jurisdictionsWorththeRisk

24 February 2003

Lorna Brazell

Most businesses are aware that their intangible assets can constitute a significant proportion of their corporate value. Intellectual property rights (IPRs) constitute an extremely valuable component of these intangibles since they are the component which companies have the ability to protect legally, and hence, have most control over. Businesses accept that to secure these rights requires appropriate policies to be applied throughout their organisation, but do not necessarily also realise that rights already obtained are vulnerable to erosion through inadequate management, external attack, or changes in government policy.

Corporate strategy needs not only to identify and secure the appropriate protection for the company’s products and inventions, but also to formulate policies aimed at minimising the risks to those rights, and ensuring that they are protected for as long as they remain useful to the businesses to which they pertain. The principle is similar to the way in which all other, perhaps more familiar, business or financial risks are routinely managed.

Once risks have been identified, the choice of which strategy to adopt in order to minimise them necessarily depends on the perceived value of the rights relative to the costs, including opportunity costs, of additional protective measures. Commercially, additional costs to increase protection against a low value risk may not be justified. Alternatively, the probability of a high value risk materialising may be so low that a business may elect not to invest in additional protective measures. But in contrast to a conscious, justifiable choice to risk the loss of rights in one or more jurisdictions, very few managers would choose to find themselves in the position of having to justify an inadvertent loss. Even where a decision is taken not to continue to protect a particular right, better alternatives than simple loss may be available, such as assignment to a public institution in return for tax credits. The decision may also need to be reviewed as external and internal circumstances evolve.

Where the risks result from the limitations of protection available in different jurisdictions, the choices to be made may be that much harder. The worst case scenario could be choosing not to manufacture or sell in markets where there is a risk of not being able to protect very valuable rights – though this, of course, needs to be weighed against the value of the potential profits foregone by abandoning a market to competitors and possible infringers. A range of different approaches should be considered before this decision is taken, to ensure that no unnecessary risks are taken with intellectual property assets.

Sources of risk

The strictly national basis of intellectual property rights opens up significant areas of uncertainty. While the fundamentals are moving towards global harmonisation as a growing number of countries become signatories of the TRIPs Agreement, trade mark and copyright laws are still subject to a degree of inconsistency around the world. Although the long term trend is clearly in the direction of increasing and harmonising protection, no further harmonisation is proposed for the present round of TRIPs negotiations. Further, linguistic and cultural factors may render marks more or less distinctive, and thereby open to attack, in some parts of the world. Once the initial choice of mark has been made, the marketing of the product in such territories may need to focus on elements of the brand identity that differ to those perceived as essential in the home market, in order to reinforce the validity of the registration.

One problem – the erosion of intellectual property rights through the clients failure to enforce them - may arise either because the business is not monitoring the market adequately and does not pick up instances of infringement, or because the client chooses not to act in respect of some acts of infringement (in cases where, for example, the costs of infringment might outweigh the value). Similarly, rights may not be realistically enforceable under the judicial system in the relevant territory, due to procedural or evidential inadequacies.

This latter situation is more problematic, and can only be addressed on a jurisdiction by jurisdiction basis. While TRIPs has laid down minimum standards of enforceability - requiring all signatories to provide interim injunctions and some form of damages, for example - the actual effectiveness of court proceedings in practice is still very variable. Even within the EU, there are very substantial differences between, for example, the time scales for litigation, the evidence gathering procedures available to litigants, and the degree of technical competence of the courts. In some of less developed countries, court proceedings can run on for decades, and at the end of this ordeal, a court order may not readily be enforceable. Thus, as with the decision whether to maintain rights in all jurisdictions, the decision to enforce should also be approached with an eye to the balance between costs and achievable benefits: the vagaries of the system, combined with the costs, may mean that in reality only a few rights can be relied upon far enough to justify the enforcement procedures.

This is an aspect which it is difficult for the international community to bring pressure to bear on. Apart from the retort than all enforcement systems have imperfections (for example, the cost of bringing proceedings in the USA, and the perceived ineffectiveness of some southern European systems), it is extremely difficult to define what is effective. Many jurisdictions have all of the necessary powers as matter of law but in practice are ineffectual because of bureaucracy, corruption or simple incompetence at various levels. TRIPs cannot be used to force member states to clean up their entire administrative act, become ethical in their dealings and competent in their use of resources. In these circumstances, the best a potential investor can do is to ensure that all agreements are under an understood law (English, French, Spanish or Dutch being obvious candidates depending on the proposed country of investment), and that the agreements include detailed provisions for close supervision and reporting to enable the rights owner to monitor actions by its licensees, manufacturers or joint venture partners. The extent to which such audit provisions are actually implemented will depend upon the value that might be lost through the erosion of the intellectual property and the initial experience of working with the licensee. It is also important to ensure that the local partners obtain a fair share of the value in the deal, to minimise the extent to which the overseas rights owner is perceived to be taking unfair advantage, encouraging the licensee (or its employees on their own account) to make up the deficit for themselves.

In some jurisdictions, enforcement mechanisms other than court proceedings are available - through industry regulators or either civil or criminal public enforcement. Routes such as these are likely to be considerably cheaper to the rights holder than litigation, may be quicker and more effective, and, where the company is operating in jurisdictions other than its home territory, may also avoid or minimise the negative publicity often associated with richer foreign claimants suing smaller local infringers.

TRIPS has inspired (or required) a range of moves to increase the level of protection available at the regional and national level for rights owners, including for example the introduction of a harmonised design regime throughout Europe. Introducing too much change too quickly, however, may produce a situation where any lingering unwillingness by the less developed countries to improve their protection levels is compounded by the inadequacies of their administrations to keep up with the demands being made of them. Changing attitudes within national governments might, in this situation, present risks in their own right.

In changing circumstances, the uncertainties surrounding the protection of intellectual property rights become greater rather than less. It is possible to keep informed as to, and to some extent influence, current thinking through liaison with national governments, participation in local chambers of commerce, industry associations and so on. Monitoring and lobbying may not give a great degree of certainty on which to take commercial decisions, but as a risk minimisation strategy they can provide forewarning of changes before they happen, and thereby assist in planning for them. This is reflected in the stances such as that which Boehringer Ingelheim have taken in South Africa, actively participating in the government’s healthcare policy rather than insisting on enforcing its rights and facing the prospect of a compulsory licence, potentially including the right to export, being issued.

Dilemmas in south east Asia

Hong Kong and Singapore are excluded from this review since in both cases their rights protection systems are fully developed and effective. My thanks to Isabella Ho of the Intellectual Property Department at Tilleke & Gibbins in Bangkok for this review of the current status of protection in this region.

In Indonesia, many substantive intellectual property law provisions are not yet fully compliant with TRIPs. For example, fundamental definitions in copyright law require clarification, and a number of existing provisions may be contrary to TRIPs. Several versions of a draft copyright law have been considered by Parliament but no significant progress made.

Although the Indonesian police are responsible for the enforcement of intellectual property rights, there is no dedicated rights enforcement team. The legal system does function (first instance criminal trials may be disposed of within one year), but legal outcomes are unpredictable. Prosecutors and judges have different levels of skills & familiarity with intellectual property issues. One practical procedural problem is that the offender must be prosecuted where the delict took place. If a raid takes place in a province, the rights owner incurs high costs engaging legal counsel to travel to meet the prosecutor, and to attend hearings. There is also the associated problem with protectionism, as offenders may enjoy good relationships with prosecutors, courts and enforcement officials.

In Malaysia, intellectual property laws are generally TRIPS compliant on substantive law aspects. A series of amendment laws were introduced in 2000 to bring the relevant trade mark, copyright and patent laws in line with TRIPS. A law on geographical indications was also introduced. Rights enforcement is performed largely by the Ministry of Domestic Trade and Consumer Affairs. Criminal cases commence in the Subordinate Courts and take at least three years (often longer) to conclude. Delays in hearings, with postponements in between are common. Prosecutors and magistrates/judges in the lower courts are often unfamiliar with intellectual property issues, and the sentences imposed normally do not pose an effective deterrent as required by TRIPS. Very few custodial sentences are being handed down for intellectual property offences. The position is better with civil litigation, in which the High Court exercises jurisdiction. High Court judges have some familiarity with intellectual property rights and issues.

In the Philippines, the provisions of the IP Code are generally compliant with TRIPs requirements. The administration is relatively efficient at granting rights, but there is no enforcement agency specifically dedicated to enforcing intellectual property rights. Some four governmental agencies are responsible, and each agency’s resources are limited in terms of skills, number of officers and budget.

Judges tend to take a very strict and formalistic interpretation of the law or procedure, in requirements of proof in search warrant applications, and at hearings. Search warrants are expressed in very limited terms, often confined to evidence presented through trap purchases. Although there are Regional Trial Courts that have been designated specialist intellectual property courts, in practice the judges who hear those cases may not have specialist training in intellectual property law. This is due to the allocation of court dockets and rotation of the judges’ roster. In provincial areas, IP matters are heard in the local courts. As for prosecutions, those respondents who have not absconded very rarely plead guilty, but choose to go to trial and challenge every issue, technical or substantive. This delays proceedings considerably. Trials often take a minimum of three years to conclude, and defendants may often choose to appeal interlocutory as well as final decisions. If a trial ever arrives at a conclusion, penalties are not commensurate with the offence, and exclude custodial sentences.

Thailand’s substantive IPR laws are generally TRIPS compliant. The most recent TRIPS legislation was the Trade Secrets Act introduced in July 2002. The law on geographical indications is still being considered by Parliament. Provisions on border controls are not fully TRIPS compliant. Criminal penalties for infringement need to be increased, although in Thailand the penalties are normally higher than those set out in the Penal Code. Rights owners must take the proactive approach in Thailand, and this requires significant resources.

Several enforcement agencies are responsible for enforcement and there are no specialist intellectual property agencies working in this area. Customs authorities as yet are not yet involved in enforcement of IP rights, and to date have not taken ex-officio action for rights enforcement.

Thailand has a specialist Intellectual Property & International Trade (IP&IT) Court which disposes of cases speedily. Judges are trained in intellectual property issues, and hearings can sometimes be in English. However the style of legal interpretation, as well as application of legal rules, tends to be very strict and formalistic, therefore the documentary evidence submitted must be very exact. Courts will hand down custodial sentences on offenders, but sentences are normally suspended for first time offenders.

In Myanmar, there is no formal Trade Mark Act in force. There is, however, a registration procedure at the Office of Registration of Deeds. Civil action is generally taken under the Specific Relief Act, similar to a passing off action. Criminal provisions for trade mark infringement are found in the Penal Code. A new copyright law is being drafted to supersede the 1914 law. For enforcement, the authorities must first confirm whether the suspect goods are counterfeit, and this confirmation must be submitted to Court.

The remaining three countries of South East Asia are not yet WTO members, having observer status only.

In Vietnam, the Civil Code contains adequate provisions for intellectual property protection, and high penalties. Despite this, piracy remains high and rights owners must invest significantly to defend their rights. Foreign law firms are not permitted to practise law in Vietnam. They are also prohibited from carrying out investigations. Enforcement is carried out by local firms. The Court system still lacks the necessary expertise to hear intellectual property cases.

In the Lao People’s Democratic Republic, a new copyright law is being drafted. Legal proceedings for IP enforcement are presently not available. The only measures that may be taken are administrative proceedings through the Department of Intellectual Property.

In Cambodia, draft copyright and trade mark laws have been under consideration for several years. Following decades of war, the government lacks experience in administration and economic policies. Legal proceedings are still very much controlled by government, and favour local participants rather than foreign parties.

Other hotspots

Russia has again made the US Trade Representative’s Priority Watch list, this year for the failure to bring its Copyright Law and enforcement regime in line with the TRIPS agreement.

The enforcement of commercial obligations and resolution of commercial disputes present a serious challenge to businesses and investors in Russia. It still lacks a domestic court system capable of protecting a western company's rights – there is a serious shortage of experienced and motivated judges, and an extremely legalistic approach is prevalent. Further, the credibility of the legal system stands or falls with the respect paid to it by those in power, which in Russia over the last decade has not been great. For this reason foreign companies tend to look to international arbitration and alternative dispute resolution techniques to protect their interests, although disputes relating to patent validity cannot as a matter of law be arbitrated.

Damages awards in Russia are often several times less than in the West, as they tend to cover only real losses. Furthermore, Russia has no concept of awards for punitive damages. Enforcement of a damages award is a further hurdle, as is tracing defendants’ assets. Finally, injunctions are rarely granted.

Counterfeits may appear in the open markets (the main distribution channel for counterfeits in both urban and rural areas) in as little as two weeks after a new brand or packaging is introduced. In addition, the external quality of the counterfeits is rapidly improving. For some brands it is virtually impossible for the consumer to distinguish between genuine and counterfeit product based on package appearance. Counterfeit products are not often cleared through customs properly. It is also well recognised that the existence of a relatively permeable border with China makes keeping track of imports and exports problematic.

India acceded to the WTO in 1995 and has been working on bringing its legislation into line with the TRIPs agreement ever since. Some progress has been made, but much remains to be done. Trade Mark and copyright protection are adequate, and a new designs law was brought into force in March last year; patent protection continues to be far from it.

Ultimately, protection relies on the efficacy of legal remedies such as the injunction and damages for infringement. In principle, judicial remedies are adequate to ensure rapid and effective action in infringement cases, including injunctive remedies and a form of search order. However, in practice, court processes may be too procedural and protracted. One useful characteristic of the judicial process is that a complainant can file his complaint in Delhi for action in another part of the country (ie – in the place of residence or that of the illegal activity).

There are proposals to set up a separate court to deal with all intellectual property cases. Cells of intellectual property specialisation have been created in the police forces in 14 provincial states, and although they are currently reactive to owners’ complaints, the police have been given power to act proactively where they reasonably believe infringement is taking place. Nowadays, all new police recruits are taught about infringement activities. They have good liaison with the Customs and border control services.

In South America, most of the countries in the region are on one or another of the USTR’s watch lists, the common element being inadequate public enforcement of IPRs against copyright and trade marked goods – either prosecutions are not brought at all or, if they are, the sentences handed down are insufficient to act as a deterrent. In addition, patent laws in the region are extremely variable. Paraguay has the dubious honour, along with China, of being on the separate ‘306’ list which puts it one step ahead of the imposition of trade sanctions if it fails to comply with the Memorandum of Understanding signed with the USA in 1999. Despite the appointment of special prosecutors dedicated to intellectual property cases, Paraguay remains a key entry and distribution point for pirated goods destined for the Latin American market.

Argentina has inadequate patent laws and is therefore a base for the manufacture of unlicensed pharmaceuticals (closely followed by Colombia). Brazil is also marked out for special mention for failing to do anything to improve enforcement procedures in the face of a worsening tide of counterfeits and pirate copies, despite having enacted legislation complying with international standards. In the patent area, Brazil has a backlog of 15,000 pending patent applications.

Uruguay has both inadequate civil remedies and lax border enforcement, which have caused high piracy rates to persist, and have allowed Uruguay to become a major transhipment point for pirated products. There is apparently no copyright protection at all for software at present, with copyright still protected only under a 1937 law.

Bolivia, Chile, Costa Rica, Guatemala, Peru and Venezuela have relatively better systems. However, the regional Andean Tribunal is resisting the introduction of patent protection for second medical uses, which has led to Peru backing down from having passed legislation permitting them. Chile has a policy of issuing marketing approvals for drugs irrespective of whether or not a patented version is already available, thereby removing one of the barriers to sale of infringing products, while civil enforcement procedures are inadequate.

Minimising risk

Following the signature of TRIPs, there are no major territories remaining where rights cannot be obtained, and the exception commonly applied to patent protection - that the patent became subject to a compulsory licensing regime unless worked locally - has been overturned through the TRIPs requirement to treat import as local working. As mentioned above, not all signatories have yet reached their due date for implementation of TRIPs, nor will all succeed in implementing on time, but the writing is clearly on the wall. However, harmonisation to a minimum standard at the legislative level does not mean the problems have all gone away. On the ground, problems will continue to arise over both interpretation and enforcement of the new laws.

Where protection cannot be obtained, is limited in scope, or unenforceable, steps can still be taken to minimise risk. What steps are appropriate may depend to some extent on the product in question.

Rights owners are advised to rely on consumer protection regimes, particularly for products such as consumer electronics or pharmaceuticals, where counterfeiting may have consumer protection implications. If so, as well as bringing actions for trade mark infringement where possible, the assistance of local regulatory agencies can be invoked.

It is also important that rights owners retain as much control as possible of the products, including their distribution.In support of these strategies, the ways in which the products are handled commercially in jurisdictions with little or no rights protection can sometimes be structured to retain control over the product or potential competitors’ access to it and to the market. In some cases it may be preferable to licence production either at arm’s length or by participating with the local producer or distributor in a joint venture arrangement. This can of course lead to the non-patented information about the product or process leaking through a third party, but with appropriate safeguards may give a better return than leaving the market altogether.

In summary

Harmonisation of intellectual property rights and enforcement is proceeding steadily under TRIPs, but rights owners must be aware of the status of their rights in widely-varying jurisdictions.

  • Sources of risk include the erosion of IP rights through the client’s failure to enforce them, and changing attitudes to the desirability of IP rights
  • Trade mark protection has greatly improved in many South east Asian signatory nations, but others – Vietnam, Laos and Cambodia – are not yet WTO members
  • Multiple entries on US Watch Lists highlight problems in many South American countries – Paraguay being the most consistent offender.
  • Trade mark and copyright protection in India is adequate but slowmoving. In Russia, fast moving, difficult to identify counterfeits present massive challenges

First published in the February 2003 edition of Trademark World.