Red Carpet With Hurdles for Foreign Movies to China

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China has liberalised its market for theatrical release of foreign films to some degree, which kills two flies with one stone for foreign movie producers. On the one hand when Chinese are able to watch some popular foreign movie in Chinese cinemas, it decreases the incentive for Chinese consumers to download or buy counterfeit DVDs. On the other hand, the growth in movie tickets in the US and Europe have plateaued and China is with its soaring box office sales the promised land for foreign movies. However, importing movies to China is still highly challenging at different dimensions:

 

 

 

– the movie needs to be selected as one out of only 34 foreign movies;

– then the movie needs to be approved by SAPPRFT;

– there is a draft law that requires that two-thirds of the total movie run time consist of Chinese films;

– then there is a ban during Lunar New Year celebration and Summer holiday;

– domestic films are favoured and foreign movies sometimes have to compete against other foreign movies;

– domestic films can get a tax rebate.

 

Therefore, foreign movies can be screened in China, but many hurdles need to be taken.

 

34

The first foreign movie was screened in China in 1994. It was The Fugutive. Now, China’s box office sales have become an important part of the revenues for members of the Motion Picture Association of America’s. According to their 2015 Theatrical Market Statistics, China’s box office increased 49 percent in U.S. dollars to $6.8 billion. After China, the UK was the country where the six major Hollywood studios that comprise the MPAA, had the highest box office sales, but considerably lower: $1.9 billion.

The contours of the near sunrise future for the members of the MPAA became visible in February 2015, when the box office sales in China (US$650 million) surpassed that of the United States (US$640 million) for the first time. USCC p 7. China is already the second biggest market for MPAA members, and is projected to become the biggest market by 2018.

 

What is the MPAA?

The following companies comprise the MPAA:

  • Walt Disney Studios Motion Pictures
  • Paramount Pictures Corporation
  • Sony Pictures Entertainment
  • Twentieth Century Fox Film Corporation
  • Universal City Studios LLC
  • Warner Bros Entertainment.cinema

 

In 2007 the US brought a case to the WTO against China for measures that restrict the trading rights with respect to imported films for theatrical release, and discriminatory distribution rights. The Panel determined that, under China’s Accession Protocol to the WTO, a number of Chinese measures were inconsistent with China’s obligation to grant “trading rights”. About distribution rights, the Panel rejected the claim of the US. Both countries appealed in 2009. And 21 December 2009 the Appellate Body circulated its report in which it upheld the Panel’s determination about trading rights of imported films.

In 2010, China informed the Dispute Settlement Body (DSB) of its intention to implement its recommendations and rulings. Since the dispute involved many important regulations on culture products, China needed a reasonable period of time for implementation. China and the US agreed that this reasonable period of time was 14 months and would expire on 19 March 2011. Six days later, China reported that it had made efforts to implement recommendations and had completed amendments to most measures. However, given the complexity and sensitivity of the dispute, China hoped that Members would understand the difficulty it was facing in the implementation process. China wanted to resolve the matter through joint efforts and mutual co-operation of the relevant parties.

Memorandum of Understanding (MOU)

On 25 April 2012, the ambassadors to the WTO Yi Xiaozhun for China and Michael Punke (also known for his novel The Revenant, that made it into an Oscar winning film and which was screened in China and opened with $33 million in the first three days) for the US sign the MOU in Geneva.

On 9 May 2012, China and the US informed the DSB of key elements relating to films for theatrical release as set forth in the MOU mentioned at the DSB meeting on 22 February 2012.

At the DSB meeting on 24 May 2012, China said that it had taken all necessary steps and had thus complied with the DSB recommendations. The US said that the MOU represented significant progress but not a final resolution.

World Trade Organization, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, Dispute DS363, available here.

 

In the MOU China and the US agreed upon the following points:

  1. China confirmed that enhanced format films (such as 3D and IMAX films) are not subject to the 20-film commitment set forth in the Additional Commitments under Sector 2.D. of its GATS Schedule and agreed that China will allow the importation of at least 14 enhanced format revenue-sharing films per calendar year beginning in 2012. Therefore the total number of foreign films of 34.
  2. China agreed that the producer of the imported revenue-sharing film will be allocated 25 percent of gross box office receipts, and the Chinese side shall be responsible for the payment of all taxes, duties and expenses.
  3. In a contract for the distribution of an imported film other than a revenue-sharing film, where the two sides are not both private enterprises, China agreed that the contract will be based on commercial terms, consistent with the terms prevailing in countries whose markets are comparable to China’s market based on annual box office revenue, number of screens, annual admissions and admissions per screen.
  4. China confirmed that any Chinese enterprise is eligible to apply for and be granted a license to distribute imported films and that nothing in China’s laws, regulations or government rules prevents any eligible Chinese enterprise from applying for and receiving a license to distribute, and operating as a distributor of, these films. China further agreed that it will promote reform in the distribution of imported films and will actively encourage more Chinese enterprises, including private enterprises, to obtain licenses and to participate in the distribution of these films.
  5. China agreed that the licensing of distributors would be conducted in a nondiscretionary and non-discriminatory manner, that contracts for the distribution of imported films would reflect standard industry practices, and that other Chinese government policies or practices would not undermine the provisions of the MOU.
  6. After five years, thus in 2017, China and the US will engage in consultations regarding key elements of the MOU and to discuss the matter of China implementing the DSB’s recommendations and rulings with regard to films in DS363.

U.S. State Department, Memorandum of Understanding between the People’s Republic of China and the United States of America Regarding Films for Theatrical Release, February 2012, see here.

In short: foreign movie producers can enter the Chinese market in three ways:

  1. revenue-sharing films (but limited to 34 films; 20 normal and 14 enhanced format films), of which the foreign studio takes 25 percent of the box office receipts (which is double in other parts of the world);
  2. flat-fee movies;
  3. Co-productions (the foreign studio receives about half of ticket sales). Hollywood can bypass quotas and receive about half of ticket sales.

See, Knowledge@Wharton, 17 February 2016, available here.

 

State Administration of Press, Publication, Radio, Film and Television (SAPPRFT)

Sean O’Connor and Nicholas Armstrong in ‘Directed by Hollywood, Edited by China’, argue that the SAPPRFT does not give clear guidelines about their wishes. It describes that many a foreign studio is practising self-censorship to get the approval of SAPPRFT. See website of SAPPRFT here (Chinese).

In 2014, the SAPPRFT banned screenings involving anybody who had engaged in criminal activity. China’s new film law stresses celebrity ethics, Xinhua (via Shanghai Daily), 29 August 2016, available here.

“According to SAPPRFT regulations, all films exported to China must adhere to the principles of the Chinese Constitution and maintain social morality. Therefore, any films depicting demons or supernaturalism, crime or any other illicit or illegal actions within China’s borders, disparagement of the People’s Liberation Army and police, and anything that could be perceived as anti-China—including merely damaging Chinese sites or monuments—are prohibited.”

See, Sean O’Connor and Nicholas Armstrong, ‘Directed by Hollywood, Edited by China: How China’s Censorship and Influence Affect Films Worldwide, US-China Economic and Security Review Commission, 28 October 2015, Fn 62, available here.

 

Two-thirds of total movie run time in Chinese cinemas needs to be domestic films

The second draft of a bill, that was originally presented in October 2015, has been just released. Lawmakers are making their second reading of the bill during the bimonthly session of the Standing Committee of the National People’s Congress this week. “The law contains a provision that domestic films should take up at least two-thirds of total movie run time in Chinese cinemas.”

See, Fergus Ryan, ‘Draft Film Law Favors Local Films over Hollywood Imports’, China Film Insider, 30 August 2016, available here.

 

Duration of screenings

Foreign films are often allowed to be screened for a month. “Studios can request an extension by applying to a branch of the China Film Group, which is directly under the State Administration of Press, Publication, Radio, Film and Television, or SAPPRFT, China’s top film regulator. In a twist, China Film Group is also involved in producing films: Together with Enlight Media, it is one of the studios behind “The Mermaid.””

See, Lilian Lin, with contributions by Laurie Burkitt, Making Waves: In Blow to Foreign Films, China Gives ‘Mermaid’ Three-Month Boost, WSJ, 4 March 2016, available here.

 

Not helpful for the box office sales is that foreign films are banned during the high season of movie watching: the Lunar New Year celebration and the Summer holiday.  USCC p 7.

 

Therefore, foreign film studios that want to launch their films globally simultaneous or near simultaneous between 30 April and 2 May 2003, 20th Century Fox launched X2: X-men United in 93 countries

Hubert Gatignon, John R. Kimberly, Robert E. Gunther, ‘The INSEAD-Wharton Alliance on Globalizing: Strategies for Building Successful Global Businesses’, Cambridge University Press, 20 Sep 2004, 207-208) might be wise to first get approval for the China launch from SAPPRFT.

 

Tax rebate

Foreign films have to compete with domestic films that are eligible for a tax rebate since April 2016, which seems not conducive for the level playing field that was promised by the WTO.

level playing field?

See, Patrick Brzeski, ‘China to Reward Cinemas for Favoring Local Films Over Hollywood Imports’, The Hollywood Reporter, 27 March 2016, available here.

 

Conclusion: there is room for improvement. Expect a push for structural change for 2017.


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Baidu In Search of Copyright Solutions After NCA Fine, and Lawsuits May Follow Suit

By Danny Friedmann

 

Baidu Inc. and QVOD were each fined 250,000 RMB on December 27, 2013 for copyright infringement by the National Copyright Administration of China (NCA) and had to enjoin their infringing activities. The NCA started the investigation on November 19, 2013 after receiving complaints from Youku Tudou (since the merger in 2012 China’s biggest video website operator), LeTV, Sohu, Tencent, MPA, CODA, Wanda Films and Enlight Media; that Baidu Video, Baidu TV Stick, Baidu Yingyin media player and Baidu Video mobile app had infringed their copyrights. The complaints were also directed against QVOD, another software video player.

 

The Global Times reported that the 250,000 RMB was the highest fine the NCA could give to Baidu and QVOD. However, this would be only correct if the illegal earnings were no more than 50,000 RMB. If the illegal revenues exceeded 50,000 RMB the maximum is five times the amount of the illegal revenues, and they can also confiscate the equipment such as computers that is mainly used to provide the network service.  See Articles 18 and 19 Regulation on the Protection of the Right to Network Dissemination of Information (updated February 25, 2013 by Bridge IP Law).

 

Wang Fan wrote for the China Daily here about a campaign to deter illegal streaming of unauthorised videos in June, when 20 video website operators had to submit documents to the NCA to demonstrate that they had authorisation to stream 2,374 different films and television programmes.

 

250,000 RMB? What happened to the claim of 300 million RMB?

The administrative route is a relatively time and costs efficient mode of enforcement in China, but it lacks the remedy of compensation of damages. Therefore it was to be expected that on November 13, 2013, a consortium of video companies announced at a press conference at the Beijing Shangri-La that they were going to file a lawsuit against Baidu and claim 300 million RMB in damages. Paul Bischoff of Tech in Asia reported that Youku Tudou (since the merger in 2012 China’s biggest videosite), LeTV, Sohu, Tencent, CODA, Wanda Films and Enlight Media and other video companies were unified in the “China Online Video Anti-Piracy Alliance”.
According to Eric de Fonenay of MusicDish, Capital Copyright Industry Alliance Capital Protection Division, the China Radio and Television Association of the Television Production Committee, and many Chinese production companies gave acte de présence, see here. The Motion Picture Association of America (MPAA), Sony Pictures Entertainment, Warner Brothers, Disney and Paramount were present too, see here, although, according to Brid-Aine Parnell of The Register, the MPAA did not join the copyright infringement claim, see here. Ms Parnell wrote also that the alliance had tried to negotiate with Baidu, to no avail, because according to her Baidu would not agree to rules on violating copyright unless QVOD did the same.

 

Baidu argued that it took already four steps towards mitigating piracy: Research and development into an automatic piracy filtration system; Open complaint channels where a 24-hour team reviews reports of pirated content and consequently removes it; recommending high quality genuine content to steer users away from pirated material and Baidu’s web search will stop linking to pirated video sites.

 

Copyright infringement? Taking unfair advantage? 

 

According to Global Times’ Li Qiaoyi Baidu and QVOD were “identified as the top two violators of copyrighted video content for 2013” by Yu Cike, head of the department of copyright management, of the NCA.

 

The claim against Baidu and QVOD was that they deeplinked to copyrighted videos without authorisation: in other words that copyrighted content of third parties were directly accessible via Baidu or QVOD video players. This way, the rights holders were deprived of their right to communicate their works, performances or audio-visual recordings to the public (conform Article 8 WIPO Copyright Treaty to which China is a member since 2007, compare the language used in Article 26 Regulation), and internet users never had to visit the third parties’ sites, and devoid of advertisements on those sites. At the same time Baidu and QVOD were taking unfair advantage of the content, storage and bandwidth of the rights holders of the videos.

 

One can argue that the CJEU rule that “transmission and retransmission of works (even where those [users] streaming the content were legally permitted to view the original broadcast) constitutes a “communication to the public”, can be applied in this case as well. Read Annsley Merelle Ward’s analysis at IP Kat.

 

China has safe harbour provisions for online (network) service providers against secondary liability in case of copyright liability, comparable to the DMCA in the US (the E-Commerce Directive in the EU works horizontally, and is applicable to trademark infringements too, and is not just applicable to copyright infringement, anti-circumvention and technological adjuncts). Articles 18 (1) and 19(2) Regulation state that the network service provider is liable for copyright infringement if it is providing works, performances, or audio-visual recordings to the public through the information network without permission; and is obtaining economic benefits. The safe harbour provisions are not providing immunity against liability in case of actual or constructed knowledge, see Articles 22 (3-4), 23 Regulation.

 

Another claim was that Baidu provided access to video sites that host pirated content and do not have official licensing to operate in China. It was also stated that Baidu was profiting from advertising revenue sharing agreements with such sites.

 

Professor Eric Priest of the University of Oregon School of Law sets out in ‘The Future of Music and Film Piracy in China‘, that the conflicts about piracy of videos (at least for the part that are permitted by the Chinese authorities) could be prevented if China would apply an Alternative Compensation System (ACS) (where for example a percentage of the costs of an internet subscription via a fixed line of mobile will be redistributed to the rights holders in the relation to the usage of their works). The future Professor Priest outlined in his 2006 publication in Berkeley Technology Law Journal, is still worth considering today. The Institute for Information Law (IViR) in Amsterdam is doing a comprehensive study between 2012 and 2015 on ACS under the guidance of principal investigator Professor P. Bernt Hugenholtz, see here
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One Minute Film Contest to Promote IPR in China

The movie industry uses professional producers and movie stars such as Jacky Chan to promote that youngsters abide by the IPR laws, read here. Now, during the 15th Beijing Student Film Festival, the China Film Copyright Protection Association (CFCPA) and the Motion Picture of America Association (MPAA) launced a one minute film contest (in the […]

Cost of Piracy Overestimated Says OECD, Underestimated Says ICC

Steve Whitehouse of Thomson Financial reports about an unpublished Organisation for Economic Cooperation and Development (OECD) study which puts trade losses in 2005 at up to 200 billion US dollar, considerably lower than the 600 billion US dollars estimated by the International Chamber of Commerce. Read Whitehouse’s article via Forbes.com here. US officials estimate the […]