Asset protection

In some countries, intellectual property and copyright is tantamount to the “right to copy”, but counterfeit goods and piracy cost companies billions of dollars in lost revenue. However, there are signs that enforcement may be improving.

Intellectual property (IP) infringement is big business in emerging countries and counterfeit goods ranks as one of their biggest exports. The OECD released a study in 2007 that estimated that the annual value of international physical trade in counterfeited consumer goods was $200bn, an amount equivalent to two percent of world trade and higher than the GDP of 150 countries.

Seven in ten European businesses operating in China say that they have been the victim of IP violations. European manufacturers estimate that IP theft has cost them 20 percent of their potential revenues in China, and almost 60 percent of all counterfeit goods seized at European borders in 2007 came from China.

Havocscope, a US-based independent data and information provider of black market activities around the world, says that the counterfeit market in India is worth over $6bn, over half of which ($3.63bn) comes from the sale of pirated movies. Pirated or copied computer software is the next big market, valued at $1.28bn. The organisation also estimates that over a third of all car parts sold in India are counterfeit. To put that figure into context, the US Federal Trade Commission says the US auto industry could hire 250,000 additional workers if the sale of counterfeit auto parts was eliminated.

Patent treatment
Enforcement actions by patent offices in developing countries have traditionally been slow, but this situation is improving, especially as the WTO is ensuring that IP rights in developing countries are moving nearer to those standards in the West. For example, both India and China – regarded as key centres in the mass production of counterfeit goods – now have more efficient patent and trademark offices for processing applications to protect the IP rights of foreign firms.

In 1995 India – which still has the unenviable reputation as being on the list of countries where a prosecution can easily crawl to a standstill – signed up to the Trade Related Aspects of Intellectual Property (TRIPS) Agreement, an international treaty created by the WTO which sets down minimum standards for most forms of regulation within all WTO member countries. As of January 1, 2005, India extended the agreement to protect IP rights for pharmaceutical products, rather than just protecting production methods (more than 2.7 million fake medicines were intercepted at EU borders in 2006, which are reckoned to account for almost ten per cent of the world trade in medicines). However, other industrial sectors – such as software and technology firms – complain that their products are not afforded the same protection.

When India signed up to the TRIPS Agreement in 1995 there were only four laws in the country relating to IP rights. There are now seven but there is still no criminal infringement possible in India for violating patent rights. Aggrieved parties must file civil suits. Aside from an infringement, a patent owner can claim injunction relief, damages or accounts of profit made by the infringer. However, very few companies have ever actually been prosecuted. This is because India only afforded patent protection for processes and production methods – the product itself was not protected if it could be shown that it could be produced by different means. Furthermore, only three types of companies were offered such protection – those developing chemicals, pharmaceuticals and foodstuffs.

Out-patents
After much criticism, particularly from the US, China is also getting its act together. After two-and-a-half years of preparation, China’s State Intellectual Property Office announced in 2008 that the government has drawn up 20 methods to protect IP, including improving the protection system, strengthening law enforcement and raising public awareness.

Like India, China has had legislation in place for decades. The country’s trademark law was first adopted in 1982 and subsequently revised in 1993 and 2001. Its new trademark law came into force in October 2001, with implementing regulations taking effect on September 15, 2002. This new trademark law extended registration to collective marks, certification marks and three-dimensional symbols, as required by TRIPS. In 1989, China joined the Madrid Protocol, which requires reciprocal trademark registration for member countries.

Unlike the patent and trademark protection, copyrighted works do not require registration for protection. Protection is granted to individuals from countries belonging to the copyright international conventions or bilateral agreements of which China is a member. However, copyright owners can register voluntarily with China’s National Copyright Administration (NCA) to establish evidence of ownership, should enforcement actions become necessary. While the legislation might be in place, enforcement is patchy.

Jonathan Selvadoray, chief representative of the Shanghai office of CMS Bureau Francis Lefebvre in alliance with Cameron McKenna and Hasche Sigle, says that in China “there isn’t a problem with the legislation on designs, copyright and patents protection. All the necessary laws are in place and the country has made great efforts in recent years to take on board the international criticism heaped upon it. The key problem now is how well these laws are implemented and enforced. In China, copyright is often regarded as ‘the right to copy’”.

James Bacchus, chair of the Global Trade and Investment Practice Group of the international law firm Greenberg Traurig LLP, and counsel to the China Copyright Alliance American, argues that US corporations are losing billions of dollars to China from the theft of intellectual property (IP). In a Forbes commentary published in August, Bacchus claims that that due to its size and reluctance to enforce its copyright laws, China has and remains the focus of US and global concern. “China is responsible for billions of dollars of lost revenues by US companies, and thousands of lost jobs by US workers because of its failure to protect intellectual property rights effectively and because of its refusal to open its market to the copyrighted products,” he wrote.

The US government has even made copyright enforcement a key plank of its foreign policy for the next couple of years. The passage of the Foreign Relations Authorisation Act (HR 2410) sponsored by Foreign Affairs Committee Chairman Howard Berman in June furthers IP enforcement as a key component of US foreign policy. “This legislation will play a vital role in efforts to protect job-creating intellectual property abroad,” said Mark Esper, executive vice president of the Chamber’s Global Intellectual Property Center (GIPC). “Through increased IP enforcement and an emphasis on protecting IP rights in climate change negotiations, America’s foreign policy efforts will focus on protecting jobs and strengthening our economy.”

Trading patience
However, western companies are becoming more hopeful about China’s efforts to enforce foreign IP rights, especially since a number of WTO rulings went against China. In August Chinese authorities cracked down on a group of four software pirates for offering a custom-built copy of Windows XP, which was downloaded in excess of 10 million times. The four people who were identified as part of the Windows XP piracy ring received jail sentences and financial penalties of more than $1.6m, which won plaudits from Microsoft. Mark Elmslie, partner and head of the IP litigation team at Hewitsons solicitors in Cambridge, says that “more reliability and better policing has meant that companies can have more confidence in Chinese companies and the Chinese authorities in protecting against infringement”. “There is a perception, however, that while the regime has got better, the problem on the ground remains because there is such a vast amount of unregulated manufacturing that is difficult for the Chinese authorities to control,” he says.

One such industry that is particularly vulnerable is the software industry, largely owing to the ease with which the material can be duplicated, and also the disregard many users have for paying the software licence fee. Recent research from consultants IDC estimates that 27 percent of software installed on personal computers in the UK is unlicensed, while the piracy rate in China is 82 percent.

Najeeb Khan, vice-chair of industry group the British Software Alliance (BSA), says that “due to a high brand profile, counterfeit software being traded in developing nations is not uncommon. The primary reason software piracy is the most litigious is down to the apparent ease with which individuals are able to duplicate copies. This, coupled with the high demand and the ability to turn a fast profit, means in turn, the justification to pirate is fuelled by the fact that the ability to purchase is lowered. This is also applicable to other, less-assuming forms of software, such as fonts.”

Patented inhabitants
Khan adds that “the reason this problem is particularly acute in developing countries is partially based on the social awareness of its inhabitants. In developing markets, IP infringement really hurts because it stifles local creativity. In the particular case of software, a second version is rarely developed because illegal copies of the original stifle the revenue flow to research and development. The biggest asset developing countries can still sell, regardless of their frequently tough working conditions, is creativity and aspiration to do better. Once this revenue flow is removed, the creativity and the aspiration just ebb away.”

Yet software piracy is not limited to just copying programmes. Julie Strawson, director of marketing (Europe) for Monotype Imaging, says that when it comes to the area of IP, one form of IT that is often overlooked is the font – technically, an individual piece of design in its own right represented in software code and so subject to copyright and trademark laws akin to any other form of software. “While there is a pressing need to address font asset management in the UK, in emerging markets such as India and China software is critical to the economy yet piracy is rife and there is a monumental challenge to educate businesses to respect intellectual property,” says Strawson.

In response to the very real threat that this abuse of their IP rights has on their brand equity and profits, IP owners are turning to a variety of techniques to curb the impact of grey market and counterfeit goods, increasingly working together to channel a cross-industry response. This includes working with national and international customs agencies, law enforcement agencies, applying for court injunctions and launching anti-piracy programmes.

Elizabeth Gutteridge, partner in the IP practice at professional services firm Deloitte, and Neil Hargreaves, director in the same practice, say that “in the ever-present quest to expand local and global reach, businesses rightly look to trusted third parties to help serve their needs in what might be an unfamiliar and challenging environment. Examples include outsourced manufacturing, distribution contracts, licence agreements and franchising arrangements.

Frequently, contracts are signed but the ever-evolving nature of businesses means that the underlying principles of these relationships are rarely revisited and contractual terms and conditions can become a distant memory.”

Patience a luxury
Unfortunately, says Gutteridge, “as a result counterfeit products may just as easily enter the supply chain through a business partner as from a clandestine manufacturing operation”. For example, she says, take the case of a luxury goods manufacturer that had licensed its manufacturing operations to a factory in South-East Asia. “In this case the manufacturer had understood its contractual obligations and was reporting in a manner that the IP owner expected to see. However, what was not disclosed was that production ran during the night.”

All of these issues have prompted a closer look by companies at their business partners that are representing the brand integrity and using the IP of the company, says Hargreaves. “Many IP owners are now commissioning reviews of their third parties and trusted business partners to ensure that they continue to treat the IP as was originally intended. For those companies that have undertaken these activities, a marked reduction of IP abuse has been noted, as well as a resulting increase in royalties, profit shares and franchise payments, which have a direct improvement on the bottom line,” he says.

Sue Ratcliffe, chartered patent attorney and a registered trademark attorney at Coller IP Management, says that companies should try to register their IP rights in developing countries if possible to give them greater protection. “Filing an application shows that a company values its rights and also the fact that an application has been filed establishes a record of when rights come into being,” says Ratcliffe. “Overseas rights that are not registered are very difficult, if not impossible, to protect. In most countries, where it is possible to register rights, then it is possible to enforce them through the patent offices or the courts of that country,” she adds.

But Christine Crago, trademark attorney and executive manager at trademark and IP attorneys HallMark IP, says that “it still takes an incredibly long time to prosecute an IP infringement in India, whereas in China it has become quite easy to stop the production, distribution and sale of counterfeit goods at a local level with the involvement of People’s Courts. However, to be effective in either country you need to know experienced attorneys who not only know the local law, but how the legal system works.”

Protecting intelligence
Ratcliffe advises that “if possible, check to see if the patent/trademark attorneys are registered. For UK-based companies, if they use a Chartered Patent Attorney or a Registered Trademark Attorney, then these attorneys may well have contacts in most overseas jurisdictions and so can recommend local attorneys to help with enforcing rights.”

However, better enforcement is only one part of the long-term solution, says John Lovelock, CEO of the Federation Against Software Theft (FAST), a UK-based IT industry group. He believes that a growing awareness of a country’s own IP rights will result in the local population – and local businesses – being more protective of their own rights and the damage lost revenues can cause them through counterfeiters selling their fake goods.

Albert L. Jacobs Jnr., a partner in the intellectual property department at law firm Dreier, says that “it is important to understand over the last year or so the number of domestic patent applications filed in China has risen dramatically and is expected to increase. The significance of this is that Chinese companies themselves are filing patent applications. It is believed that a significant reason for the improvement in enforcement of intellectual property rights in China is the fact that the Chinese fully anticipate the opportunity to enforce their intellectual property rights against others.”

In fact, Chinese software companies have already launched suits in the US for copyright infringements. The first big step in this direction came in early 2006 when Netac Technology Co Ltd, a Shenzhen-based company, became the first Chinese company to sue a US corporation for copyright infringement and it did so in a Texas courtroom.

“I believe that as countries develop their own valuable intellectual property, they become more protective of it,” says Lovelock. “For example, Japan is the largest games software producer in the world and its software piracy rate is around 28 percent, similar to that of the UK at 27 percent. Therefore, as China develops its own intellectual property I am confident we will see a dramatic reduction in its piracy rate too,” he says.

Europe targets consumers in counterfeit clampdown
Copyright lawyers in the UK have warned holidaymakers that they could be fined thousands of pounds – or even jailed – for buying fake designer goods when abroad. Authorities in France and Italy are not just targeting those who produce and sell fakes but also those who buy them in an effort to clampdown on counterfeit goods and tax evasion. In France, the maximum fine is €300,000 or three years in jail.

The UK government has decided against criminalising consumers. Instead it has launched an information campaign aimed at people using markets and boot sales. Seizures of counterfeit goods on the continent more than doubled in 2008, with customs authorities seizing 178 million fake items, mostly imported from China.

The European Commission is concerned about the growing involvement of organised international criminal gangs. It says: “Without doubt, one of the principal methods of dispersing counterfeits is the ‘ant-like’ traffic of tourists returning home from holiday, bringing back souvenirs.” This has prompted some member states to take a harder line.

The UK government says legitimate businesses lose an estimated £10bn a year to counterfeiters, with £9bn ending up the hands of gangs. It also warns that fake alcohol can cause blindness or death, copied toiletries can be harmful and that counterfeit toys or medicines will not have passed safety tests.