The Hollywood Reporter recently did a story, entitled, “China’s Looming Entertainment Problem: Not Enough Lawyers,” discussing, among other things, intellectual property in China. Our own Beijing-based China entertainment lawyer, Mathew Alderson, was interviewed for that story and The Hollywood Reporter has kindly agreed to allow us to run a post based on the original interview.

 

Hollywood Reporter:  We’d like to first give a general overview of the state of entertainment and IP law in China.

Alderson:  There is no separate body of entertainment law as such, but it helps to understand how China generally views foreign investment. China limits the industries in which it accepts foreign investment or foreign business operations.  Foreign involvement in Chinese industries is categorized as “encouraged,” “permitted,” “restricted” or “prohibited”. Industries move between, or appear within, the various categories from time to time depending on the changing requirements of the Chinese authorities and the economy they oversee. An awareness of these categories not only assists foreigners to avoid illegal or unwise investments, it allows us also to understand the level of regulation to be expected in a particular industry as well as the business entity prescribed for that industry. Foreign involvement in the entertainment business in general, and the business of operating cinemas in particular, is “restricted” in China. It follows that there are substantial barriers to entry into the cinema business and the China film production business. These businesses are heavily regulated. Foreigners cannot operate in these areas independently of Chinese partners, so a co-production is required to make a film and a joint venture is required to set up a movie theatre.

As far as intellectual property is concerned, at first glance China’s legislative framework is world-class. This is largely because such a framework is a requirement of China’s WTO membership. The trouble is that this framework has been grafted onto a society with little frame of reference for its underlying concepts and the level of protection of intellectual property rights in China is often less than satisfactory despite the generally good quality of the laws themselves. I give some examples of current problems below.

In China, authority to adjudicate infringement and damages is vested in the courts and administrative agencies. So you have a situation in which the Chinese Patent Office, for instance, can make its own infringement determinations, award damages and issue injunctions without the need for a complaint filed in court.

One of the big issues at present is that foreign technology transfer is sometimes a pre-condition for market access. Trademark piracy remains a persistent and serious problem. Local businesses routinely register enterprise names that use famous US trademarks in misleading ways, often in conjunction with goods or services for which the US brand is famous. What we Westerners would see as Bad faith filings and trademark “squatting” are commonplace. And, as everyone is aware, DVD and online piracy are rampant. The Chinese government itself reckons that 15-20% of all products made in China are counterfeits accounting for around 8% of gross domestic product.

 

Hollywood Reporter:  Is this field developing fast enough to serve the booming Chinese film industry (expected to eclipse North America as the world’s largest film market in 5-10 years, as I’m sure you’re aware — the impressive growth numbers abound)?

Alderson:  I think it is developing steadily, but whether it serves any particular industry is another question.

 

Hollywood Reporter:  Is it reasonable to assume that more legal disputes will arise in the film and entertainment sector as the stakes rise and the value of the business grows?

Alderson:  Yes. That is a straightforward outcome of the sort of growth we are seeing. More business means more disputes in any market.

 

Hollywood Reporter:  This piece covering the “Lost in Thailand” suit quotes a consultant who suggests many studios are ill-equipped to handle IP protection issues (“Practitioners in the film industry have relatively weak awareness of intellectual property rights protection and very few companies would equip themselves with a complete team of lawyers in a film project or seek professional legal advice in advance.”) Do you agree with that assessment?

Alderson:  That may be the case with certain purely Chinese studios but I do not think it applies to everyone else.

 

Hollywood Reporter:  What kind of legal issues/problems/complaints do you think Hollywood parties are most likely to encounter/make in China?

Alderson:  It is generally assumed that China’s quota on foreign films is the biggest challenge but the quota has no application to domestic Chinese films or to official co-productions because these are regarded as domestic films. The biggest challenges are getting films approved by the Chinese censors and then getting paid a full share of box office. Foreign films must be cleared by the censors before they can be considered for the quota. Censorship comes first. China’s lack of any age rating system provides it with a useful and additional justification for censorship decisions. Censorship is a key issue because during the first 30 years or so of the PRC, foreign films were entirely banned and the film medium was seen mostly as a means of achieving “social enlightenment”. The government remains determined to subordinate the growth of the film industry to outcomes such as social stability and morality.

 

Hollywood Reporter:  What legal and other protections could and should a Hollywood studio seek when doing business in China?

Alderson:  There is a tendency to assume that US law and jurisdiction should apply to all contracts in all circumstances.  US law and jurisdiction are of little value unless the Chinese party has assets in the US. Just getting this jurisdiction piece right can be a critical form of protection.

 

Hollywood Reporter:   Are legal protections likely to be weaker for foreign parties than local counterparts in Chinese courts?

Alderson:   These days, foreign companies seeking to enforce contracts can often obtain good results in Chinese courts if the contract was written with the Chinese courts in mind and if the other party is a private company of a similar size. Having said that, it certainly is more difficult when you are suing a State Owned Enterprise (SOE) or a Government Agency.

 

Hollywood Reporter: Given that foreign (Hollywood) investment into China’s film industry, and partnership with local players, is continually increasing in scale, is it realistic to hope that new IP protection regulations might soon be passed and enforced in China?

Alderson:  Yes. Improvements are occurring all the time.  But at this point, the problem is not so much the laws and regulations, but rather, their enforcement.

 

Now that I have your attention with my Global Times-ish headline on protectionism in China, I am going to backtrack.

The protectionism that people attribute to China is wrong. I have become convinced that the protectionism that people tend to attribute to China does not really exist, or at least barely so. The Chinese government does not care nearly as much about its domestic companies as widely believed, at least those that are not State Owned Entities (SOEs). Instead, the Chinese government cares almost exclusively about the Chinese government. Once you understand this, you will be better able to know where you, as a foreigner, stand.

I just read a China Hearsay post noting how China’s Ministry of Commerce’s recent approval of Yum! Brand’s purchase of Little Sheep Restaurant should put everyone’s fears to rest about China using its M&A review for protectionist purposes. China Hearsay was not the least bit surprised by this approval, nor was I. I figured the approval would come because the buy-out was not going to impact much (if at all) the things China’s government really cares about.

The Chinese Government is still uncomfortable with private business and it rarely, if ever, steps in to assist them just to assist them. Therefore, if you as a foreign business are going to be competing with private businesses, you likely will do okay. If you are going to be doing business in an arena dominated by SOEs there is a much better chance of your facing problems.

If you are going to be doing business in areas critical to the government, such as internet, publishing, movies, mining, defense, automobiles, then you really need to be very careful about what you are doing, both in terms of its legalities and in terms of how you will be viewed by the government. Each of these industries can be very different in terms of how you will be viewed by the government. By way of example, foreigners are not treated terribly well in the movie business and many have cried “protectionism” because of this.  The Chinese government’s policy towards foreign films does seem like protectionism, but because foreign films are limited for informational reasons and not to protect China’s domestic film industry, calling it protectionism may not be appropriate, especially since there does not appear to be all that much love lost between Beijing and China’s own film industry. Mathew Alderson, who represents a number of media companies in China, wrote on this in a post, entitled, Protecting Hollywood Films in China Makes Sense For China:

It is not the local Chinese film industry that wants to stop foreign films. Far from it. Barriers to entry such as China’s twenty foreign film quota, and the requirement that foreigners shoot their films in China as Chinese co-productions, are there to stem the invasion of Hollywood’s “corrupting” influences, which the  Chinese government sees as US propaganda or soft power. These barriers really have more to do with the government’s desire to preserve what it deems important than in protecting the local Chinese film industry.

The same is generally true with respect to publishing.

But if your business is something like retail, or electronics manufacturing, then you probably have nothing to worry about from Beijing by way of protectionism . That is not to say you do not have other issues you need to worry about, including local governments that may not appreciate your being there, but odds are good you do not have an enemy in Beijing.

What do you think?

I was fortunate enough to have been invited to attend a recent session in Beijing convened by Nancy E. Kremers, the Senior IP Attaché to the US Embassy here.

The purpose of the session was for intellectual property lawyers from US firms, together with representatives of IP-dependent US companies, to brief the Attaché on current IP issues in China. It was also a chance for the attendees to get up to speed on the many US Government initiatives in this area.

One of the biggest concerns voiced at the session was the ongoing problem of “bad faith” in Chinese trademark law. I am not going to get into that too much here because others have already covered it adequately. Suffice it to say that there is a big problem in China with “pirates” or “squatters” who register in China a brand they have simply ripped off from the West. Restrictions against this sort of thing are tougher in most other countries, but in China it is extremely difficult, if not impossible, to get rid of someone who registers first, even if they do it in bad faith. This is what we were referring to in our earlier post on Chinese trademark law, entitled, Do you Feel Lucky? Do You?

One of the challenges faced by the U.S. and by other Western countries that try to plug the “bad faith” loophole or simply push to improve IP protection in China generally, is that many Chinese perceive this is being done for essentially selfish reasons, with little or no benefit for China. The fact that the Chinese are, at least during their current stage of economic development, net importers, or even copiers, of Western IP tends to underlie this perception. This state of affairs provides little incentive for improving protection on the part of the Chinese.

Anyway, the point I tried to make at the Attaché’s session was not about trademarks. What I conveyed was that the argument for improved copyright protection in China might be easier to get across in the context of the film industry. I brought this up because China’s domestic film industry suffers from piracy just as much as, if not more than, Hollywood.  Couple that with the abundance of Chinese producers, cast and crew wanting to work more with foreigners and you have a pretty good argument for lifting the barriers to foreign films as well.

In other words, not only would the local Chinese film industry benefit from better protection against piracy in China, it would also benefit from the general increase in local production that is likely to occur if the market opened up to foreigners.  Sure, strictly speaking that is also a trade issue, but it certainly is an IP-related trade issue nonetheless.

It is not the local Chinese film industry that wants to stop foreign films. Far from it. Barriers to entry such as China’s twenty foreign film quota, and the requirement that foreigners shoot their films in China as Chinese co-productions, are there to stem the invasion of Hollywood’s “corrupting” influences, which the  Chinese government sees as US propaganda or soft power. These barriers really have more to do with the government’s desire to preserve what it deems important than in protecting the local Chinese film industry.

All of this means that the foreign and the Chinese film industry should be able to work together to advance the film industry in China by expanding those who can make the films and by blocking those who seek to copy them.

For more on the legal issues foreign filmmakers confront in China, check out the following:

What do you think?