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An exciting showdown that could become a landmark case in copyright protection is shaping up in Shenzhen, where a company accused of rampant piracy is refusing to pay a record fine formally levied this week by the city government. I first wrote about the massive 260 million yuan ($42 million) fine against video sharing site QVOD, whose Chinese name is kuaibo, about a month ago when the record-breaking sum was first announced. (previous post) Now Shenzhen has formally levied the fine, and QVOD has refused to pay and is threatening to take its own legal action.

There are quite a few subtexts to this story, including reports that Shenzhen-based Internet giant Tencent (HKEx: 700) was one of the main forces that persuaded the city government to levy the massive fine. (previous post) But certainly the big picture is that this case could well become a precedent for China as it becomes more serious about copyright protection.

China for years has said it respects the copyrights of both domestic and foreign film and music makers, and governments periodically crack down by shutting websites and factories that engage in piracy. But many of those illegal operators and manufacturers simply close up shop and then reopen elsewhere under different names. One big obstacle to better deterrence is a lack of major fines, since China usually caps financial penalties for copyright violations at relatively low sums in the tens of thousands of dollars.

But that element of the equation could change with this latest case involving QVOD, which was formally ordered this week to pay the record fine within 15 days. (English article) Failure to pay on time would result in a late fee of 3 percent of the amount for each day past the deadline, said an official with the Shenzhen Market Supervision Administration, which is handling the matter.

The fine and conditions for its payment were announced following a formal hearing last week. The Shenzhen government says the fine is equal to 3 times the money that QVOD earned through illegal activities involving copyrighted material on its site. QVOD has responded by saying it won't pay the fine, and is threatening to take legal action against the government in an administrative procedure. (Chinese article)

I'm certainly no fan of companies like QVOD that engage in rampant piracy, but I do have to admire it for its brazen defiance of the powerful Shenzhen city government. Of course, the company is probably taking such a defiant stance because it would face financial collapse if it actually had to pay the fine. Still, I can't imagine that the company will be able to defeat the local government, and this story will end with QVOD either paying the fine, with a closure of the company, or both.

This crackdown comes as a growing number of major Chinese Internet and other media companies, many of them US listed, have embarked on their own clean-ups of pirated materials from their sites and services. That's been a critical factor in this latest development, since names like Youku Tudou (NYSE: YOKU), Sohu (Nasdaq: SOHU) and Tencent (HKEx: 700) have become powerful private-sector police that are paying big sums to properly license copyrighted material and want to protect their investments.

This new cooperation between local governments and big corporations could well mark a major turning point in the fight against piracy in China. In the past, big companies like Baidu (Nasdaq: BIDU) and Tencent would play a passive and sometimes even resistant role in the war, often because their sites contained pirated material. But now that these firms have matured and shown they want to help protect copyrights, local governments like Shenzhen could become much bolder about levying big fines and taking other decisive actions to shut down the pirates once and for all.

Bottom line: QVOD's showdown with Shenzhen over copyright violations is likely to end with the closure of the company, and could mark a major turning point in China's battle against piracy.

Disclosure: None.

Source: QVOD, Shenzhen Govt Face Off Over Record Fine