China -- Intellectual Property Rights

INTELLECTUAL PROPERTY LAW IN CHINA

Penny Milsom

OMBA 606

November 24, 2002

EXECUTIVE SUMMARY

Staples is an $11 billion international company that may benefit from expanding to other countries across the globe. Staples already maintains stores in the U.S., Canada, U.K., Germany, and the Netherlands. However, Staples may be able to continue their growth by expanding to new countries. Staples can increase their target market reach while maintaining their core products of low price office supplies. This paper explores the intellectual property rights issues Staples might encounter if the company were to expand to China.

Intellectual property is the ownership and possession of things created by a person’s mind. There are many national laws and regional agreements such as the U.S. Copyright Laws, the Paris Convention and the Berne Convention that govern intellectual property rights and these agreements will impact the expansion of Staples into China. As a government, China accedes to many of these international practices. However, the government’s ability to enforce the regulations is limited. If Staples cannot protect their intellectual property in China, their potential profit will be limited. Fortunately, there are strategies, such as low price guarantees and high customer service, that Staples can take to limit their exposure to illegal pirating of their property.

INTRODUCTION

Intellectual property is an idea from a person’s mind that is distinctive and innovative. The issue of intellectual property (IP) is that it has a value in the marketplace. People are willing to pay for such things as an idea, unique name, business method, computer process, or presentation.

Entrepreneurs investing in intellectual property need to know that their investment has the potential to make a profit and is safe. Profit is reduced if investors cannot protect their rights to the ideas that are produced from their initial costs. If investors cannot protect their investments, they may be less willing to commit time and money to the production of new ideas.

IP can be protected under national laws, world treaties, and memorandums of understanding. In the United States, there are several ways to protect intellectual property. Copyright laws protect original works. Patent laws protect new, and unique inventions and processes. Trademark laws protect words, names, and symbols used to identify goods and services. And, finally, trade secret laws protect confidential, corporate information.

IP laws are often regional laws that originate in one country and affect the citizens of that country. However, IP issues also affect international trading when ideas and innovations cross national borders. To encourage cross-national trading, various countries may agree on IP law and sign treaties or memorandum of understanding. In that case, IP which passes from one country to the other, or within a specific region, is protected by international law. It is important to develop laws that protect intellectual property to encourage international trade.

CHINESE LAW AND INTELLECTUAL PROPERTY

IP law can affect trade in China in many ways. A company may want to export their IP to China only if they are assured that their ideas and property will be protected from pirating and duplication. If the company’s innovations are easily copied without penalty, a reasonable profit may be unattainable. When China strengthens their IP laws, innovators may be more inclined to export products to China. In addition, if ideas and products are not copied or pirated, there will be few products available and less competition. This will increase the demand curve and raise the price of goods and potential profit. “The Chinese government has recognized the importance for its long-term growth of protecting foreign investments in intellectual property and has developed copyright laws modeled on international standards as a first step towards effective protection of intellectual property rights (IPR)” (Spierer, J. Summer 1999. par 2).

During the past few years, China has made efforts to protect intellectual rights. In 1985, China joined the Paris Convention for the Protection of Industrial Property. The Paris Convention protects various forms of industrial property such as trademarks, appellations, patents, utility models, industrial designs, and unfair competition. The Paris Convention requires member nations to assure protection for the investment and safeguarding of industrial property.

The United States and China signed the Memorandum of Understanding on the Protection of Intellectual Property in 1992. This agreement required China to make certain changes to its law governing intellectual property protection. In addition, China agreed to accede to the Berne Convention (which protects artistic and literary works), and the Universal Copyright Convention (which protects the rights of copyright proprietors in literary, scientific and artistic works, including writings, musical, drama, cinema, paintings, engravings and sculpture). In addition, China has pattern its own IP laws after the World Trace Organization’s 1995 Agreement on Trade-Related Aspects of Intellectual property Rights (TRIPS). By signing these agreements and establishing Chinese IP law, China has pledged to develop IP protections and to establish equal rights for foreign investors.

ENFORCEMENT OF CHINESE LAW

China's National Copyright Administration, under the Ministry of News and Publication, is responsible for the implementation of copyright laws, investigation of infringement cases, administration of external copyright relations and guidance for local authorities. The People's Courts hear complaints, make decisions and recommend penalties. Possible penalties (specified in Article 51 of the 1991 law) include fines of RMB 10,000 to RMB 100,000, civil damages equivalent to two to five times the value of the infringing copies, and two to seven years of prison depending on the specific case. (Spierer, J. Summer 1999. par 8).

Although laws and agreements are in place in China, a foreign company’s IP still may not be protected. “The implementation of these laws has proven lacking, due largely to ambiguities in the law and difficulties in enforcement” (Spierer, J. Summer 1999. par 2). “One important ambiguity is the ‘knowingly‘ standard in Article 32 of the Computer Software Protection Regulations, which states: ‘Where the holder of software does not know or has no reasonable grounds for knowing that the software is infringing (upon an existing copyright), liability for infringement shall be borne by the supplier of the infringing software.’

This could become a major loophole, as any user could falsely claim that she was unaware of infringement of other copyrighted products” (Spierer, J. Summer 1999. par 9).

Another provision of the Chinese law allows a few copies of written products to be made for non-commercial use. Yet another ambiguity refers to products that are banned from publication. “The Copyright Law stipulates that works ‘banned from publication’ shall receive no copyright protection, but does not clearly define ‘banned‘ works. As a result the government might ban publications after the fact to suit its particular needs. If banned by the government for ‘public interest,’ a large black market could result for works legal else where in the world but illegal in China”. (Spierer, J. Summer 1999. par 12).

“Finally, Article 31 of the Rules permits the government to exempt certain software products from liability for any copyright infringements if the software is developed to implement relevant "state policies, laws, rules, and regulations." This rule could unfairly be used by the government to obtain source code or programs for its own use”. (Spierer, J. Summer 1999. par 13).

Aside from the ambiguities in Chinese IP law, another issue is the Chinese ability to enforce the law.

Although criminal penalties have been introduced, sentences vary between vaguely-defined grades of infringement. For example, ‘huge amounts’ of illegal income, ‘especially serious’ circumstances or ‘relatively large amounts’ of illegal income are factors that distinguish between small violations and large illicit operations. Naturally, this vague language has discouraged foreign firms from pursuing criminal proceedings. (Spierer, J. Summer 1999. par 14).

Jonathan Spierer, (1999) discusses other issues that impede China’s ability to protect Intellectual Property. These issues include:

1. China’s central government’s inability to police the huge area and large population of the People’s Republic of China,

2. The continued decentralization of the central government that weakens China’s ability to monitor and enforce international policies,

3. A Chinese culture that teaches learning by copying and has considered copying as respectable and essential,

4. Consumer’s easy access to pirated information and the lack of consumer concern,

5. And finally, corrupt officials.

STAPLES’ STRATEGIC PLAN

It will be important for Staples to enter the Chinese market in the near future. According to Zen Peign, as quoted in the China Daily on November 11, 2002, “China's economy is expected to continue its growth. For 2003 a rate of 8% is still considered a realistic estimate. The economy is expected to grow, while trade and foreign investment will hit a new high” (chinabiz. 2002). Staples may not want to ignore this lucrative opportunity. However, in order to successfully operate in China, Staples will have to take steps to protect their IP.

There are several methods available to Staples to protect their investment in China from theft or copy of intellectual property. The first step Staples must take is to protect their intellectual property by filing for protection in the U.S., China , and under International treaties and conventions. A guide to applying for a Chinese patent is found at: http://www.sipo.gov.cn/sipo_English/zlsq_e/default.htm. However, following legal and conventional patent protection mechanisms may not be enough to protect Staples from losing a share of their profits to illegal copy bandits.

Staples can also concentrate on a low price strategy. Even if office supply products were copied, by continuing to take a low price strategy, Staples’ pirating competition may not be able to establish a foothold in the market. Pirates, using logos or strategies that are core to Staples, Inc., will only be successful if the pirates can under-price the legitimate owners. In addition, if a pirate were to copy software sold by Staples, a low price strategy will protect Staples’ long term success.

Another strategy that Staples might consider is to emphasize extreme customer service. Chinese consumers may continue to buy at Staples, even when illegal competition exists, if Staples maintains a high level of customer service. Consumers will return to Staples to receive quality customer service that meets their individual needs.

Another strategy that Staples may consider is to initiate a campaign to encourage customer loyalty. This campaign may include personalized shopping, easy return of unused items, 8 hour delivery, reduced prices for return customers, etc. If Staples can maintain their current customer base and grow incrementally, they will successfully overcome competition from Chinese firms that have copied their intellectual property.

An advertising campaign identifying store promotions may also help Staples beat their illegal competition in China. Chinese businesses and professionals might be inclined to shop at Staples if they were convinced that the Staples product was superior to the imitation. In addition, Chinese consumers may be persuaded to shop at Staples if a brand image can be introduced and consumers felt they were ‘trendy’ by shopping Staples.

Staples might also consider changing their advertising, strategies and reproducible material frequently. Chinese pirates will need time to copy material. If Staples can maintain a fast moving and rapidly changing series of initiatives and products, it will be more difficult for pirates to copy their products. Consumers will want to purchase the newest version and the pirates will have difficulty keeping up.

A final strategy that Staples might consider is to refrain from selling certain products such as computer software until enforcement of Chinese copyright law becomes more predictable. To market these easily pirated items in China, may be a risky endeavor and Staples may not be able to maintain their competitive advantage in that market.

CONCLUSION

With a desire to succeed, Staples may well flourish in the growing economy of China. It will be important for the company to maintain their “Back to Brighton” strategy as they concentrate on their corporate mission: “Slashing the cost and hassle of running your office!” The core values of the corporation, that spell out CARE, will be important strategy against copyright violations in China. Those core values are:

Customers – Value every customer

Associates – Support them as valuable resources

Real Communications – share information with people when they need it

Execution – achieve our business goals"

By concentrating on their mission and values, Staples may be able to successfully compete in China. Intellectual Property laws are in place and China is working towards enforcing these laws. By Staples may have what it takes to be successful seller of office supplies to small businesses and professionals in China.

REFERENCES

The Berne Convention for the Protection of Literary and Artistic Works. Retrieved online 11.19.02 from http://www.law.cornell.edu/treaties/berne/overview.html

Chinabiz.org. China Facing bright Economic Future. Retrieved online 11.12.02 from http://chinabiz.org/articles/show.asp?id=1704

China laws Online retrieved online 11.12.02 from

http://www.China-Laws-Online.com

Fink, Carlton and Braga, Carlos. How stronger Protection of Intellectual Property Rights Affects International Trade Flows. Unknown location.

Intellectual Property Protection Treaties. Retrieved online 11..19.02 from

http://www.wipo.int/treaties/ip/paris/index.html

Legal Information Institute retrieved online 11.12.02 from

http://www.law.cornell.edu/treaties/berne/overview.html

Paris Convention. Retrieved online 11.19.02 from http://www.tufts.edu/departments/fletcher/multi/texts/BH004.txt

Sullivan, Jeremiah. 2001. Exploring International Business Environments. Pearson Custom Publishing: MA.

Spierer, Jonathan. Harvard Asia Quarterly. Retrieved online 11.12.02 from

http://www.fas.harvard.edu/~asiactr/haq/199903/9903a010.htm 700

Staples, Inc. Retrieved online 11.19.02 from http://www.staples.com.

State Intellectual Property Office of the People’s Republic of China. Retrieved online 11.13.02

http://www.sipo.gov.cn/sipo_English/default.htm

The ’Lectric Law Library’s Lexicon on Intellectual Property. Retrieved online 11.12.02 from Http://www.lectlaw.com/def/i051.htm