enforcement mechanisms (Hoffman and
Marcou, 1990). According to the Business Software Alliance, in 1994, Taiwan reportedly
had a piracy rate of 72 percent while South Korea’s was substantially higher at 78 percent

(BSA, 1998). (See Appendix A.)

Why China is Positioned to Resist Global Cooperation

China is positioned to resist global change for several reasons. First, the Socialist
state has a skilled labor force that is capable of developing a knowledge-based, economy-
driven state of its own, which affords some degree of autonomy. Secondly, it is among
the top 11 exporting countries in the world (as of 1992), suggesting that its products are
highly sought after. China also ofl'ers tremendous opportunity to transnationals seeking to
expand, because it has the largest potential consumer market in the world and finally, the

country has an abundance of low-wage workers. Thus, transnationals seeking to optimize

profitability could tap into an enormous supply of cheap labor.

Domestic Production Capabilities

China has some of the best software engineers in the world (Ramjerdi and
D’Amato, 1995). In general, the highly-skilled and college-educated are to be found in
major cities (Ernst and Young, 1994). This is also where most of China’s most
sophisticated piracy rings operate due to the urban universities, research institutions,
corporations and ministries (Ramjerdi and D’Anrato, 1995), which also house some of the

most sophisticated replication technology in the world.

Trade Surplus
One reason for the accelerated growth in China is the opening of its economy to
foreign trade and investment. When exports increased, foreign exchanged bottlenecks

were removed (Weinstein, 1985; Ramjerdi and D’Amato, 1995). In 1992, China was the

45

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eleventh largest trading nation in the world, up form fifteenth in 1991. It’s global exports
increased from $7 billion in 1975 to $59 billion in 1988 and from $72 billion in 1991 to
$85 billion in 1992. Global inrports increased from $5 billion in 1975 to $27 billion in 1988
and from $63 billion in 1991 to $80 billion in 1992. China’s total trading share of the
GNP went liom 9 percent in 1978 to 36 percent in 1991 (Ramjerdi and D’Amato, 1995).
The increased trade between China and the U.S. has had a substantial impact on
both economies. Between 1979 and 1987, America became China’s third largest trading
partner. Within a ten year span, from 1979 to 1989, U.S. investments in China had grown
to $10 billion (Wu, 1989). For China, the value of exports to the U.S. was $5 billion in
1990 and $6 billion in 1991. In addition, the Socialist state has realized a global trade
surplus since 1990, particularly with the U.S. In 1992, Chinese trade surplus with the
U.S. reached a record $18 billion (Laris, Clemetson, Liu and Hirsh 1997; Ramjerdi and
D’Amato, 1995). By 1996, it’s bilateral surplus reached $39 billion world-wide, which is

second only to Japan (Laris, Clemetson, Liu and Hirsh 1997).

Market Size

When transnational firms endeavor to increase the sales of goods and services,
they must concentrate their effort on their potential consumer market. Conventional
wisdom suggests that the larger your target market, the greater the possrhility of
incremental sales. Thus, no advanced nation can afford to ignore a market the size of
China (Wu, 1989).

China has the world’s largest population. With 1 billion people at the end of 1991,

it accounted for nearly one-quarter of the world’s total population. During the 19808’, the

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annual population growth rate fluctuated between 1.3 percent and 1.7 percent. In recent
years, the rate has stabilized at 1.3 percent. The population is projected to reach 1.25 to

1.3 billion by the year 2000 (Ernst and Young, 1994).

Cheap Labor

As the attention of the firm is turned to labor costs, wages and benefits are of the
utmost importance. In contemporary China, the average workers’ monthly income is
derived through domestic employment and is set at approximately RMB 200 to RMB 300
or the U.S. equivalent of $23.00 to $35.00 dollars respectively. However, workers
employed by the Foreign Investment Enterprises are usually paid higher than those of state
rim entities. As a rule, Foreign Investment Enterprises rmrst set a wage standard of not
less than the average wage of employees of local state-run enterprises operating in a
similar industry (Ernst and Young, 1994).

For white collar workers in Foreign Investment Enterprises and representative
oflices, the estimated annual salary for clerical staff is RMB 12,100 ($116.00 U.S.); for
professional staff, RMB 16,600 ($159.00 U.S.); and for managers, RMB 24,900 ($238.00
U.S.). Most Foreign Investment Enterprises operates on a 24 hour, six days a week basis,
with seven paid public holidays annually. Additionally, three days of paid marriage leave
and 56 days ofpaid maternity are allowed. Although these wages are extremely low and
the working conditions endured by the Chinese people are excruciating (Ernst and Young,
1994), the opportunity for transnationals to tap into what appears to be an ahnost endless

supply of cheap labor is tremendous.

47

Summary

Transmtional firms are quick to point out that China’s most severe problem is in
the area of penalty imposition, which is why the Socialist state aligned itself with the
World Intellectual Property Organization. Furthermore, transnationals maintain that
strong IPR’S’ protection is necessary for fostering growth and increasing profitability.
Thus, several possibilities for LDCs are presented. Among them is to: align themselves
with local creative industries that are natural allies; co-opt successful pirates and make
them stakeholders; license foreign nationals as stakeholders and share the profits; and
finally, assist local industries and governments by providing financial support during the
adoption of a strong IPRS regime (Stanberry, 1990a).

Nation states eagerly point out that costs, limitations to domestic production
capabilities and constraints to competition leads to increased dependency. However, not
all LDCs ascribe to the same notion. Singapore opted to accept the assistance of the U.S.
and Great Britain and was successful in adopting a strong regime for protecting IPRS.
Today, Singapore boasts of a vibrant economy. However, not all developing countries are
as successful. Both Taiwan and South Korea attempted to adopt strong IPRS legislation,
but were unsuccessful, because they failed to provide adequate enforcement mechanisms
(Stanberry, 19903).

China is unique, because the Socialist state has a well educated population, capable
of advancing a knowledge producing country. It this a strong economy, the largest
potential consumer market in the world and an abundance of cheap labor. Thus, China is

a relatively autonomous state with markets so attractive, they can not be ignored by

48

foreign firms nor governments seeking to increase profitability or expand its sphere of

influence respectively.

49

CHAPTER V

What China Must Do to Establish and Enforce IPRS

To establish and maintain an effective national public policy on IPRS, China’s
principal organs must proactively adopt and enforce measures to protect the interests of
foreign firms. Thus, it must follow through with its 1995 Action Plan, which outlines both
immediate and long-term solutions. Additionally, enforcement efforts are required of all
the People’s Government provinces, directly administered municipalities, autonomous

regions, cities, and government ministries.

Establish a Timetable for Objectives

In 1995, Chim set forth an Action Plan outlining immediate and long-term projects
to enforce IPRS by exercising existing and expanded authority. The key short-term
project of this plan included the institution of a special enforcement period. During this
period, intensive action was to be taken to investigate and punish violators, with special
attention given to high-level infringement actions against the manufacturer, reproducer
and distributor of infiinged products (Yi, 1995).

Long-term (3-5 years), sustained enforcement is to be carried out by the State
Council’s Working Conference on IPR’S, other working conferences, enforcement task
forces and ad hoc groups. Their primary objective was to coordinate efforts to provide
effective enforcement of IPRS and punishment within each province, directly administered

municipality, autonomous region and city. Administrative organs, including Chinese

50

Custom, State Council’s Departments, police and other relevant agencies also

participated in this initiative (Yi, 1995).

State Council ’s Working Conference

The State Council established a Working Conference on Intellectual Property
Rights, which through forceful measures centrally organizes and coordinates protection
and enforcement of all IPRS throughout the country. The State Council is also responsrhle
for assuring that substantial reductions are observed. For the purpose of drawing up the
plan, IPRS includes copyright and related rights, trademarks, patents, protection against
unfair competition, including protection of undisclosed information and other relevant
subject matter . The State Council’s Working Conference includes departments in charge
of science, technology, foreign trade and economic cooperation, foreign affairs, press and
publication, culture, broadcast, film, television, justice, public seemity, patent, copyright,
industrial and commercial administration and customs. (McCall, 1996; Yi, 1995).

The primary responsibilities of the State Council’s Working Conference on IPRS

A. To coordinate, study and decide on major policies and measures for the
effective protection and enforcement of IPRS and to coordinate and organize enforcement
activities among provinces, directly administered municipalities, government regions,
ministries and departments as well as cities.

B. To monitor the implementation of the laws and regulations on IPRS to organize
and instruct relevant authorities within regions and departments to substantially reduce

IPRS infiingements.

51

C. To instruct and organize relevant authorities within regions and departments to
provide education and publicity for laws regarding IPRs; to foster a greater understanding
of IPRS protection among people throughout the country; to improve enforcement skills
of leading oflicials at various levels of government as well as skills of enforcement
personnel (McCall. 1996).

D. To provide instructions so that administrative, civil and criminal processes for
sanctions are applied consistently and uniformly to all Chinese and foreign persons as well
as public, private and nonprofit entities that engage in IPRS infiingement (McCalL 1996;
Yi, 1995).

E. The State Council’s Working Conference will direct and coordinate work of
Intellectual Property working conferences, which the People’s Governments of at least 22
provinces, directly administered municipalities and autonomous regions and major cities,
includins Gumgdong, Beijing, Shanghai. Tianjin, Wuhan, Nanjing, Shenzhen, Jiangsu,
Zhejiang and Fujian will organize to carry out (Yi, 1995). Activities within their
jurisdiction will be at the direction of the State Council’s Working Conference so that
effective enforcement is achieved throughout the country (McCall, 1996; Yi, 1995).

The State Council’s Working Conference will issue directions to the provincial,
directly administered municipalities, autonomous regions, city bodies, coordinating and
guiding IPRS to formulate Action Plans, provide infornmtion and education (McCall,

1996).

52

I 995 Action Plan

In 1995, an Action Plan outlining immediate and long-term projects to enforce
IPRS by exercising existing and expanded authority was implemented. The key
components included the institution of a special enforcement period in which intensive
action would be taken to investigate and punish violators. Special attention is to be given
to large scale operations (Yi, 1995).

The following is an outline of the 1995 Action Plan:

A. Each Action Plan or work program shall provide for effective enforcement,
eliminate interference by local protectionism and ensure complete implementation of said
plans. The State Council’s Working Conference will receive these plans within three
months after the issuance of the Action Plan and will address or enforce any problems
outstanding at that time.

B. In the irmnediate filture, the focus must be to select key regions and problems
where serious efforts shall be made to investigate, tackle cases and punish criminals.

C. The provinces, regions and cities working conferences shall issue follow-up
reports each quarter for the first year and semi-annually subsequently. Beginning on June
1, 1995, Action Plans and work programs were published as soon as they were issued
(McCall, 1996).

D. Included in each report will be the name ofa contact person in the working

conference who will accept responsibility for the carrying out and enforcement ofthe

Action Plan in each territory.

53

The State Council’s Working Conference on IPRS established an office within the
State Science and Technology Commission to prepare for and handle the day-to-day
functions of the conference.

A. The Ofice of the State Council’s Working Conference on IPRS established a
system of Liaison Oflicers. The liaisons make reports to the Working Conference
regularly regarding directions taken and provides eflective enforcement on IPRS in their
region. They also relay information on instructions, spirit and work duties item the State
Council’s Working Conference .

B. Provincial, regional, municipal and city working conferences established local
oflices to carry out the day-to-day flmctions, consistent with that of liaisons.

The Enforcement Task Forces were designed to cany out specific duties as well.
Although their assignment is not as comprehensive as the State Council’s Working
Conference, they are crucial to China’s success. Among them are:

A. Each task force shall have all the necessary legal authority to use its resources to
initiate and carry out investigations of any suspected infi'ingement of IPRS.

B. When property rights violations are suspected, with reasonable cause, task force
members may search any premises, review records of evidence and seal all suspected
goods or tools predominantly used to make the fake products to use as evidence.

C. When the task force is found to be correct, they may impose fines, revoke permits
used by the operator of illegal or for legitimate purposes and confiscate any implements or

materials directly used in the violation without ofi'ering any compensation.

54

The task force has the authority to order the infiingement stopped while the case is
being processed. In severe criminal cases, the suspects will be held over for criminal
prosecution. Fines will be commiserate to the level of piracy that occurred.

All sub-central levels on Intellectual Property protection and enforcement
authorities participating in the enforcement task will have aggressive ex oflicio actions
(actions on their own authority without the permission of the copyright holder) against all
types of IPRS infiingement. Upon its establishment, an enforcement unit must select a
contact person, publish their telephone number and keep the victim of the illicit activity
informed of progress with their case. Additionally, foreign victims are to be accorded the
same right (access to their case information) as Chinese citizens (Yi, 1995).

Ad Hoc Groups act within areas where the situation is very serious. The groups
are given direct enforcement rights on Specific forms of Intellectual Property, particularly
audio-visual products (which includes CDS, LDs, audio and video tapes, sound recordings
and motion pictures). They are also given the rights to computer software in any form.
This includes video games, as well as networks, hard drives, CD-ROM and other media.
Each Ad Hoc group was given the same authority as Enforcement Task Force members
(Y i, 1995).

The State Council’s Working Conference and Enforcement Tasks Forces will
continue to work over a prolonged period or approximtely 3-5 years. This plan was
implemented on March 1, 1995. However, the interim (period prior to the implementation
of the State Council’s Working Conference and task force) has been regarded as a Special
Enforcement Period. Thus, actions were taken to eliminate piracy, counterfeiting and

other forms of infiingements of Intellectual Property (McCall, 1996; Yi, 1995).

55

During the Special enforcement period, nation-wide information and education
campaigns were underway. Emphasis was placed on enforcement in key cities likely to
have high levels of infiingement activity. Here, Special attention was given to places
where contraband was produced, distributed and sold, particularly CDS, LDs and CD—
ROM producing factories. Those found in violation were subject to punishment
commensurate with the level of infiingement.

In respect to trademark prosecution, intense investigations were given to the most
significant cases. Severe penalties were imposed and widely publicized. The Chinese
Government hopes that the publicly will act as a deterrent, while filcilitating much needed
publicity about their efforts to reduce the illicit activities (Yi, 1995).

By July 1, 1995, Chinese officials concluded their first investigation series on
software producing entities. Immediately thereafter, relevant units engaged in the
reproduction of publications, exports, leasing operations and the like were investigated
and violators were closed down. With special regard to conrputer software, entities found
in violation (public, profit and nonprofit) were subject to the same penalties, irrespective
of their connections to various state organs (McCall, 1996; Yi, 1995). Orders to enact
tighter control over software reproduction was passed-down to sub-central departments
while special punishment was given to repeat offenders. Punishment included severe fines,
revocation of license for legitimate manufirctures and/or jail time.

Because tradermrk infiingement is illegal, the State Council’s Working Conference
began investigating and punishing violators with vigor. Trademark agents, once only
allowed to act on behalf of Chinese citizens, were authorized to act on behalf of foreign

entities as well. This authority was expanded to include joint ventures, wholly-owned

56

subsidiaries and any foreign licensee of Chinese interests. China’s National Copyright
Administration and State Administration for Industry and Commerce also have key roles
tlmt are similar to organs previously mentioned (Yi, 1995).

China’s National Copyright Administration is responsible for the administration
and nuintenance of all copyright protection for computer software, audio-visual products,
books, general publications and all other literary works. The National Copyright
Administration also directs and oversees enforcement efforts as part of an enforcement
task force, which is also comprised of local administrative agencies. Each task force is
charged with the respomibility of investigating and punishing copyright violators (Yi,
1995).

The State Administration of Industry and Commerce have a Trademark Ofice,
which oversee registrations and administration throughout the country. If there is reason
to believe that a trademark contract is inconsistent with the law, the Trademark Oflice will
review the contract to assure its validity. The office also punishes trademark violators and
counterfeiters, as well as handle the appeal of trademark infiingement cases (Yi, 1995).

It is important to note that although China’s 1995 Action Plan was extremely
comprehensive, it was not thorough. Not only does the plan omit mandatory penalties for
software piracy, but it virtually ignores the penalty issue altogether. Needless to say, this
suggests that the Socialist country is far from compliance with global regimes that

advocates strong IPRS protection.

57

How F or is China from Global Cooperation?

Efforts to fully and immediately modernize its stance on IPRS will require that
China receive assistance from advanced nations (such as the U.S.), while adhering to
global standards set forth by regimes like the World Intellectual Property Organization,
the United Nations’ Education, Scientific and Cultural Organization and the like. In
addition to providing on-going consultation and training, capital requirements to initiate
such a bold plan of action Should be forwarded by countries with a vested interest in
China’s successes and failures.

U.S. Federal Trade and Customs Agents developed an aggressive training and
advisory assistance package for IPRS enforcement in China (McCall, 1996). The first
phase of their initiative includes sending four advisory teams to Guangzhou, Beijing and
Shanghi to train Chinese Customs Agents. Emphasis in training focused on preventive
measures (McCall, 1996; Yi, 1995) such as:

(1) Identifying Intellectual Property infiinging merchandise through physical examination
and a verification process.
(2) Assisting Chinese officials in designing a centralized recording device to register
copyright and tradenmk rights.
(3) Advising Chinese officials on investigative techniques.
(4) Advising the Socialist state on seizure and forfeiture techniques.
(5) Providing input on regulatory guidelines and,
(6) Establishing contracts for future Customs-to-Customs cooperation.
The Federal Bureau of Investigations, in cooperation with the State Council’s

Working Conference on IPRS, the Ministry of Public Security and the Supreme People’s

58

Procuratorate, entered into discussion on several areas of mutual interest. These
discussions primarily focus on criminal investigation procedures to enhance prosecutions
of IPRS violators.

In a letter written on February 26, 1995, Mickey Kantor (U.S. Trade
Representative) acknowledged the mutual understanding that China’s Minister of Foreign
Trade and Economic Cooperation (Office of U.S. Trade Report, 1995; Wu, 1989; Yi,
1995) and the U.S. had reached. In the letter, China acknowledged the need for
“cooperative, reciprocal assistance” among them and the U.S. Customs Service,
Department of Justice and Patent and Trademark Oflice. Additionally, the letter also
suggested that China is not at all comfortable with the way they are viewed by the rest of
the world (Yi, 1995).

In exchange for China’s cooperation and Sharing of information (first, on a
quarterly basis for eight months, thereafter, once armually) with U.S. oflicials regarding
the progress of IPRS enforcement efforts, the U.S. would: (1) Assist China by sending
representatives fi'om its Patent and Tradermrk Oflice to train them in Intellectual Property
registration techniques. (2) Consult with China’s Government with respect to “any” area
of trademark registration and evaluative techniques and; (3) Provide information and
statistics on U.S. prosecution and administrative court decisions. On the basis of the
foregoing, Chinese oficials requested that the U.S. innnediately remove China from its
“priority watch list” as a Section 301 consideration (Yi, 1995).

Itisworth notingthat Section 301 priority status, as itrelates to Chim, isvirtually
insignificant. However, strong Chinese interest in being removed fi'om the “priority watch

list” may (Yi, 1995) suggest that the Socialist state is concerned about its image in the

59

eyes of the world, because they are preparing to both cooperate and compete globally.
This notion can not be easily dismissed, particularly considering China’s relentless efforts
to gain membership into the World Trade Organization and continued interests in
maintaining its Most Favored Nation status with the U.S.

Although the U.S. is in the forefront of the efforts to curtail Chinese IPRS
violations, it is not alone. For almost two decades, China proactively pursued other
avenues of gaining support among international regimes. As early as 1979, when China
considered formulating a special Copyright Law, the govemment initiated its first omcial
contact with the World Intellectual Property Organization in Beijing around 1981 (Declet
Jr., 1997; Shell, 1989).

China began preparing for new Copyright Law and organized training causes for
Chinese Nationals in conjunction with Western legal practitioners. By 1996, more than 71
Western law firms established satellite oflices in some of China’s major cities. Among
them were Shanghai, Beijing, Shenzhen, Haikou and Guangzhow (Adams, 1996) They
also received assistance fiom experts at the World Intellectual Property Organization,
United Nations’ Educational, Cultural and Scientific Organization and other foreign
associations sending representatives to union meetings and seminars held by international
copyright regimes. Since the resurgence of IPRS protection 1995, Chim has made
significant strides in drafting and enforcing Intellectual Property Laws across a multitude
of industries (Declet Jr., 1997; Shen, 1989).

Seven plants producing infi'inging products have been closed, business licenses
revoked and more than two million infiinging CDS, LDs and copies of computer software

have been seized and destroyed. Intermediary technologies used to create the illegal

products were reportedly destroyed and/or seized (Declet Jr., 1997; Yi, 1995). Under the
Chinese Government’s Action Plan, these effort will only intensify. To date, investigation
of all production lines suspected of producing infiinging CDS, LDs and CD-ROMS have
been completed (Declet Jr., 1997;).

In support of U.S. and Chinese customs oflicials, the Asian Development Bank
granted $500,000.00 in aid (Yi, 1995). Thus far, China appears to have full cooperation
fiom the U.S. and special interests in Asia. They also appear to be working diligently with
global regimes such as the United Nations’ Education, Scientific and Cultural
Organization, the World Intellectual Property Organization and ultimately, the World
Trade Organization. However, there are Significant obstacles to be overcome.

The piracy rate in China in 1996, just one year after its crusade to reduce software
piracy began, exceeded $703 million in losses to the software industry. A primary portion
of these losses are attributable to the continued large scale production and export of illicit
CD-ROM products. Although the closure of a significant number of plants is a solid start,
the remaining plants in operation have tremendous production capacity and must be shut
down (BSA, 1998). End-user piracy within businesses and homes has also expanded and
contributed heavily to the approximate 98 percent piracy rate in 1996, which is second
only to Indonesia and Kuwait with 99 percent and tied with Ecuador, Oman, Thailand and
Vietnam for the same year. (see Appendix A.)

It is also worth noting that although Chinese oflicials pursued an aggressive stance
on IPRS enforcement, the end results were an increase in piracy from 97 percent in 1994
to 98 percent in 1996. However, in 1995 (the year the plan was implemented) the

Socialist country experienced a 1 percent reduction; down hour 97 percent to 96 percent

61

(BSA, 1998). Thus, the apparent affects of the Action Plan was Short-termed and

suggests that more attention needs to be focused on end-user enforcement.

62

System of Checks and Balances

China must endeavor to restructure its regulatory framework to accommodate the
progressive public policies outlined in its 1995 Action Plan. Its judiciary must: (1) have
enough legal specialists capable of grappling the complexities of IPRS and infiingement
cases; (2) achieve the necessary autonomy to get beyond bribery and intimidation; and (3)
impose severe penalties. The latter may correct what is considered by many to be China’s
biggest problem.

The earliest Intellectual Property legislation of the People’s Republic of China
came after the communist victory in 1949, and dealt with the problem of replicating Soviet
models. These problems persisted until November 3, 1963, as the country pressed for
self-reliance and industrialization. Patents were revoked as ideologically unacceptable and
inventions were considered to be property of the state without question. The “system of
checks and balances between courts were completely abolished” as civil disputes were
handled by informal or nonjudicial agencies and the People ’s Daily openly praised

lawlessness.

Shortage of Legal Experts

In 1974, a benchmark in the American legal system was passed when the number
of lawyers in America reached 400,000. What that meant at the time was that for every
500 person, one was a lawyer. Since most law school graduates are 24 years old and if we
arbitrarily defined an adult as a person over the age of 24, that would mean that one out of

every 250 adults in the U.S. were lawyers. Equally important is that there were more than

63

100,000 law students in the U.S. during the same period. Clearly the national trend in the
U.S. was leaning toward lurving a larger percentage of the population fimction as lawyers
(Li, 1978). In China, a vastly different picture emerges.

The greatest number of lawyers ever claimed by the Socialist state was 3,500 in
1956. Many of these legal practitioners stopped practicing law in the Western sense
around the 1950’s. It is ironic that a country with four times the population as the U.S.
could have only 1 to 2 percent of its number of lawyers. In 1978, out of the four law
schools operating in China, Peking University (the largest school) had approximately 200
students. The consequences of not having a sufficient cadre of legal practitioners are quite
clear (Li, 1978).

Even if China wanted to adopt America’s legal theory and structure, the Chinese
legal system would frmction quite difi'erently, because it would be stafl‘ed by a few
thousand, as oppose to 400,000 legal practitioners. In addition, China only have a small
number of Specialists. Thus, it should not necessarily consider constructing a complex
legal system (such as that of the U.S.), because the greater the complexity, the greater the
need for legal Specialists (Li, 1978).

With so few legal specialists, the Chinese legal system must be simple in structure,
method and content so that relatively untrained people or even members of the general
public can participate in the legal process. Simplicity goes beyond the logical conclusion.
The Chinese maintain that the law “ought” to be Simple, otherwise, how can the masses of
people understand or easily use the law. The underlining principal is that the law Should
beandindeedmustbesirnple,sothatthemassescanuseittocarryouttheirwishesand

not be subjugated to rules understood by the legal profession alone. This philosophy is

consistent with China’s traditional Marxist and Socialist theory (Come, 1997; Ramjerdi

and D’Amato, 1995; Li, 1978).

Legal Autonomy

The relationship among the judges and Chinese Communist Party is problematic,
because the latter may appoint, reappoint or dismiss the former. Party interference with
the judicial system is wide-spread and allegations of political favoritism discourages judges
fi'om responding to instances of administrative abuse. When judges do act, administrative
officials simply refuses to comply with court instructions and ignore formal judgment
(Declet Jr., 1997). Compounding the problem is the fact tlmt Chinese judges are paid very
little (relative to the West) and are reportedly susceptible to bribery. They are
inadequately trained and many have no formal legal education prior to their appointment
to the bench. (Declet Jr., 1997; Li, 1978; Stanberry, 1990a).

Furthermore, under China’s one party system of govemment, the Chinese courts
are viewed as organs of the state and Communist Party. It is custom for court
personnel to discuss the handling of very important cases with party officials (Declet Jr.,
1997). Thus, Chinese courts possess functional independence, but lacks structural

independence within the current constitutional fiamework.

Penalty Imposition
The final and perhaps the most important aspect to China’s legal dilemma involves
the Socialist state’s unwillingness to impose severe penalties for IPRS infi'ingement. A

prime example was discussed in Chapter III. with regard to the Microsoft Corporation.

65

Another good example involves a major American computer giant, I.B.M.( Stanberry,
1990a).

Jerome Cohen, a partner in the New York-based law firm of Paul, Weill, Rifldnd,
WhartonandGarrison, believesthattherearesome encouraging signs intheenforcement
of China’s Trademark Law, including raids on companies that infiinged on I.B.M.
products. Five corporations (operating within an economic zone) were found to have
purchased, assembled and sold fake I.B.M. computers. The Chinese govermnent fined the
companies $180.00 (U.S.) and ordered them to remove the firke logos and destroy the
packages containing fake I.B.M. logos. It is worth pointing out that the Chinese
government did observe more computers in the location of the illicit activity. However,
the counterfeiters were never fined for having the technology, because the labels were not
on them drning the seizure (Stanberry, 1990a).

As previously pointed out (in Chapter I] under the Trademark section), stiff fines
and harsh criminal penalties are considered necessary to deter trademark infiingement.
China’s remedies of having the offender proclaim his or her crimes publicly through self
criticism; cancellation of the trademark; fines of less than 20 percent of the illegal turnover
or less than twice the amount of illegal profit; seizure of the false marks; and
compensation are filr too little to be efl‘ective (Come, 1997; Ramjerdi and D’Amato, 1995;
Li, 1978; Stanberry, 1990b). Thus, the nation state must attempt to bring balance to its
legal system through the direction of the centralized governing body (such as the State
Council’s Working Conference), which will ensure that all penalties are commensurate to

the crimes and consistently applied on an equal basis.

Incentive-Based Cooperatives

As China’s government makes its transition toward an open market economy, fi'ee
of IPRS violations, it could learn a great deal fi'om American oflicials and erqrerts within
the software community. For the U.S., efforts to minimize the affects of pirating proved
costly when software manufacturers worked alone. Although methods of protecting their
Intellectual Property varied, the results were fairly similar. At the risk of designing strong
anti-pirating tools within their industrial property, manufacturers experienced reductions in
sales (Furger, 1995) and were forced to seek alternate strategies. Subsequently, software
publishers found greater success through wide-Spread collaboration among software

retailers, publishers or manufacturers and end-users.

Design Engineering

Describe tried to protect its Describe program for 08/2 word processors by
shipping upgrade disks that became useless after 6 months. Thereafter, registered users
would receive new copies while a much smaller company, SoftCop, released its version of
electronic surveillance. The tool allows the developer to lock entire applications until the
software is registered. Regular customers of the respective companies canceled their
orders while citing the inconvenience of having to call the manufacturer or having their
system(s) lock-up as the primary reason (Fuger, 1995).

Software metering packages are used in a growing number of companies wishing
to minimize unnecessary software expenditures. These firms’ systems, such as Express

Systems' Express Meter, are typically deployed on an organization’s application server and

67

distributed among concurrent users according to licensing agreements. Concurrent
licensing involves determining the total number of users that will possibly work with a
software package, regardless of the number of potential installations (Fisher, 1994a).
Another technology, SoftTrack, which is based on NetWare, works with all the
rmjor operating systems, including DOS, MacIntosh, OS/2 and Windows NT. Licensees
of Softka may distribute the software across a network on an aS-needed basis and to
multiple servers. For example, if five eligible users request an application fi'om a server
that only has three licenses, two may be taken fiom another. For vendors of metering
packages the solution is a mixed blessing as the technology limits pirating, but also

reduces sales due to its inherent sharing properties (Fisher, 1994a; Hildebrand, 1991.

Alliance Among Software Retailers

In 1988, software firms such as Autodesk, Inc., Aldus, Corp., and Adobe Systems,
Inc. initiated programs designed to minimize software piracy. The companies offers 20 to
30 percent commissions to retailers who identify offenders. Once found to be in violation
of Copyright Law, the firm or offender is asked to purchase the software. A commission
on that purchase price is paid to the resaler. Autodesk recovered more than $8 million
fi'om the time the program was initiated in 1988 rmtil 1992. Retailers received more than
1.5 million dollars during the same time period (Borzo, 1992; Hildebrand, 1991).

Software publishers found some success through wide-spread collaboration among
retailers. This is evident when considering that a single manufacturer (Autodesk)
recovered more than $8 million dollars (from 1988 until 1992) (Borzo, 1992). It is

important to note, however, that the incentive-based program can only serve to off-set the

68

firms’ financial loses (Borzo, 1992; Lawrence, 1995). It is highly unlikely that this type of
program or any program for that matter, can eradicated software piracy altogether. Thus,
transnational firms have formed software consortiums and aligned themselves with special

interest organizations to combat the problems of international piracy.

Alliances Among Software Publishers

Software piracy is prevalent in the U.S., despite the presence of the Federal
Copyright Act (Boulton, 1996). The Software Publishers Association is a trade group,
which works with federal marshals to inspect companies suspected of software piracy.
Since 1989, the Software Publisher’s Association has cooperated with law enforcement
agencies to enforce Copyright Laws governing software applications. From 1988 to
1991, the Software Publisher’s Association launched more than 70 raids on businesses and
was proven to be wrong in their assertions only once during the three year time span
(Fitzgerald, 1991).

The Software Publishers Association secures warrants and visits suspected firms
unannounced to conduct audits of a company's software server and every microcomputer
in the establishment. Under current law, the Software Publisher’s Association is entitled
to collect up to $100,000 in fines and legal fees for each instance of copyright
infi'ingement. However, trade groups such as the Software Publisher’s Association usually
settle for an amount equal to the assessed value of the pirated software (BSA, 1996;
Fitzgerald, 1991; Radding, 1992).

As a preventive measure, the organization assists companies in purchasing or

seeming software aheady cleared for sale. Information system professionals who attempt

69

to keep their firms in line with the law may not be targeted if only a few workers copy
software. The Software Publisher’s Association is primarily interested in firms that
blatantly go against software laws (Fitzgerald, 1991; Radding, 1992).

The Business Software Alliance is a Washington, DC. based organization
comprised of software rmnufacturers in collaboration to guard against the piracy of
software world-wide. Since its inception in 1988, the Business Software Alliance has filed
more than 600 law suits against suspected software copyright violators. The organization
promotes continued growth of the industry through its international programs designed to
eradicate software piracy (BSA, 1996). On behalf of the personal computer software
industry, the Business Software Alliance conducts enforcement, education and public
policy activities in more than 60 countries, including the U.S. (Boulton, 1996; BSA,
1996).

The Business Software Alliance is increasing its efforts to halt software piracy,
which its director of enforcement, Bob Kruger, considers to be the greatest threat to the
industry. According to the Business Software Alliance, in 1995, software publishers were
losing over $2.8 billion to piracy annually. During that same year, the organization
estimated that one in every three programs being used were pirated. This figure also
accounts for losses due to counterfeited products that made it to the mainstream rmrket,
as oppose to the black market. To date, the Business Software Alliance have recovered
more than 3,500 pirated Computer Aided Design programs in addition to other relatively
inexpensive application packages (Boulton, 1996; Greenberg, 1995).

The Computer Professionals for Social Responsibility promotes the interest of the

software industry. They also advocate on behalf of computer hardware manufacturers as

70

well. Usually they hold training seminars and develop outreach programs to teach the
general public the importance of using computers responsibly. In essence, the
organization acts as a clearinghouse for information (Browing, 1992).

Among the many government policies which affects the industry is the ban on the
export of encrypting teclmology, which industry officials believe has forced companies to
transfer their operations abroad. This shift in development efforts allows other countries,
instead, to gain expertise in the area of encrypting technology. This issue, coupled with
increased computer piracy, has the U.S. software industry imposing greater pressure on

policy-makers (Browing, 1992).

Alliances Among End- Users and the Government

In the Pacific-Rim basin, developing nations have successfully pursued aggressive
and proactive measures to maintain Intellectual Property protection (Hoffman and
Marcou, 1990). Governments assessed taxes on blank video cassettes, thereby, forming a
virtualalliancewithend-users. Theideaisthatthetapesnnybeusedto smuggle pirated
videos. Although this technique will not stop piracy, tax revenues gained through the
preemptive measures can help off-set potentially lost revenues (Nevos and Waldman,

1984).

Summary

The Chinese Government appears to be making significant strides toward bettering
its standing in the eyes of the world community. It’s 1995 Action Plan charted a course of

short and long-term strategies. The plan was promulgated with the full support of the

71

U.S. justice and trade authorities, as well as Asian banks and numerous global regimes.
National organs were mobilized and guided by a central body (Communist Party Working
Committee) to assure that the state’s will is carried out at every level. However, China
still has far to go.

Although 1995 was a relatively successful year in the area of IPRS protection, the
effects were short-termed as domestic piracy began to rise the following year. By 1996,
China had a piracy rate of 98 percent. Thus, the country must now reorient its way of
thinking about its nation’s course to eradicate both commercial and end-user piracy. This
will not be an easy task.

China suffers from a lack of expert legal knowledge, because the country is so
large. The local citizenry is left to interpret and enforce the law at the very basic level,
while its judiciary is subject to intimidation and bribery. Furthermore, Chinese judges are
too close to the Communist Party, which renders the courts ineffective, because their
ability to impose severe punishment is substantially compromised. The mere possibilities
of punishing commercial pirates is synonymous to handing down punishment to the state.
Thus, China’s judiciary must be restructured in an effort to establish a proper “checks and
balance” system.

China should follow the lead of U.S. software publishers. Just as the Socialist
state experienced with the implementation of its 1995 Action Plan, American firms
realized short-term reductions in piracy, at the cost of long-term growth. The most
significant gains for U.S. software manufacturers were realized when commissions were
offered to retailers who reported software infringements. Perhaps China could do the

same among its citizemy.

72

China’s population is highly fi'agmented. and most of the population live in rural
areas. Thus, a great deal of territory must be covered by Chinese oflicials to substantially
reduce piracy. However, the Chinese people are well disciplined and highly patriotic. It
would be in the government’s best interest to offer some form of incentive to report end-
user piracy. Just as retailers were able to work with nunufacturers, the Chinese
government could form “virtual partnerships” with its citizenry by making them
stakeholders in the endeavor. This approach is not only sound, but it is absolutely
necessary.

Most likely the Chinese govermnent knows the location of the commercial pirates
and is never really concerned about their activities. With increased end-user piracy,
China’s government has little choice but to appeal to its people on a broad scale. This is
because the end-users are fiagmented, increasingly mobile and more difficult to catch than

large-scale organizations.

73

CHAPTER VI

Other Issues to Consider

The cultural differences among various nations have Significant influence on how
Intellectual Property is viewed. Quite often, governments of Socialist states and LDCs are
natiomlistic in their approach toward IPRS (Merriman, 1991; Stanberry, 1990 A&B;
Weinstein, 1985). This is, of course, the case with China. Rather than protecting the
interest of foreign firms, developing states have had a cultural barrier to understanding the
significance of adopting a strong IPRS regime (Merriman, 1991; Stanberry, 1990 A& B;
Weinstein, 1985).

China should be viewed within its cultural context. Over time, this could serve the
country well as it attempts to adopt a strong IPRS regime. In addition to examining how
culture plays a significant role in the global piracy scheme, one must also consider the
inherent biases in reporting, the methodology used to determine piracy rate(s) and

subsequently, scrutinize the accuracy of the information.

Cultural Barriers

In 1949, when the Communists took over China, the Chinese Communist Party
abolished all laws and the judicial system of the Nationalist Regime and the Kuomintang’s
Complete Book of Six Codes (Come, 1997; Ramjerdi and D’Amato, 1995). The old
system was replaced with Marxism, Leninism and Mao Tsetung’s theory of State, Law
and the “New Democracy’s” policy. As a result, China’s Communist government was

faced with the dilermna of dealing with inventions. According to Marxist ideology, the

74

invention of an individual is considered a social production. The idea of granting exclusive
right to an individual (to profit from) is inconsistent with a Socialist society (Ramjerdi and
D’Amato, 1995).

After Mao’s death on September 9, 1976, and concurrent fill of the Gang of Four
(which is considered the end of the Cultural Revohltion and Mao’s isolationist policy), the
view toward a whole range of economic and legal issues began to shift away fi'om
orthodox Marxist ideas that were popular between 1950 and 1978. Around 1978, Deng
Xiaoping lead the movement of the Chinese economy fi'om a Soviet-styled centralized and
monolithic, political, socio-economic system, in which control over capitaL human
resources, information and economic decision making was in the hands of the political
elite, toward a more open, lmrket-driven economy (Come, 1997; McCall, 1996; Ramjerdi
and D’Amato, 1995). Thus, another plateau in the turning point of the People’s Republic
of China was reached .

Deng’s announcement for “Economic Structure” proposed that China develop a
commodity (market) driven economy, which would be regulated by central “guidance.”
Thus, the plan called for a dual strategy of economic reforms and cautious political
changes, thereby, causing the process of marketization to be gradual (Ramjerdi and
D’Amato, 1995). Problems of ideological incompatibility become more apparent as
China, a Socialist state (almost devoid of customary Western legal nornmive
understanding) attempts to accept the ideas of marketization (compatible enough with
that of the West), while rejecting the philosophical foundation upon which it is based

(competitive capitalism, individualism, etc.) (Come, 1997; Rarm'erdi and D’Amato, 1995).

75

Biases in Reporting

For the purpose of reporting piracy world-wide, special interest organizations such
as the Business Software Alliance, Software Publisher’s Association, International
Intellectual Property Alliance and the like rely heavily on the assistance they receive fiom
concerned citizens, which usually turns out to be disgruntled employees (BSA, 1996;
Fitzgerald, 1991; Riley, 1994). However, each of the respective agencies are inclined to
serve their own best interests, because most of the consortiums are composed of software
manuficturers and distributors. Thus, not only are the figures of software theft likely to
be inflated, but one can expect a gross disparity in reported levels of infringement, even
among similar agencies. A good example would be the inconsistent figures reported by
the International Intellectual Property Alliance and the Business Software Alliance with
respects software piracy in China for that same year (see U.S. Position on Intellectual
Property in Chapter III.). In addition, the basis on which information is reported is highly

subjective.

Method for Determining Loses

Each year the total dollars lost due to piracy is estimated on the basis of legitimate
software usage in specific countries. Estimates are based on software and hardware
Shipments in a particular country. Retail prices of software are used, reflecting losses to
the entire software industry, which include the distribution channel as well as the
publishers. Hardware and software Shipments are obtained fiom numerous commercially-
available resources (BSA, 1996). In determining software losses world-wide, the

following equation is used:

76

0 Software units divided by hardware units = applications per PC.

0 Estimated number of applications (varies country to country, based on published
estirmtes) per PC minus actual applications per PC.

0 Illegal application per PC divided by estimated number of applications per PC =
estimated percentage of illegal applications in use (subtract this amount fi'om 100
percent to obtain the percentage of legal use).

0 Illegal applications per PC multiplied by the average retail price (varies country to
country) multiplied by hardware units = dollar(s) lost to piracy, reflecting losses to the

entire software industry.

Accuracy of Information

It is highly unlikely that the information reported is close to actual figures. First,
consider that during discussions on IPRS and infi'ingement, trade representatives quite
often cite industrial organizations and their unfivorable reports (including their loss
estimates) to sustain its investigations (Sun, 1995). Furthermore, much of the
computation used to determine various levels of piracy is based on estimates. Finally, we
must consider that there are strong incentives for software alliances to misrepresent
figures.

From the position of the firm, reports of high-level piracy create negative
sentiments toward the host nation. This, in turn, lends itself to propaganda, which may or
may not work in the best interest of the firm (McCall, 1996). On the other lmnd, where
piracy is ahnost non-existent or unreported, competing domestic firms will likely emerge.

The end results will be that the transnational that is currently entrenched rmy lose its

77

dominant position over time (to either foreign or domestic firms). Ultimately, it would
lose market share and the ability to control its own pricing due to competition. Hence, a

reduction in autonomy would be eminent.

Summary

China needs more time to make its gradual shift toward an open, market-driven
economy. Although its relatively recent attempt to accelerate newly adopted principals
(that will be more palatable to highly industrialized countries) began in the early 19703, for
the most part, China’s current stance on Intellectual Property stems fi'om a halfcentury of
social, political and economic upheaval. Nwdless to say, legal training (such as that
extended by the U.S., United Nations’ Education, Scientific and Cultural Organization,
World Intellectual Property Organization and the like) and flmding (such as support fiom
Asian Banks) is necessary as well (Declet Jr., 1997).

The need to establish more reliable ways of reporting IPR violations is apparent.
Although the current system allows for input fi'om those most affected by piracy (software
consortium), it also leaves significant room for personal bias and flawed reporting
methods. Software manuficturers and special interest organizations often investigate and
report unverifiable findings of piracy, which lends continued support for government

sponsored investigations (Sun, 1995), particularly if the level of piracy is extrenrely high.

78

CHAPTER VII

Thesis Statement and Sumrmry

Global IPRS can not exist in the absence of wide-spread collaboration and strong
enforcement mechanism among people, governments and regimes that cooperate to better
serve their own interests.

To understand IPRS in relation to software piracy in Chirm, one should consider
the contextual fictors affecting our view of China. These fictors reveal the inherent
contradictions that propel two very powerful nations (China and U.S.) on an interception
course. The results of such a proposition lms yet to be contemplated fully. However,
there is no dispute that in this critical path lies diverging views with competing
philosophies.

Thecommonthemeistheneedto actinitsownbestinterest ortakeanationalist
position toward IPRS. The former proposition for China represents an abandonment of
government sanctioned, extra-legal normative practices and adhering to global regimes
such as the World Intellectual Property Organization and World Trade Organization. For
the U.S., it represents movement toward modernization and practices more consistent
with that of the advancing Socialist state and rest of the world.

China’s 50 year transformation was initiated by cultural imperatives that presented
special challenges to the nation state’s ultimate objective, which was to spur economic
development. Accordingly, its government revised existing public policies to establish a
regulatory fiamework that accommodates the vagaries of its people. It adopted loosely

interpreted rules, thinly veiled as public policies or laws (Come, 1997; Declet Jr., 1997;

79

Ramjerdi and D’Amato, 1995). State organs ficilitated national objectives by encouraging
foreign investments through laws (Joint Venture Law) that reduce skepticism abroad.

A revised Patent Law allowed the country to realize record increases in new
patents fi'om 1984 to 1989. The country also nrade Significant strides toward improving
its Trademark legislation since 1983 (Laris, Clemetson, Liu and Hirsh, 1997).
Concomitant to the aforementioned measures, the laws played a key role in increasing
innovation, stimulating commercial and scientific research, assisting in programs of
service, technology transfer and accelerating modernization through economic growth. By
the early 19808, the Socialist state had clearly advanced its domestic and economic agenda
(Declet Jr., 1997).

Problems existed for several reasons. While the Joint Venture Law appears to
indicate China’s willingness to attract foreign investment, the law itself iS in direct
opposition to long standing decrees that were drafted to contain foreign investments. Its
Authorship Rights Law, which is considered to be very modernized, was drafted to benefit
Chinese nationals only. Although the Software Regulation section (under China’s
Authorship Rights Law) appears extremely progressive, allowances were made for the
appropriation of a creator’s work through highly subjective decrees. Thus, the “fiir use”
provision only serves to countermand any sincere efforts to advance the nation state
toward firll IPRS protection practices.

The U.S. has significant economic stakes in the preceding matters, because
software comprises an increasing and vital part of America’s economy. However, it is
also besieged for several reasons. First, it relies heavily on China as a trading partner as

both exports and imports have increased since the early 1970’s. Secondly, U.S. citizens

80

enjoy the benefits derived from cheap labor abroad. Thus, cheap labor equals inexpensive
products, which translate to fivorable votes for incumbent politicians and increased profit
margins for American business. Needless to say, these circumstances are very good for the
economy.

American businesses suffer more than any other nation at the hands of software
pirates. This presents special challenges, because the U.S. has little to no way of
redressing wide-spread pirating activities other than imposing sanctions (such as Section
301) against the offending nation state. However, to do so against China would cause
more harm than good to the U.S. economy, because China is such an important trading
partner. Thus, America must seek the assistance of global regimes.

Proponents for strong IPRS enforcement mechanisms argue that China’s
acceptance into a global regime would accelerate its compliance under international laws,
thereby, removing the firndamental U.S. vs. China conflict. However, this argument does
not always hold true, particularly when considering the nature of global regimes such as
the World Intellectual Property Organization. Because, the World Intellectual Property
Organization is a secretariat, it lacks the necessary enforcement mechanisms to combat
software piracy (McCall, 1996).

Dming a 1996, Diplomatic Conference in Geneva Switzerland (McCall, 1996;
Stith, 1997) the World Intellectual Property Organization fiiled to incorporate language
that is relevant for the protection of software in its “Provisional Treaty on Protection of
Literary and Artistic Work”. Furthermore, unlike the European Union, the World
Intellectual Property Organization completely ignored the possibility of including

copyright protection for computer databases under the “Database Directive” (Stith, 1997).

81

Thus, setting the stage for further litigation and prolonged settlement disputes among its
signatories.

China’s accession to the World Trade Organization would more likely eliminate
much of the debate regarding enforcement mechanisms and prescribe remedies, such as
mndatory jail time for commercial pirates. This is because under the General Agreement
on Tariffs and Trade, prescribed negotiations would necessarily bring trade and
investments into the discussion. Thus, stronger protection for transnational software firms
would more likely be extended on an equal basis.

In response to the criticism form the world community, China stepped-up its
efforts to reduce software piracy and drafted a bold and progressive Action Plan in 1995.
For the nrost part, the plan appeared to work in the short-run. China was able to
galvanize many state organs at the basic level and appointed a centralized body to oversee
the progress of implementing and enforcing IPRS. However, just one year after the plan
was initiated, in 1996, China realized a record level of piracy fiom end-users.

Solutions to resolve the problem of software piracy will not be easy, because China
lacks the necessary legal expertise to handle such complex matters. Lawyers in general
are very scarce and the govemment must rely on the citizenry to interpret and apply the
law at the basic level throughout the provinces. In addition, its judiciary is subject to
bribery and intimidation. Most importantly, the Socialist state has a tendency to impose
weak fines or punishment for IPRS violations. Much of the problem with weak penalty
imposition stems fiom the judiciary’s relationship with the Communist party, which
translates to a lack of structural independence. Another is associated with the state’s

limited ability to comprehend the significance of adopting a strong IPRS regime.

82

Many developing nations are eager to point out that cost, limitations to domestic
production capabilities and constraints to competition leads to increased dependency.
However, not all LDCs ascribe to the same notion. Singapore opted to accept the
assistance of the U.S. and Great Britain and was successful in adopting a strong IPRS
regime. Today, Singapore boasts of a vibrant economy. Both Taiwan and South Korea
attempted to adopt strong IPRS legislation, but were unsuccessful, because they fiiled to
provide adequate enforcement mechanisms.

China should follow the lead of U.S. firms. Just as the Socialist state had
experienced in 1995, American firms experienced Short-term reductions in piracy at the
cost of long-term growth. If the Chinese Government could galvanize special interest
groups, the possibility of minimizing the software piracy is strong. Among its rmny
strengths, the government has the ability to control its citizenry, because they are highly
patriotic. Because end-user piracy may be the greatest challenge ficing the rmtion state
over time, the formation of “virtual partnerships” would probably fire well with the proper
incentives in place.

China needs much more time to make it’s gradual shift toward an open, market-
driven economy. Although its relatively recent attempt to adopt new principles (more
compatible with that of highly industrialized countries) began in the early 19703, China’s
current overall stance on Intellectual Property stems hour a halfcentury of social, political
and economic upheaval. The best possible support that other nations can offer China is
patience until attitudes change, and the necessary systems of enforcement are put in place.

China needs time to recover fi'om its Cultural Revolutions, and to adjust to the

ways of more advanced societies; accepting assistance fi'om legal practitioners, and

83

experts in the West (U.S. Customs, FBI, etc.). It also needs time to adhere to the
standards of conduct as prescribed by the World Trade Organization, United Nations’
Education, Scientific and Cultural Organization, World Intellectual Property Organization
and the like. Needless to say, financial assistance is necessary as well (Declet Jr., 1997).

Additionally, the need to establish more reliable ways of reporting IPRS
infiingernents is apparent. Although the current system allows for input fi‘om those most
affected by piracy (software consortium), it also leaves significant room for personal bias
and flawed reporting methods. This is demonstrated by the inconsistent reports of piracy
loses in Chapter III.

Software distributors, manufacturers and special interest organizations often
investigate and report findings of illicit activities or piracy. Reporting inflated levels of
piracy serves the transnational’s best interests. This is because the U.S. government (or
most likely any govermnent of a highly-industrialized nation) will sponsor costly
investigations. In addition, reports of high-levels of piracy may discourage new entry by
competing firms. This, in turn, helps to preserve the entrenched position, market share
and autonomy of the transnational firm

Software piracy will continue as long as there are benefits (monetary or not) to be
realized. The important question is whether or not the interests of both the host cormtry
and transnational firm can be preserved. Thus, bringing us back to the age old questions

that impose the perennial challenges for highly industrialized and less developed states.

84

fr"

APPENDIX

85

BSA Software Loss (In Dollars) and Piracy Estimates by Country for 1994.

COUNTRY
Argentina
Australia
Austria
Bahrain
Belgium
Bolivia
Brazil
Bulgaria
Canada
Chile
Colombia
Commonwealth of

Independent States
Cyprus
Czech Republic
Denrmrk
Ecuador
Egypt
El Salvador
Finland
France
Germany
Greece
Guatemala
Honduras
Hong Kong
Hungary
India
Indonesia
Ireland
Israel
Italy
Japan
Jordan
Kenya
Korea
Kuwait

APPENDIX

LOSS
208,220,000
1 27,543,294

66,830,624

6,940,000

77,304,687
12,460,806
550,936,140
30,900,000
254,533,200
70,414,496
90,765,000
10,413,000

3,847,500
l07,550,000
89,818,500
7,013,200
38,910,344
13,142,700
48,098,063
771,460,734
1,874,741,352
79,231,445
8,520,000
4,652,592
132,688,750
101,500,000
l27,527,600
1 18,320,000
44,525,803
42,329,763
404,382,500
2,075,809,729
3,382,500
647,600
545,926,907
14,094,000

86

PIRACY RATE

74%

37%

48%
96%
46%
95%
77%
95%
58%
84%
8 l %
97%

91%
83%
46%
98%
85%
97%
43%
57%
50%
80%
94%
89%
62%
85%
82%
99%

.82%

74%
96%
67%
96%
96%
78%
99%

 

1‘!"— ~

Lebanon
Malaysia
Malta
Mauritas
Mexico
Morocco
Netherlands
New Zealand
Nicaragua
Nigeria
Norway
Oman
Pakistan
Panama
Paraguay
P. R. of China
Peru
Poland
Russian Federation
Saudi Arabia
Singapore
South Afiica
Spain
Sweden
Switzerland
Taiwan
Thailand
Turkey
United Kingdom
United Arab
Emirates
United States
Uruguay
Venezuela
Vietnam

1 ,607,526
96,207,600
2,916,000
2,397,600
200,213,302
23,200,000
21 5,867,250
105,436,670
6,664,500
8,820,000
80,5 18,875
9,566,100
8,600,000
4,410,000
16,1 10,080
526,740,300
1 8,898,200
201,000,000
540,564,400
101 ,000,000
44,752,650
64,102,400
239,529,767
1 5 1,106,006
94,491,000
23 1,703,570
1 74,232,070
158,736,097
543,5 16,297
39,019,968

2,876,922,400
1 8,201 ,713
104,271 ,936
292,500

87

95%
89%
90%
93%
78%
81%
78%
55%
99%
85%
52%
98%
96%
78%
96%
98%
90%
91%
94%
90%
58%
68%
73%
52%
52%
72%
98%
97%
43%
93%

35%
90%
71%
98%

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