China Power | Economy | Risk Intelligence | East Asia

How China’s Legal System Enables Intellectual Property Theft

China’s recent improvements in IP protection can’t overcome the fact that its legal system will never offer a level playing field.

By Daniel Rechtschaffen for
This article is presented by

Diplomat Risk Intelligence, The Diplomat’s consulting and analysis division. Learn more here

How China’s Legal System Enables Intellectual Property Theft
Credit: Public Domain Pictures

Despite dissension over how to hold China accountable for unfair market practices, hawks and doves agree that the country’s intellectual property protection regime has made significant progress in recent years. The establishment of specialized IP courts, a Supreme People’s Court IP tribunal, as well as countless revisions to the country’s various IP laws, all attest to this.

But since China’s IP framework is intrinsically linked with the country’s legal system, solving issues like trade secrets theft, online infringement and political influence and local protectionism via the courts would require a complete structural overhaul. Beijing undoubtedly knows this, which means pledges made in the phase one trade agreement with the United States were at best hollow promises designed to appease Washington.

The trade agreement’s first chapter explicitly promises to shore up trade secrets protection in China. Trade secret theft is often difficult to identify and is much harder to prove in court than other forms of IP theft. Typically, someone with inside access to a company will purloin a commercially valuable design and then copy the company’s core product. But since technologies can be legally reverse engineered, proving trade secret theft necessitates demonstrating that a design was stolen. It basically requires an audit into the company, which common law jurisdictions achieve by means of discovery.

Bolstering trade secret protections would require establishing a civil discovery process in China. Currently, companies must plead with local administrative agencies to investigate on their behalf. The agencies require high burdens of proof, are sometimes favorably acquainted with the companies they are investigating — I’ll dive into political influence in the court system below — and, since they are not subject-matter experts, often do not know what they are looking for.

Yet creating even a limited civil discovery process would mandate a philosophical shift in the country’s legal system, one that would empower the plaintiff over the defendant. And in fairness to detractors, critics of the U.S. argue that country’s unbridled discovery system often disadvantages smaller companies relative to large corporations, who “bury” their opponents in discovery. So far, China has made no indications that it is willing to move in that direction.

Online infringement, which the trade agreement also addresses, is similarly hard to navigate. Bringing China’s vast consumer market online with the rise of e-commerce has resulted in an increase in counterfeiting and piracy. And companies have been quick to adapt, putting in place teams to comb through online platforms like Taobao, tracking down knockoff goods and sending notice-and-takedowns to the platforms.

But online policing has been made more difficult by a shift of infringement from open platforms like Taobao, which in recent years have implemented stricter self-patrol measures, to closed ones like WeChat. Data privacy laws and WeChat’s user interface both shield users from prying companies, which are unable to see what is posted on an individual’s timeline. To spot infringement, a company must add an individual user as a friend, which allows the infringer to screen potential clients. Furthermore, since payments are not made through the platform itself — WeChat functions more as a wallet — infringers can use multiple accounts to conduct anonymous transactions, meaning payments cannot be easily traced back to the counterfeited product.

To combat such infringement, the trade agreement with the U.S. promised only that “China shall provide that e-commerce platforms may have their operating licenses revoked for repeated failures to curb the sale of counterfeit or pirated goods.” It’s hard to imagine Beijing revoking WeChat’s operating license over anything, let alone a piracy charge from a foreign company.

But the greatest challenge facing any maligned company is political influence and local protectionism in the courts. The most blatant example of this is the city of Putian, dubbed China’s “fake sneaker capital,” where corruption in the courts makes IP prosecution nearly impossible. The city’s notoriety is such that a simple mention of its name elicits a snort and knowing head-nod from any IP counsel.

China has certainly worked to ameliorate court malfeasance. In 2014, Beijing created three specialized IP courts in Beijing, Shanghai and Guangzhou, and in 2019, created an IP tribunal that allows plaintiffs to appeal local judgments up to the Supreme People’s Court. But interference is almost guaranteed if the defendant is a politically influential company. In an off-the-record conversation, an American company recently recounted to me a serious case they had lodged against one of China’s tech Brobdingnagians in a tier-one city. The severity of the infringement obligated local police to investigate. But to shield the defendant, the local police continuously cut the American company out of communications and conducted feverish back-channel negotiations with the court. Unsurprisingly, the court threw out the case.

An independent judiciary, the bedrock of a robust IP protection regime, has never been China’s forte. And it is difficult to conceive of a world in which Beijing relinquishes its hold on the court system.

Of course, China’s progress in protecting IP in recent years should be commended. And it is worth remembering that most developed countries have at some point taken advantage of lax IP protections. The Washington administration openly condoned stealing trade secrets from the British in the 1790s. New Jersey’s Paterson city was a Hamiltonian experiment in textile manufacturing that was basically founded on trade secret theft.

And despite little-to-no progress on fronts like trade secrets, China will uphold many of the commitments made in the trade agreement. As promised in Chapter 1, Section C of the agreement, a draft amendment to the Patent Law currently out for public comments will create a patent linkage system and introduce patent term extensions for innovative pharmaceutical drugs.

But rapid improvements notwithstanding, structural flaws in China’s legal system ensure that a comprehensive U.S.-style IP protection system will forever remain a mirage in the eyes of foreign corporations. Not that it ultimately matters. Companies will continue to bitterly swallow any affront to retain access to the world’s second largest consumer market.

Daniel Rechtschaffen is a government relations manager at the American Chamber of Commerce in Shanghai. He was one of the founding editors of Sixth Tone, a Shanghai-based news agency, and is a contributor to Slate, The Diplomat, and Forbes Asia.