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The Patent Reform Act: Boon to Chinese Pirates
William R. Hawkins
Thursday, November 01, 2007
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William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.

On Oct.  24, Jon W. Dudas, Under Secretary of Commerce for Intellectual Property Rights, said the Chinese government has become notably less willing to engage in bilateral discussions about that country's rampant counterfeiting of brands and outright theft of other intellectual property rights (IPR).

Speaking to a group of American business executives in Beijing, Dudas noted, “Since April, when the United States sought dispute settlement at the WTO (World Trade Organization) over IPR issues, bilateral relationships with our counterpart offices have suffered.”  The more important of the two WTO case targeted China’s legal system.  It alleges that China fails to enforce IPR protections, allowing the widespread – and wide open – counterfeiting and theft of intellectual property.  

I have been to several major Chinese cities and have seen first hand shops crammed with obviously fake American products.  The U.S. case would be open and shut if the WTO were truly a judicial body and not a political organization.  As Dudas told his audience, 81 percent of the counterfeit goods seized in American ports ast year were made in China.  Global piracy is estimated to cost American businesses $250 billion a year, with China being the origin of 70 percent of the world's counterfeited goods.  Beijing is clearly hoping that the WTO will prove a paper tiger on this issue, while providing cover in the meantime for China to avoid direct U.S.  bilateral pressure.  

China has even ignored calls for a new meeting of the working group on IPR under the U.S.-China Joint Commission on Commerce and Trade (JCCT), a commission established to conduct ongoing, high-level talks on key trade issues as part of the Bush administration’s “engagement” policy with Beijing.

Dudas is hardly unique in calling attention to this problem.  The U.S. Trade Representative’s office in its annual National Estimates Report on Foreign Trade Barriers has blasted China’s IPR behavior for a decade.  But it has also succumbed to optimism about Beijing’s future behavior.  For example, the 2007 report claims, “The United States achieved some important successes through bilateral dialogue in 2006, including at a JCCT meeting in April.  At that meeting, China made several commitments related to IPR protection and enforcement.” Yet, once again, Beijing’s promises were not kept.  Past USTR reports have called the theft of intellectual property in China as being at “epidemic” levels.  

Dudas’ comments have been singled out here because he is also Director of the U.S. Patent and Trademark Office (USPTO), whose prime mission is to protect American intellectual property under U.S. law.  It is important that U.S. enforcement be strengthened, since it is in the American market that IPR thieves make much of their profits.  Unfortunately, the Patent Reform Act of 2007, which is winding its way through the Congress (passed by the House and now awaiting action in the Senate), would do just the opposite.  Its purpose is to weaken IPR protection for American inventors, research universities, and manufacturers, while seeking to harmonize U.S. law with foreign rules, which are far weaker and more vulnerable to predators like China.  

Dudas testified about problems with the proposed reforms before the Senate Judiciary Committee on June 6.  He stated that the USPTO is in favor of letting the courts continue to determine the apportionment of damages, based on experience and precedent, rather than the new formula proposed in the Reform Act, which would greatly reduce the penalties for patent infringement.  He came out strongly in favor of retaining treble damages for willful infringement.  He also disagreed with expanding the “prior use” defense favored by pirates.  

Of particular importance to the China problem, Dudas discussed the international implications of a shift to the first-to-file system mandated by the reform legislation and the requirements that applications, with all their technical information, be published on the Internet prior to the granting of patent protection.  

Dudas paid lip service to global harmonization as a reason to shift to first-to-file, but did not support an immediate conversion to such a system.  Instead, the USPTO wants such a shift to be “contingent on significant progress and international agreement” with  “a standardized one-year international grace period” to protect inventors who disclose their inventions before filing.

Such a diplomatic deal is very unlikely.  Dudas did not agree with the new legislation’s removal of the opt-out provision to the publication requirement for inventors who do not seek foreign patents.  It would be open season on American inventors to have their secrets revealed to the world before they have even a shred of legal protection.  Yet, unbelievably, that is what the Patent Reform Act would do in the name of globalization.  And the Chinese pirates could not be happier, since plundering on a global scale is their business.

Within the United States, disputes over intellectual property are comparatively rare in industries where intellectual property ownership has long been accepted, such as semiconductors, electronics, telecommunications, pharmaceuticals, and biotechnology.  Intellectual property licensing is well-understood and actively pursued under generally-accepted terms.  There is a vibrant sub-sector in these industries where “invention companies” thrive as part of the business system.

By contrast in the software and system integrator industries, intellectual property practices are strikingly primitive.  A Hobbesian law of the nature seems to prevail, with rights determined by money and power rather than the rule of law.  It is the perpetuation of this brutal system that is behind the current reform effort, which is backed by such major Big Tech firms as Microsoft, Apple and Cisco, well-known for their bully tactics.  

But there is an even bigger bully on the world scene.  China’s ruthless approach to economics has already taught many major corporations a thing or two about merciless competition.  The U.S. patent system is the linchpin of global patent protection and innovation, not just American efforts.  Inventors and companies across the world rely on the patent protections provided by the United States, which is the world’s largest market.

Judge Randall Rader of the Federal Circuit Court of Appeals urged attendees at the 2007 American Intellectual Property Law Association meeting to "understand that there are international implications in our domestic (IPR) debates that stretch beyond our understanding.” Half the patents filed in the United States each year come from overseas because American law provides the best protection for the creative work of those who are moving human knowledge forward.  

This superior regard for IPR is a tremendous advantage to the United States.  It should not be thrown away by politicians who cannot see beyond the amount of money lobbyists are spending to sway their votes for petty, parochial reasons.  Statesmen, like the Founding Fathers, who provided for the creation of the patent system in the Constitution, know the importance of protecting intellectual property rights.  We can only hope there are still enough statesmen today to prevail in the current debate to keep the patent system strong, comprehensive, and favorable to inventors.

William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.