By Thomas Chow

The International Law News, which is the American Bar Association’s publication for the International Law Section, recently published an article by Law Professor Richard Gruner entitled “Intellectual Property in the Four Chinas”.  Now, you might be wondering if there are four Chinas in the first place since most people think there is one China.  If you are a firm supporter of Taiwan, which is technically the Republic of China, that would give you two Chinas at best.

On that note, Professor Gruner argues astutely:

The analysis of IP laws and their enforcement in China has been hobbled by oversimplifying China itself. A number of astute observers of the developing business environments . . .

in China have recognized that there are at least four distinct regional situations–that is, the “four Chinas” within the [PRC]–that are developing as the country emerges into a period of greatly heightened commercial activity.

The regional characteristics . . . of the four regions of the PRC discussed here create four very different sets of opportunities and problems for IPR holders. The impact of IP varies in different regions of the country because a combination of local differences in types of dominant businesses in local areas, variations of the local political clout of businesses that infringe IPR, and the ability of local officials to grant or withhold strong IP enforcement due to the regional nature of IP enforcement mechanisms in China.

I cannot agree more. China, while it is trying to unify its laws and enforcement of IP law (and its other laws, for that matter), is a huge nation.  I keep reminding people that China has a landmass that is far more comparable to the entire EU than to America.  Inevitably, there are bound to be differences.  Even in America, the law can vary dramatically from state to state.  Louisiana isn’t even a common law state.  If people forum shop in the U.S. because courts and laws are different, imagine forum shopping in a landmass that encompasses more than three times America’s population.  I think you get the picture.

Gruner identities the Four Chinas as:

1. The municipalities of Beijing, Shanghai, and Hong Kong, and the surrounding areas under the direct control and influence of these cities, which are both commercial centers and heavily industrialized.

2. Coastal China, the areas near China’s coastline other than the major urban centers of the First China, which are often mixed economies with many large scale manufacturing activities conducted at low product cost.

3. Inner China, regions immediately inland from the coastal sections of China, which are heavily dominated by agriculture.

4. Outer China, the western provinces of China and desert areas, which consist mostly of economies of mineral and oil extraction.

This should be no surprise to China watchers. The differences between the “tiered” cities mirror some of these observations.  Many colleagues and clients will assume that enforcement in China is enforcement in China.  It is not, and it is important to consider the characteristics of various regions.

Gruner observes that in the First China, “local authorities have strong motivations to pursue IPR enforcement as a means to both reward and enhance local innovators and to entice outsiders . . . to inject new technologies into the local economy through IP licensing.” He approximates the level of IP interest as being similar to those of highly technical western counties like the U.S.

Coastal China’s manufacturing “involves technologies originating in other parts of China or copied (often without proper IP licenses) from foreign sources. The interests of this region are thus largely tied to the . . . profitability of local manufacturing without any reciprocal concern over the lack of IP-based rewards for local innovators.” Gruner concludes about this area:

This region represents the greatest challenges for IP enforcement in China due to both its present economic interests in weak IP enforcement and the breathtaking scope of its infringement capacity in large-scale, low-cost manufacturing of unlicensed goods covered by IPR.

Gruner argues that Inner China, on the other hand, will find IP enforcement largely irrelevant except “IP-protected products or services used in agriculture.” On the whole, inner China is more like “unindustrialized portions of Africa.”

Finally, outer China also finds IPR enforcement irrelevant except where mining and oil extraction take place, because businesses “may have significant opportunities to use advanced technologies. While there may be some local innovation in these technologies . . . , these are probably outweighed by the commercial advantages of tolerating infringement.”  Gruner believes that enforcement here will be similar to Inner China.

While I agree generally with Gruner’s conclusions up to this point, I want to note a few things.  First, he does not define what cities fall under the urban category or the coastal category.  Areas “under control” of Beijing-Shanghai-Hong Kong is only more confusing.

Second, it is increasingly difficult to try to segregate out Beijing, Shanghai, and Hong Kong (the “first tier” cities) from other major “second-tier” cities, such as Qingdao, Tianjin, or Dalian.  Ironically, most of these second tier cities happen to be the Coastal Regions.  Which do they fall under?

And how about a second tier city like Hangzhou?  It is neither coastal nor within the direct influence of Shanghai.  And yet, it is the Hangzhou Intermediate People’s Court that made headlines with the G2000 v. 2000 case.  There, the court assessed damages of 20 million yuan–far beyond the damages of any of other China’s first-tier courts. 

I think the first two categories are problematic to some degree.  I still agree that the Beijing-Shanghai-Hong Kong triumvirate will provide greater IPR enforcement in general.  But I also believe that Coastal China and China’s second-tier cities are much harder to group.  Some areas will have strong enforcement while others fall directly into Gruner’s description.  A better categorization would be that urbanized areas and coastal China outside of the 3 major cities fall within a sliding scale that is hard to determine.  If you or your clients plan to be in these areas, then you need to do your due diligence to understand the extent of IPR enforcement.

In the end, Professor Gruner argues that a multi-regional view of IP in China is necessary.  I definitely agree with that.
 

Thomas Chow is an attorney with the San Francisco office of Gartenberg Gelfand Wasson & Selden LLP. His practice includes counseling Chinese clients on U.S. domestic matters, including entity formation, business transactions, employment matters, and IP/trademark prosecution. He also represents Chinese clients in U.S. based litigation involving intellectual property (copyright, trademark, trade secrets), contracts, real estate, securities, and products liability.