An Impromptu Table Sprouts up in a Hong Kong Subway Station, Piled High with Real Ralph

Intellectual property theft in China costs nations billions
Janet Moore, Star Tribune
November 28, 2005

An impromptu table sprouts up in a Hong Kong subway station, piled high with "real" Ralph Lauren cardigans -- cheap! A woman with bulging pockets shimmies up to a tourist strolling along the Bund, Shanghai's signature promenade, and murmurs: "Ladies watch? Rolex for you!" Perched at any street corner in Beijing is an entrepreneur hawking the most-recent DVD titles out of Hollywood -- China's unique version of Blockbuster.

Knock-off. Piracy. Out-and-out theft. Labels vary, but global trademark, copyright and patent infringement in China is a black market that cost U.S., European and Japanese companies at least $60 billion in lost sales in 2003.

China and Hong Kong are the world's two biggest offenders, according to a U.S. Customs and Border Protection report.

Even California Gov. Arnold Schwarzenegger entered the fray on a recent trade mission to China that focused on stomping out piracy, an effort that speaks to the governor's roots in that state's stalwart entertainment industry.

Schwarzenegger and fellow action star Jackie Chan introduced an antipiracy public service campaign, currently being shown in Hong Kong, that features a clip of the two in leathers straddling motorcycles and brandishing bold words for film pirates.

"Let's terminate it," intones the Terminator.

But how? Many businesses simply expect their goods to be copied in China, but ignoring a market of 1.3 billion potential customers isn't a viable option.

"China's loose intellectual property regime stands as a giant informal trade barrier to American companies," said Ted Fishman, author of "China Inc.: How the Rise of the Next Superpower Challenges America and the World," in recent congressional testimony.

"The fear of theft prevents American firms from wading into the world's fastest-growing economy with valuable products they would otherwise be enthusiastic about selling, and even developing or improving," he said.

One of the fears of U.S. companies whose products are copied in China is that the fakes will be manufactured (at a far cheaper rate) and then exported back to the United States. So companies essentially compete against their own products.

Business strategist Kent Kedl recently came across an example of the brazen, even casual, nature of thievery in China.

A promotional brochure touting Chengdu, a city of more than 11 million people in Sichuan province, featured a gleaming skyline that looked familiar to the Roseville native, who is executive director of Technomic Asia, a consulting firm in Shanghai. It actually was Minneapolis' skyline -- complete with IDS and Foshay towers.

"[Intellectual property] is not safe in China. Eventually you will lose it," he said.

Are medical devices next?

T-shirts or watches are one thing. But what happens when pharmaceutical drugs and medical devices -- which make sophisticated products that cost millions to develop and, if reproduced ineffectively, could result in serious health consequences -- are ripped off?

One of the most highly publicized cases of drug theft involved the impotence buster Viagra. Six months after Pfizer Inc. introduced Viagra in China, the company discovered there were vast amounts of counterfeit versions available domestically. In 2004, the Chinese government dismissed Pfizer's patent on the drug, and the company has appealed.

And as recently as September, law enforcement officials from China and the United States busted a drug ring in Tianjin that allegedly was selling fake Viagra, Cialis and Levitra, along with cholesterol drug Lipitor.

In the medical device arena -- an area of intense interest in Minnesota -- it's unlikely but not impossible that heart-shocking implantable cardioverter defibrillators might be copied.

"You've got to get your product tested and approved by [China's] equivalent of the Food and Drug Administration," said Terry Bunge, president and general manager of Eden Prairie-based Acist Medical Systems Inc. "If someone were to copy the product, they'd have to register it and get it approved by the government. So it's not just like you can go down to the local store and start selling it."

Bunge said there might be a bias among Chinese doctors against using domestically produced products. "In the past Chinese doctors didn't want to use Chinese medical devices because the quality was so bad," he said. "But that part of the equation is changing, as Western quality or Japanese quality come into Chinese manufacturing operations."

China starting to fight piracy

Experts in the field said there's hope for U.S. firms worried about counterfeiting, especially if business-savvy China is serious about maintaining its position as an economic superpower. Although U.S. businesses might think it futile, it is important to register copyrights, patents and trademarks with the Chinese government, the experts said.

Intellectual property protection and enforcement are relatively new to the Chinese -- the very first patent laws were passed just 21 years ago, the first trademark law in 1982 and the first copyright laws in 1990, said Tony Zeuli, a partner with Twin Cities-based Merchant & Gould, which specializes in intellectual property law.

"The Chinese have embraced IP and, despite public perception, I am optimistic about both protection and enforcement of IP in China," he said.

Zeuli points to recent statistics to back up his claim: Foreign trademark infringement cases --involving non-Chinese trademark owners enforcing their trademarks in Chinese courts -- have increased 55 percent this year. And last year, 12,205 IP litigation enforcement cases were filed in China -- a surge of 32 percent from 2003.

Zeuli said China "Westernized" its patent enforcement laws in 2001 with revisions that make it more attractive for non-Chinese companies to bring patent-infringement suits in China's courts. An important caveat to the law was the possibility of an injunction -- a court order requiring the defendant to immediately stop the infringement.

Still, simple economics might discourage the Chinese from aggressive enforcement of these laws, said James McGregor, a Duluth native who is author of "One Billion Customers: Lessons from the Front Lines of Doing Business in China." Too many people -- mostly poor and rural -- depend on the counterfeit industry for a living.

"For the Chinese, the tipping point will be when their own companies are being hurt," McGregor said. "That's already happening on their own IP development. They have lots of indigenous software companies and entertainment that need IP protection. ... But where's the balance between those people being hurt and poor people being put out of work? It's a balance that the international community has to push China on -- hard."

class="contact">Janet Moore • 612-673-7752