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San Jose Mercury News, August 30, 2005

Spotlight on Copyright Piracy; New Intellectual Property Czar Targets Lax Enforcement in China

 By KARL SCHOENBERGER, Mercury News

 Chris Israel, the Bush Administration’s new czar for intellectual property rights protection, has the eyes of Silicon Valley on him.

The 35-year-old Commerce Department official, who was appointed in late July to fill the newly created post of Coordinator of International Intellectual Property Enforcement, will be the point man for putting pressure on China, the global capital for product piracy and a major bastion of illegally copied software.

The task will be daunting, Israel conceded in an interview.

“I’m asked, ‘Are you crazy?’,” Israel said, describing how some people react when they learn about his new job. The problem with China is “a big challenge,” he said. “And it’s been with us for a long time.”

The theft of intellectual property in China—everything from technology patents to software codes to DVDs—is a perennial thorn in Sino-U.S. relations. American companies lose an estimated $250 billion in annual sales worldwide because of intellectual property violations, according to the U.S. Department of Commerce, and China is held out as an incorrigible offender with its lax enforcement and weak judicial system.

Israel is scheduled to visit China on Sept. 12 and plans to hold talks with officials there to follow up on recent promises China has made on improving intellectual property enforcement. The U.S.-China Joint Commission on Commerce and Trade met on July 11 in Beijing, where U.S. Trade Representative Rob Portman and Secretary of Commerce Carlos Gutierrez extracted renewed commitments from their Chinese counterparts to reduce exports of counterfeit goods and weed out software piracy in state-owned companies.

“When we talk to industry, China is consistently one of the top concerns they raise with us,” said Israel, who was a Republican Congressional aide and a lobbyist for Time Warner before joining the Commerce Department.

Israel said he has spoken directly with Silicon Valley companies about piracy in China since taking office, but declined to identify them. Software companies have a particularly big stake in boosting intellectual property rights protection in China because 90 percent of all software in use there is illegal, according to the Business Software Alliance, an international industry group based in Washington, D.C.

Most effective

“Every country is unique and I won’t wade into diplomatic territory—that’s not my job.” Israel said. “But we will work with the Chinese in ways we think are most effective.”

A spokesman at the Chinese consulate in San Francisco declined to comment on the new U.S. anti-piracy czar, or on China’s reputation as the global center for product piracy.

The music and motion picture industries have been outspoken on the issue of intellectual property theft in China. Disney’s attempts to protect its rights to Mickey Mouse are legendary. But high technology companies are now stepping forward and playing a more active role in the battle against piracy in China after years of quiet diplomacy and broken promises.

Intel adopted a bold legal strategy at the end of January by suing a Chinese competitor for intellectual property infringement in a local Chinese court. Cisco Systems settled out of court last year after suing a Chinese company in Texas for allegedly stealing its technology.

High-tech lobbyists have praised the appointment of the anti-piracy czar and expressed optimism about the outcome of July’s intellectual property rights agreement in Beijing. But some observers in the valley remain skeptical.

“It would be great if the Chinese said they are going to respect IPR laws and crack down on violations,” said William Plante, director of Symantec’s Corporate Security and Brand Protection Task Force. “But there’s internal pressure not to crack down. Exporting counterfeit software is one of the sources of their economic boom.”

Robert Holleyman, chief executive of the Washington-based industry group Business Software Alliance, said an estimated 90 percent of the software used in China is pirated. One of the biggest problems, he said, is that corporate end-users copy software programs for internal use without obtaining legal licensing permission.

Software lags

“The only legitimate measure of improvement would be when software sales rise at the same rate as PC sales in China, which is not happening,” Holleyman said. “This is not an issue where Chinese software companies are gaining a share in the domestic market. China is the 2nd largest market in the world for PCs, but only the 25th largest market for PC software.”

Colleen Rubart, spokeswoman for Intel, said the company had no comment on its pending law suit against China’s Shenzhen Dongjin Communications Technologies, a networking components maker that Intel accuses of copying proprietary software. The Chinese company has counter-sued, accusing Intel of monopolistic practices.

Rubart noted, however, that China is making efforts to live up to its commitments on intellectual property rights reform as a new member of the World Trade Organization.

“China is taking steps to comply, but they’re still in the early stages. They’re making efforts,” Rubart said in a conciliatory note. “But we take IP protection seriously. It’s the same in China as anywhere else.”

Fine line

Silicon Valley companies walk a fine line in asserting their intellectual property rights in China while protecting their strategic long-term interests in the country’s huge domestic marketplace. China’s economy is still dominated by state-owned enterprises and public sector clients—where software piracy is rampant.

A cautious rule of thumb for foreign businesses in China has been that it’s important not to offend your Chinese hosts while trying to penetrate the domestic market. But that’s beginning to change with higher expectations that China adapt to international business norms. U.S. companies aren’t tip-toeing around the intellectual property issue anymore.

Cisco Systems was the first major technology company to resort to a confrontational approach on intellectual property rights. It sued Chinese competitor Huawei Technologies in a Texas court in 1993, claiming the state-owned company had copied Cisco’s technology for certain switching and routing products.

The case was settled out of court last year with Cisco saying the result was “a victory for the protection of intellectual property rights, and for all companies who spend considerable resources on R&D in order to offer better products for the marketplace.”

Since then, the Bush Administration has stepped up its focus on intellectual property protection in China. It has become one of the key areas of economic friction with China that U.S. officials are juggling, along with the yuan currency valuation and other supposed non-tariff trade barriers. Political heat is rising with the soaring U.S. trade deficit with China, which grew to more than $162 billion last year.

“Intellectual property theft costs U.S. businesses billions of dollars and weakens our economy,” Gutierrez said in the statement announcing Israel’s appointment to the intellectual property enforcement position. “American ingenuity and innovation are driving forces in our economy and we need to protect our ideas, both at home and abroad.”

Contact Karl Schoenberger at kschoenberger@ mercurynews.com or (415) 477-2500.

 

Copyright 2005 San Jose Mercury News