USTR Special 301 Report Highlights Continued Issues with IP Enforcement, Notorious Markets in China

On April 25, the Office of the U.S. Trade Representative (USTR) released both its annual Special 301 Report and an updated Notorious Markets List, each of which highlights international issues facing U.S. intellectual property owners living in the United States and abroad. The Special 301 Report this year includes 36 countries that have been placed on watch lists for either inadequate IP protections or denying IP rights to U.S. rights holders. Similarly, the Notorious Markets List includes a non-exhaustive collection of online and physical markets that are alleged to have contributed to piracy and counterfeiting activities around the world.

China Remains the World’s Largest Threat to U.S. IP Owners

The Special 301 Report makes it clear that China is the source of greatest concern for U.S. owners of all types of intellectual property. The report’s executive summary notes that China remains on the USTR’s Priority Watch List for various reasons, including forced tech transfer, discriminatory licensing practices and high-volume counterfeit manufacture. Other countries included on the Priority Watch List are India, where the national government has restricted transparency on state-issued pharmaceutical manufacturing licenses and expanded patentability exceptions for rejecting pharmaceutical patents; Indonesia, where concerns have been raised over patentability criteria and compulsory licensing; and Saudi Arabia, which has failed to address concerns involving lack of IP protection for pharmaceuticals and the illicit pirate service BeoutQ.

China’s position as the chief culprit among foreign governments causing concern to U.S. IP owners is driven home by the fact that its Country Report is the longest such profile included in the Special 301 report. While China’s government has reorganized IP responsibilities among government agencies and proposed revisions to IP law, it has failed to address fundamental issues affecting the legal landscape for IP owners. Despite judicial reforms such as the creation of specialized IP courts, there remain procedural obstacles limiting appeals and influence by government and Communist Party officials that undermine the rule of law. Statistics cited in the report show that China is the world’s largest source of counterfeit goods shipped into the U.S., as well as the world’s largest e-commerce market, where counterfeit and pirated goods are more widespread than in physical markets. Despite China’s new E-Commerce Law, which went into effect at the beginning of 2019, the USTR was critical of provisions of the bill that impose burdensome requirements on rights holders trying to enforce their IP rights.

Slow Progress on Chinese Patent and Copyright Laws

Also around the beginning of this year, China amended the country’s Patent Law. While those changes increased the term for design patents and improved availability of punitive damages for willful infringement, there were several concerns regarding issues the new law doesn’t address. Pharmaceutical innovators have reported difficulties in satisfying patentability requirements during examination and refusal from Chinese authorities to protect against unfair commercial use on drugs that have previously received marketing authorization in countries other than China. The USTR also voiced concerns over Anti-Monopoly Law enforcement, which would require consideration of IP ownership in enforcement matters, and expansion of China’s “social credit system” to penalize patent-related behaviors, such as repeated infringement or misconduct during prosecution.

Other concerns regarding China’s IP enforcement regime include slow progress on amending that nation’s Copyright Law to prevent the unauthorized transmission of live broadcasts and provide effective criminal enforcement. The USTR also outlined Chinese authorities’ use of cybersecurity law to force the disclosure of sensitive IP to the Chinese government. Other concerns included market access barriers posed by geographical indications (GIs) and the use of unlicensed software by government agencies and state-owned enterprises.

Some Positive Developments, but Concerns on Effective Remedies Remain

The Special 301 Report did note that there were positive developments made in worldwide efforts to promote IP protection in various areas. For pharmaceuticals and medical devices, the USTR noted strong provisions in the United States-Mexico-Canada Agreement (USMCA) as well as meaningful engagement on pharmaceutical-related matters with governments in Korea, Japan, India and Indonesia. The USTR also discussed positive steps taken by certain countries in IP enforcement overall. Tajikistan, for example, was removed from the Priority Watch List after mandating ex officio authority for customs officials and working to facilitate the use of licensed software in government agencies. USTR also cited a commitment by the Philippines to the U.S. for mutually beneficial protection of geographical indications, as well as reinvigorated efforts in Brazil to combat piracy.

Still, there were many areas of concern outlined by the USTR in the Special 301 Report. Aside from forced tech transfer rules in several countries, the report also discusses a lack of effective remedies for trade secret violations in India and China. An aggressive system of geographical indications put in place by the European Union raised concerns regarding the protection of trademarks issued prior to GI issuances, limited EU market access for products made around the world and its contribution to the deficit in U.S.-EU food and agricultural trade. Online and broadcast piracy is increasingly being abetted by illicit streaming devices (ISDs) that use apps and add-ons to access pirated content. Ineffective border enforcement against counterfeit goods and flawed operations of collective management organizations in many countries are also cited by the USTR as posing serious issues to intellectual property rights holders.

Notorious Markets List: Illicit Chinese Markets Still a Problem

The USTR’s Notorious Markets List cited a number of positive developments in IP rights enforcement that have occurred since the last list was released. Shutdowns of piracy services including 123movies.to and gomovies.to were the result of ramped up enforcement activities in Thailand. Other activities led to the shutdown of FAB IPTV, a provider of unlicensed streaming content in the UK, and the disruption of illicit online pharmacy providers. Increased enforcement at physical markets led to raids at Canada’s Pacific Mall as well as seizures of about $173 million worth of counterfeit goods in the Philippines through the first half of 2018.

The Notorious Markets List also included a section focusing on the issue of free trade zones (FTZs), which have grown from 79 such zones in 1975 up to more than 3,500 zones in 2018. Exports from FTZs represented about 20% of world exports in 2007. These areas, which aren’t subject to normal customs procedures enforced by the countries in which they operate, are particularly susceptible to individuals or organizations that want to market counterfeit goods or launder money. The number of small commercial parcels exported from FTZs has been growing and small shipments represent the majority of IP-related seizures around the world. The USTR advocates for legislative measures providing legal authority to customs officials for proper IP enforcement at FTZs around the world.

A review of notorious online markets shows that pirate streaming sites have overtaken pirate torrent and direct download sites as the main distributors of pirated content. BeoutQ, which was cited in the Special 301 Report, provides pirated content in multiple ways including satellite piracy, online piracy and support of ISDs. China-based DHGate.com had triggered concerns regarding high volume counterfeit sales and limited enforcement mechanisms, but the USTR notes that the website reported a 38% drop in IP-related complaints over the past year and removal of 97% of listings that garner IP complaints. Hosting Concepts B.V. is a notable player in the illicit pharmacy industry, hosting 2,523 illegal online pharmacies. Other websites discussed in the list facilitate the unauthorized sale of streaming content, music, television, journal articles and counterfeit auto parts, the latter being a particular issue on Alibaba Group’s taobao.com.

The physical notorious markets review shows yet again that China presents a particularly thorny problem, as it is one of only two countries contributing more than one such market to this list. Chinese notorious markets include Huaqiangbei Electronics Market, a global hub for counterfeit electronics parts; Luohu Commercial City, which trafficks clothing and fashion accessories and where an alleged half of all sales are counterfeit; and Beijing’s Silk Market, which remains a major counterfeit hub despite successful raids and enforcement actions. Mexico also contributed a pair of physical markets, including Mexico City’s El Tepito, where counterfeit video games and technological protection measure circumvention products are sold; and Guadalajara’s Mercado San Juan de Dios, the largest indoor market in Latin America, which also trafficks counterfeit goods.