Italian businessman Stefano Gandolfi has one of those troubling stories about protecting your intellectual property rights in China. After his Italian toy-making company Italtrike srl began having its plastic tricycle made in China, distributors started showing up at trade shows there trying to market illegal copies, he said.
So Gandolfi hired a Hong Kong lawyer, and had just started writing letters to the suspected Chinese counterfeiters telling them to stop, when his lawyer got a letter suggesting it might not be so easy - one of the copycats had sent him a check for 1 Hong Kong dollar, or about 13 U.S. cents.
Gandolfi's lawyer had told them Italtrike's tricycle was patented in both Italy and China, and that their company should stop selling its counterfeit copies. For Gandolfi, the message was clear: You can't stop us.
``They said, `That is our penalty,' '' said Gandolfi, the president of Italtrike, a 40-person manufacturing firm headquartered outside Venice, Italy. ``They feel safe to do what they decide to do.''
Gandolfi said he eventually was able to convince those trading firms to stop, but then more copies started showing up, this time marketed by another Chinese factory and other distributors. He said the counterfeits have harmed his firm, costing him significant business in Australia, for example, and time and effort policing elsewhere.
Examples like Gandolfi's indicate that intellectual property remains a significant challenge for many businesses in China, according to experts and reports from Western governments.
Some problems are obvious: Pirated DVDs are readily available on street corners in Chinese cities. And software piracy is widespread: A joint U.S.-Chinese police investigation last year claimed to have dismantled the largest piracy syndicate in the world, responsible for distributing an estimated 2 billion copies of counterfeit Microsoft software.
``Rampant counterfeiting and piracy problems have continued to plague China,'' the U.S. government said April 25 in its annual report on worldwide intellectual property rights protection. ``Enforcement efforts, particularly at the local level, are hampered by poor coordination among Chinese government ministries and agencies, local protectionism and corruption, high thresholds for initiating investigations and prosecuting criminal cases, lack of training, and inadequate and nontransparent processes.''
The U.S. report said China is making progress and many government officials are working hard on the problem, but it singled out China and Russia as the biggest global challenges.
For some China-based IP experts, however, the country is not a black hole for IP because companies have options and the IP legal system is getting stronger.
Chris Bailey, partner and deputy country head of China for U.K.-based intellectual property consultant Rouse & Co., said foreign firms generally win between 60-90 percent of IP cases they bring in China.
Speaking in an interview in his office in Guangzhou, where he is based, he said that may be because foreign firms are much more careful in choosing the cases they file, only suing when they have a very strong position. Chinese firms, with lower legal costs, tend to sue more quickly, he said.
Bailey, who has worked for London-based Rouse in IP issues for eight years in mainland China, said, in his opinion, China's system is improving.
``That depends on who you ask, [but] our view is yes, it's getting better and there are some fairly obvious factors that are driving that,'' he said, including general economic development and a desire in China to develop a more innovative domestic economy.
He said China's IP system is stronger than in some Southeast Asia countries, which are ``frankly much worse in terms of corruption and IP protection. It's just that those countries are less important globally to industry.''
Some overseas plastics firms are seeing court victories in China. German extruder maker Battenfeld Extrusionstechnik GmbH said it won a judgment in court in Dongguan late last year against Hong Kong-based competitor Cosmos Group for allegedly infringing a Battenfeld patent for a single-screw extruder design.
Cosmos, however, said the courts ruled against only one of three Cosmos subsidiaries Battenfeld sued, dismissing claims against the other two. Cosmos also said it has appealed, and said it was premature for Battenfeld to declare victory.
The lower court awarded Battenfeld 500,000 yuan (US$71,510) in damages, which Bailey and others said was a large amount for a local court judgment, although by standards in other countries, relatively small.
Some argue that China's smaller damage awards mean that too often infringing companies see IP violations as only a cost of doing business. And the country remains a tough place to get the kind of sizable court judgment that can deter an obvious case of infringement, Bailey said.
Xu Jian, a Guangzhou IP lawyer with the Birmingham, U.K-based law firm of Wragge & Co., said China is likely to triple the maximum damage awards in its next rewrite of IP laws, due in a year or two: ``It's obviously unfair to award a little damage, which is not a huge deterrent for the infringer.''
Last year, a Chinese court for the first time awarded a 1 million yuan (US$143,000) damage award in a case involving a chemical patent, Xu said.
The majority of IP cases in China are brought by Chinese companies suing other Chinese firms, which is driving the Chinese government to toughen laws, along with complaints from foreign governments and companies, he said.
``If so many Chinese companies are suing other [Chinese] companies for IP infringement, that also puts huge pressure on the Chinese government to improve the process,'' Xu said. ``The government has to satisfy their domestic companies as well as the foreign companies.''
Still, those changes may not come fast enough for companies like Italtrike, the maker of the plastic toy tricycle.
Gandolfi did one of the right things that Bailey, Xu and others say is often overlooked: he registered his patent for design of his tricycle in China, increasing his protection.
Gandolfi said what is unique about his toy was the design of the roof canopy. He said he was the first to use that style canopy, and while he said he can't of course stop others from making canopies, he wants to protect his design.
He said large retailers like Toys R Us or Carrefour will not buy counterfeits, so that sales channel is protected, but smaller distributors will, creating openings for copies.
That happened in Australia, he said, where cheaper copies undercut Italtrike's official distributor. That distributor initially thought the copies were in fact Italtrike originals that Gandolfi was sending into the country for much less than the distributor was paying.
The distributor was very upset at first, so Gandolfi said he explained they were illegal copies, not his. But in the end it was hard to recoup the lost market share there, he said.
The situation leaves him wondering what his options are, beyond fighting when he periodically sees another copycat pop up at a trade fair or selling on the Internet, he said: ``[The Chinese firms] know that nothing will happen to them.''