China and Piracy: Rutchik Quoted

U.S. Prepares WTO Lawsuit on China's Copyright Laws, People Say
April 7 (Bloomberg) -- The Bush administration's dispute with China over its movie piracy and other copyright infringement may escalate into litigation as early as this month unless Chinese leaders offer an acceptable solution during summits with the U.S. that start next week, people briefed on the matter said.

The U.S. is preparing to file a lawsuit with the World Trade Organization alleging Chinese intellectual property laws fall short of the global requirements China agreed to when it joined the WTO in 2001, the people said. The administration has been discussing the legal strategy with the film, music and software industries and congressional staff members, they said.

Administration officials have said in those strategy meetings that they intend to file the suit if the summits in Washington fail to resolve the issue, the people said.

The preparation of a suit reflects frustration in Washington that promises China made to curb the illegal manufacturing U.S. goods haven't led to a decline in lost revenue from piracy. U.S. companies say those losses total $250 billion annually.

``There is still a lack of a meeting of the minds'' over how China is dealing with the issue, said James Jochum, a former U.S. Commerce Department official who now works on China issues at the law firm of Mayer, Brown, Rowe & Maw LLP in Washington. ``The U.S. thinks it is going poorly, and the Chinese think it is going well. There is an incredible disconnect.''

Yan Xiaohong, the deputy commissioner of China's National Copyright Administration, and other Chinese officials say they are making progress to stem piracy. They point to recent mandates for businesses to buy legal software and new measures that transfer more copyright violation cases to criminal courts.

Strategy Shift

The decision to base a complaint on allegations that China fails to fulfill WTO standards requiring criminal prosecutions and transparency of rules represents a new U.S. approach. Previously, U.S. officials had discussed basing a suit on data showing the volume of illegal merchandise. That data has proven difficult to obtain, the people involved in the matter said.

The lawsuit would be one of the most complex cases in the 11-year history of the WTO, which oversees rules of international commerce for 149 member nations.

The U.S. has made the protection of intellectual property the centerpiece of its trade agenda. It sees China as the center of global production for illegal copies of a wide variety of items including Harry Potter books, Microsoft software, Louis Vuitton handbags, automotive parts, and pharmaceutical medicine.

``China is manufacturing 80 percent of the pirated goods'' out there, said Gregory Rutchik, a senior counsel at the law firm of Liner Yankelevitz Sunshine & Regenstreif LLP in San Francisco. ``We are talking about a multi-billion dollar industry. The scope is just staggering.'' [See e.g. Testimony before Senate puts the number between 85 and 90% of all copyrighted works!]

Trade Summit

U.S. and Chinese trade officials are scheduled to meet April 11 for an annual policy meeting in Washington that is intended to produce pledges on how the two nations conduct business with each other. In each of the last two meetings, China pledged new crackdowns on intellectual property rights violations, promises the U.S. says haven't been fulfilled.

Chinese President Hu Jintao is scheduled to meet with President George W. Bush in Washington on April 20 to talk abut a broad range of issues, including trade relations.

In addition to illegal goods being made in China for sale in China, pirated goods are now being exported to the U.S. for sale, Commerce Secretary Carlos Gutierrez said in a speech on March 14.

``We know there's rampant piracy in China, and we know it affects our imports to China in a very direct way,'' U.S. Trade Representative Rob Portman said in an interview April 5.

Options Explored

In a separate interview last month, Portman said that the U.S. is considering bringing a WTO complaint against China over this issue. He didn't provide specifics then, and a spokeswoman for Portman declined to comment yesterday about the possibility.

``The U.S. government has been supportive of our China agenda, and we're working with them to explore all of our options to stop our losses'' due to piracy, Gayle Osterberg, a spokeswoman for the Motion Picture Association of America, said.

In recent discussions with industry representatives, the U.S. trade office complained that it hasn't been getting the data it needs from them to bring a case that would argue systematic piracy in China is a violation of WTO provisions.

In a meeting with U.S. business representatives in Beijing last month, the general counsel for the U.S. Trade Representative's office, James Mendenhall, pleaded with companies to provide him with the information necessary to file such a case. Speaking with reporters after the meeting, Mendenhall said he told the business representatives, ``You need to arm us with the facts.''

Data Lacking

In addition, the U.S. has been unable to get data on the extent of copyright piracy and government crackdowns that it demanded from China last year under a separate WTO provision.

The Chinese plan to come down harder on all large companies found to use pirated software, Yan, the deputy copyright commissioner in China, said March 27.

China shut down 17 assembly lines for pirated digital video discs last year and has closed six more this year, Yan said.

Not all U.S. businesses are in favor of litigation because of fears it could damage commercial relations between the two countries.

``We are optimistic,'' said Robert Holleyman, the Washington-based president of the Business Software Alliance, which represents companies such as Microsoft Corp. ``China has made a number of very specific commitments related to software. We are optimistic that ultimately we are on the right path.''

George Scalise, president of the Semiconductor Industry Association, agreed. ``WTO cases generally take too long,'' he said.


To contact the reporter on this story:
Mark Drajem in Washington at mdrajem@bloomberg.net