The view on China’s IP environment from inside a Chinese corporation

As the general counsel of a Chinese internet company who happens to be an American, I often encounter lawyers from the United States who assume that there is no IP protection in China. Having worked at Tencent for nearly seven years, I am happy to say that, while there are still areas for improvement – yes, there is IP protection in China and overall I am bullish that it will continue to improve. China’s ever-evolving IP environment is the product of two mutually reinforcing factors. First, courts and government agencies are becoming increasingly sophisticated and active with respect to IP protection. Second, and perhaps serving as a driver for this increased judicial and regulatory attention, the private sector – including foreign companies but also, crucially, domestic companies such as Tencent – is increasingly devoting the time and resources necessary to protect intellectual property that is essential to their new business models, which in turn is helping the economy to transition from manufacturing/exports to a more consumer-focused model.

New digital economy

While this improved IP environment affects many parts of the economy, I see it most clearly in the rise of business models that distribute digital content. To outsiders this may be surprising, as the common perception is that China is a land of pirated DVDs and a slew of Napster-like services. However, the market has shifted dramatically over the last several years. Businesses are now investing in and competing on the basis of premium licensed content. This is important, first, because it means that they view it as a more viable business than unlicensed content; and second, because they need to protect their investments through IP enforcement.

There are many examples of this in the internet space in China. In the past, video platforms were full of low-quality, unlicensed content. However, evolving business and IP enforcement strategies have changed this. Major video platforms – including Iqiyi, Sohu Video, Youku Tuduo and Tencent Video – now offer licensed video content via advertising and subscription-based services, which rely on the convenience of easily accessible content libraries and value-added features to attract eyeballs and paying customers. Such companies now compete with one another, often paying millions of dollars in licensing fees for exclusive content to differentiate their platforms.

Rights holders have also noticed this improvement and are working with Chinese video platforms not only to distribute their content, but also to help them protect it. Tencent, for example, has exclusive licences with a wide range of premium content providers – including the National Basketball Association, Warner, HBO and National Geographic – and have established strong collaborative IP enforcement strategies with each. Over the past few years we have actively enforced our rights in China, through litigation as well as takedown mechanisms, to great effect.

The success of a competitive market in which video platforms compete based on licensed content and paying customers is a significant indicator of the improving IP environment. While the trend is strongest in terms of video content, other types of content are starting to follow.

With respect to online music, platforms such as QQ Music – Tencent’s online music service – and Kugou Music are increasingly focused on providing premium and legitimate content to users. Tencent, for example, has licensing deals with Sony Music and Warner music for QQ Music, which uses advertising, subscription and transactional based models. Tencent’s recent success in selling digital albums by popular artists such as Jay Chou, Jacky Cheung, Big Bang and Adele proves that consumers are increasingly willing to pay for premium and legitimate content. Music content platforms are also competing to provide better services and actively fighting sites that use unlicensed content. For example, as a result of the efforts of Tencent’s enforcement team, we have been able to identify and remove over 1 million infringing musical works from the Internet since 2013.

Enforcement landscape

So what has driven this improved IP environment? From what I can see, there are three important players: companies, courts and government agencies.

Let us start with the private sector. As discussed above, digital content companies are increasingly competing on the basis of exclusive content and are starting to protect their positions by becoming active proponents of IP rights, devoting significant resources to obtaining and enforcing them. Tencent has a team of 15 lawyers who are solely dedicated to IP enforcement, as well as a separate team focused on IP registration and prosecution. In addition, it has created automated and manual monitoring systems covering websites, mobile applications, message boards and personal cloud storage services. This is paired with an active takedown notice mechanism and, if required, administrative and legal actions.

Private sector companies have also joined together in the name of IP protection. In 2014, Sohu Video, LeTV, MPAA, the China Film Copyright Association, Enlight Media, CODA, Youku Tudou, Wanda Films and Tencent Video formed the China Online Video Anti-piracy Alliance, which organised a public conference in Beijing claiming that companies such as Baidu and Kuaibo wrongfully distribute content via deep links to third-party sites. As a result, the third-party sites were taken down and Baidu agreed to certain stipulations, including R&D for an automatic anti-piracy filtration system and the licensing of a 500,000-song catalogue, paying both upfront as well as per-download licensing fees. However, arguably the most significant development was the alliance of Chinese companies united by the common goal of IP protection.

Outside the digital content space, Chinese companies’ investment in patents also illustrates a growing focus on intellectual property. Chinese patent applications worldwide under the Patent Cooperation Treaty (PCT) totalled 25,539 in 2014 – an 18.7% annual increase, making it the only one of the top-10 filing countries to see double-digit growth in patent applications. Huawei led the number of PCT patent applications with 3,442, while China’s ZTE came third with 2,179. Through August 2015, Tencent applied for and obtained 10,961 and 2,163 patents, respectively, in China and 5,471 and 797 overseas.

In addition to building their patent war chests, companies are actively fighting against infringement, both inside and outside China. In 2011, Huawei sued ZTE for trademark and patent infringement in Germany, France and Hungary covering various patents relating to its 4G LTE technology. The next day, ZTE filed a countersuit against Huawei in China. The two companies have been involved in several legal battles since.

The private sector may have all the IP applications and registrations, but it is up to a proper court system to give meaning to IP rights. In China, courts are becoming increasingly sophisticated and sympathetic with respect to IP protection. Where copyright infringers could formerly withstand infringement suits, paying low fines and continuing with their piracy-based business models, recent rulings have rendered this course of action risky, if not completely unfeasible.

In one of the most substantial rulings relating to IP protection, in 2014 Kuaibo was fined Rmb260 million ($42 million) for copyright infringement – three times the estimated amount that licensing the content would have cost. The fine set a record in China and cannot be considered meagre even by US standards. Officials claim that it was a result of factors such as prior infringements and the company’s continued refusal to rectify its infringing activity. The fine, which was set to increase by 3% for every day after payment was due, signifies a shift in the environment to one in which blatant piracy sites can no longer profit.

Several recent preliminary injunctions further reflect the courts’ unwillingness to tolerate ongoing piracy. Last year, Tencent was awarded a preliminary injunction against NetEase involving 623 pirated songs. As far as we know, this was the first preliminary injunction granted for digital music infringement in China. In May, Alibaba was similarly awarded a preliminary injunction against Kugou Music for over 260 pirated songs. While damages for music copyright infringement remain low in comparison to those awarded in the United States, there is a clear trend of increasingly meaningful damages.

Moreover, on October 31 2014 the Standing Committee of the National People’s Congress further advanced IP protection by approving the Decision on the Establishment of IP Courts in Beijing, Shanghai and Guangzhou. The new IP courts play two roles. They are trial courts which hear civil and administrative cases at first instance in relation to technically complex matters, including IP disputes concerning patents, new plant varieties, layout designs of integrated circuits, technology secrets and other technical issues. They are also courts of appeal, hearing appeals from the basic people’s courts in their respective jurisdictions involving copyright and trademark disputes. These new IP courts are generally staffed with younger judges who are familiar with IP matters and technology.

Finally, government agencies – most notably the National Copyright Association of China (NCAC) – have been active participants in the battle against piracy in China, and have increased the pace and scope of their activities in recent years. For instance, the NCAC publishes a list of rights holders of popular content to deter piracy and even sends out notices to potentially infringing sites before airing popular content to remind them of the rightful copyright holder.

The NCAC has also launched the Sword Net Action plan, which is designed to address internet copyright piracy. According to information released at the Second China Seminar on New Internet Copyright Issues, the campaign has resulted in the investigation of 4,241 cases relating to online piracy; 1,926 of these were referred to the Ministry of Industry and Information Technology so that the infringing platforms could be shut down; and 322 were transferred to law enforcement, presumably for criminal prosecution. On July 8 2015 the NCAC announced that music piracy would be a priority this year, and that online platforms must cease providing unlicensed content by July 31.

The NCAC is also focusing on piracy in cloud sharing, addressing policy changes at the same time as new technology develops – a rare advancement for a government agency in any country. It is expected that in 2016 the NCAC will shift its focus to online literature – another area where user demand has surged, but piracy is still rampant.

Good portents

The improvements in the IP protection environment that have taken place in recent years may not be obvious to outsiders – even those foreign companies with a substantial investment in China. However, companies that have invested the appropriate resources in IP protection in China – including hiring local legal counsel and working with local partners – have reaped the rewards of working with this new system. While IP protection is still developing, it is doing so at a rapid pace, especially with respect to digital content. This – coupled with and reinforced by the efforts of Chinese companies, courts, and government agencies – bodes well for continued improvement.