Intellectual Property Rights and Competitive Strategy
A Multinational Pharmaceutical Firm
OTTO A. STAMM
A patent is something like an insurance policy against theft. One does not absolutely need it, for perhaps nothing will be stolen, but if one does need it and has not got it, then the experience is usually a painful one.
If the probability is great that something may be stolen from us, then it is best to insure oneself against the risk of loss. A good artist will therefore be well advised to insure his paintings against theft, for he has invested time, labor and hence money in producing a work that, after all, he wishes to sell.
To do so the artist must first make his work known, thereby risking that someone will fake it or copy his style. This means that it is not the paintings themselves (i.e., the artist's tangible assets) but the creative work the artist has put into them that will be stolen. Theft of this kind is worse than that of a tangible asset, because the theft of an idea that can be reduced to practice becomes common knowledge to which all can help themselves.
From this example of the artist, it can be said that a first object of patent protection is that it makes possible publication, avoids secrecy, and thus permits the spread of information without the creator being robbed of his or her intellectual property.
If, however, this theft is not prevented by legal protection of intellectual property, such as copyright or patent protection, then the painter or the inventor will lose the bulk of his expected return on investment, which he needs in order to survive. It is therefore a second object of patent protection to ensure that inventors receive an adequate remuneration for their creative achievement by preventing the theft of their intellectual property.
If the painter or inventor is no longer able to make a profit from his paintings or inventions, then he will stop painting or carrying out research and seek another means of earning an income. He has no further incentive to paint pictures or make inventions. Hence, it is finally a further object of patent protection to motivate people to engage in innovation.
If the manufacturer of a product that she has developed herself must reckon with the theft of that product, she will no longer make it because the money invested in development would be lost. The situation in the research-based pharmaceutical industry is by analogy the same as that just briefly outlined.
Can the products manufactured by the innovative pharmaceutical industry easily be stolen? The theft in question is not, of course, of the actual pills themselves (i.e., the tangible asset) but of the creative idea that produced them, in other words the invention, which is something intangible. It is precisely this intangible asset that a patent protects. The nub of the matter therefore is whether people have the incentive to copy an invention that they know, for example, from a publication.
It is a regrettable fact that of all branches of the chemical industry, the research-based pharmaceutical industry is the one most liable to theft of intellectual property. The reason is that the development of a new pharmaceutical product is extremely expensive and that the product has a number of typical properties: it is a specialty for which there is a need and which has a relatively long therapeutic life cycle. The product is one of high added value; it has consumer product characteristics (i.e., it is produced in a large number of units, each of which is relatively inexpensive and easily transportable). Last but not least, anyone with an elementary knowledge of chemistry and pharmacology can imitate most of these products at a fraction of the enormous costs incurred by the creator of the original product. For this reason, the pharmaceutical industry is a sector of industry that must have a key interest in securing protection for its innovations. A lead over the competition must be safeguarded by law; otherwise it is impossible to achieve an appropriate return on investment. Profits are necessary for reinvestment in future research. Without such a safeguard against imitation (i.e., without patent protection) there would be no research-based pharmaceutical industry.
The first basic point to be made is therefore that without patent protection, the pharmaceutical industry would make no investments in research.
The legitimacy of this is supported by the situation in countries that grant or granted no patent protection for pharmaceuticals. The fact is that no significant new drug has ever yet been developed in such countries as the former Soviet Union, Brazil, Argentina, and India, which have the necessary level of expertise to do so, but whose patent protection for pharmaceuticals is nonexistent or weak.
It may fairly be said that, without patent protection, there would be virtually no further progress in pharmaceutical research. Such a situation would be deplorable because only about 10,000 of the approximately 30,000 diagnosable diseases can actually be treated with drugs. Moreover, causal therapy is not available for most diseases; only the symptoms are treated. Nevertheless, it is noteworthy that those circles that condemn patents for pharmaceuticals or living organisms as being an unsocial monopoly are the very ones to insist categorically that the pharmaceutical industry should provide a drug to combat AIDS, cancer, or Alzheimer's disease. In a competitive environment, innovation and supportive patent protection are key both to the research-oriented firm and to society.
Drugs that were known not to be covered by patent protection would not be developed. That research is carried out at all is thus linked directly to patent protection. Patent protection must therefore be available in large markets, so that research-based private industry can exploit the possibility thereby provided of keeping ahead of the competition to make the profits it needs to finance research projects.
In the pharmaceutical sector there are few inventions that can be kept secret, perhaps only manufacturing processes, especially in the genetic engineering field. Yet protection for secrecy, even if it were legally ensured nationally, is of little use. Once the secret is out of the bag it cannot be put back in again, and it is known worldwide. Also, we have no warranty against this leakage of knowledge into the public domain, especially not in areas where government registration requires that all documents be handed over and where there is no absolute reliance on their actually being kept secret. In the case of self-reproducible matter, the loss of a single bacterium is theoretically enough to hand the factory over to a third party. For this reason, the deposit of cultures of microorganisms, if required for obtaining patent protection, should be better protected against usurpation by third parties.
What effect does it have that the level of patent protection varies from country to country? The kind of research being conducted depends far less on the local intellectual property situation than it does on the strategies for research planning. However, the pharmaceutical industry would not develop any product from which only a country such as Brazil, Argentina, India, Turkey, Thailand, or others that do not grant patent protection for pharmaceuticals, would profit.
To be competitive, it is important not only to develop new products but also to sell them (i.e., a strategy for marketing is also needed). How does patent protection influence the marketing strategy of an innovative pharmaceutical company?
When an artist has painted a picture, his primary aim is to sell it. What happens to the painting later probably interests him less, although it certainly will not leave him unmoved if an art dealer makes a much higher profit from his painting (i.e., his creative effort) at an auction. The same consideration applies to a product that a manufacturer has developed. She wants to sell it to make a profit. The sale is the primary object, but the later fate of the product on the market may also be important. Where there are substantial, usually government-dictated, price differences in different markets, as is the case with pharmaceuticals, it must be possible to prevent parallel imports (the catchword here is "international exhaustion"), otherwise competition will be distorted.
The second point to be made here is this: Patent protection tends to be rather of secondary interest for marketing strategy. The aim of a good marketing strategy is to bring a new product as rapidly as possible and as widely as possible onto the market, regardless of the quality of the patent protection in that market. If patents help to support an acceptable price level and to provide a lead over the competition, then they are naturally a welcome and important element in helping to achieve the desired profit optimization. Good patent protection also motivates marketing to speed up the introduction of a product in those countries so as to exploit the advantages conferred by patent protection for as long as possible. The efforts being made to extend the actual utilizable patent life by means of patent term restoration clearly demonstrate that these advantages are not to be disregarded. All available means for additionally safeguarding intellectual property are used to back up patent protection, but they do not have the absolute character of patent protection. These means include, in particular, trademark protection, which can very strongly influence the goodwill of the buyer. The trademark, once firmly anchored in the customer's mind, is a guarantee of quality and hence a sign of loyalty to the customer or patient. The trademark is also an aid to image cultivation. The advantage of the trademark is its unlimited life and the wide geographical spread of the protection accorded it. The drawback of the trademark is that it can be circumvented easily, and that the government regulations prevailing in many countries restrict its value. Registration protection (i.e., the ban on using registration data for a second registration before the expiration of a specific time limit) can also supplement patent protection. A certain marketing exclusivity is thereby also ensured, but only for a specific product. Finally, secrecy—especially for production processes—is another supplementary mea-
sure in certain cases for gaining the edge over one's competitors and thus for supporting a comprehensive marketing strategy.
Especially important, above all in countries without effective patent protection, are marketing steps that—varying from place to place—are independent of property rights. Such steps include customer orientation (e.g., the confidential relationship with doctors); satisfying real needs, which requires a true understanding of the customer's interests; promotion by means of medical-scientific and other explanatory literature; a reliable distribution organization; readiness to take up suggestions from the realm of practice; good contacts with government authorities; commercial probity; market-oriented price strategy; the guarantee of ongoing and consistent drug monitoring on an international basis; keeping ahead of competitors by rapid product launching; and a healthy capital structure of any company-owned production plants, which makes it possible to survive unfavorable economic conditions such as high inflation.
The unavailability of efficient patent protection in certain countries therefore does not keep a firm from marketing its products in these countries. Hence there are doubtless countries in which there is no patent protection—where it is not possible to take out risk insurance against theft, but where nonetheless original pharmaceutical products are sold.
Also, just where a product is first introduced does not depend primarily on whether efficient patent protection is available in a country. At present the wish and the need are to introduce new pharmaceuticals onto the market as quickly as possible and in as many countries as possible. The location of clinical testing and first market launching will be chosen in accordance with this principle, as will also the later sequence of local market launchings. The period of time until the first introduction onto the market will be influenced materially by government regulations and by the availability of doctors who carry out clinical tests. The desire for global market presence cannot therefore take into account the quality of local patent protection. This desire dictates solely the measures to be taken in addition to patent protection for successful marketing of the product. The sales in different countries can be effected by one's own sales organizations or, where this is economically or politically infeasible, through agents and outside distributors.
The best marketing strategy, however, cannot in the long run lead to the desired profits without new and improved products. Without new products a pharmaceutical company will ultimately lapse into trading in generics; that is, it will become a company that simply cannot afford to engage in such expensive research. In this case there would, of course, be no more progress in the pharmaceutical industry. Yet, as already mentioned, this is just what most people do not want. To be able to afford research, to be able
to develop products at all, requires patent protection, especially in those countries that constitute large markets. Fortunately, in the United States, Western Europe, and Japan, patent protection for pharmaceuticals is good. Given a sufficiently long patent life and exclusivity, it is possible to achieve the kind of return on investment that will allow a pharmaceutical company to market new products in countries where the price level is inadequate. Naturally there are limits to this indirect subsidizing of market presence in countries with inadequate patent protection by countries with efficient patent protection. Since the prices of pharmaceuticals are usually government controlled even in countries with efficient patent protection, the research-based pharmaceutical industry can no longer afford the shortfall in sales resulting from the loss of markets caused by imitation products. The ever spiraling costs of research into and development of a new drug also call for an ever-increasing return on investment. The newly industrialized countries must also make their contribution here if new drugs are to be made available to all of humankind in the future. Therefore, without worldwide patent protection, industry will be increasingly unable to afford a globally oriented marketing strategy for new products.
One concluding comment on the influence of efficient patent protection on the transfer of technology, and hence on corresponding new investments: It can quite confidently be ruled out that investments will be made in research into novel products in a country where patent protection does not exist. However, with regard to investments, the question of patent protection is only one factor among many for deciding on investment. Other factors, such as intellectual work potential, infrastructure, political stability, and economic structure must also be taken into account. The third important point is therefore that if a country is prepared to raise its patent system to a high level, the readiness to invest and transfer know-how will increase. For only through patent protection does a creative idea, an innovation, become a legally protected item of trade and thus of transnational transfer.
This point is best illustrated by citing the drift of investments away from Europe to the United States in the field of biotechnology. Table 10-1 shows the volume of investment made by European firms in biotechnology in Europe and in the United States for 1989 and the first half of 1990. Of the total investments made by European firms in this sector only three percent remained in Europe in 1989; in the first half of 1990, the figure was as low as 1.6 percent. Also, in this example, patent protection is only one part of the overall picture that influences the decision to make investments. Nevertheless, in view of the fact that in the United States, patent protection is fully available for the entire field of biotechnology (including plants and animals)—whereas in Europe effective protection is still lacking or explicitly not obtainable—it is very likely that the distribution of investments is not purely fortuitous and supports the argument that patent protection is a
TABLE 10-1 Investments in Biotechnology by European Firms in Million ECU
Percentage of total investment remaining in Europe
factor that does have an influence on the decision to make investments and therefore on technology transfer.
To sum up:
Without efficient patent protection in the most important trading areas, there can be no research and development of new pharmaceuticals.
For marketing strategy, rapid product launching and a worldwide presence (i.e., global sales with an edge over competitors) are more important than considerations of patent protection and its quality in different countries. These criteria influence the choice of countries in which the pharmaceutical industry is active first. Patent protection in big markets, however, is an important factor in securing a lead over competitors for a limited time and hence in optimizing profits. Industry therefore will not introduce important products onto the market if exclusivity, even if limited in time, is unavailable in key markets.
Without adequate patent protection, no investments will be made in pharmaceutical research, and consequently there will be no corresponding transfer of technology to countries that de facto grant no patent protection for pharmaceuticals.
One final comment, which has no bearing on the patent strategy of a multinational research-based pharmaceutical company but does concern the patent strategy of our politicians: The inventions of the pharmaceutical industry that will be on the market in 15 years' time are being made today. If awareness that no insurance is available for these innovations comes only in the next decade, then it will be too late. The entire investment of time, work, and money will benefit the imitator. For this reason, efficient patent protection without discrimination of individual technological fields, such as biotechnology in Europe and many other countries, is needed today and not 20 years from now. Otherwise the incentive will be lacking to pursue research whose results we need urgently. Therefore, patent protection or, more correctly, exclusion from patent protection does have an influence on the choice of research projects. This need not be if the politicians would
finally realize that patent protection is there to protect intellectual property from theft and not to standardize ethical concepts; to act as an animal, plant or environmental protection law or as an instrument of price control; or finally to prevent any risks in industrial research, development, and production.
A Multinational Electronics Firm
According to my historical observation, when manufacturing companies begin to need royalty income badly for the improvement of corporate financial performance, it is a strong sign of losing competitiveness. So I do not buy the stock of such companies, or I sell them if I own them.
Manufacturing companies should earn a profit as a result of good services, by providing a better product to the market. For this aim, intellectual property rights are a very important asset to pursue the corporate strategy of serving the market best without interference from other competitors.
My company, NEC, was established in 1899 jointly with Western Electric Company of Illinois and Japanese partners. We now manufacture computers, communications, semiconductors, and home electronics. These are the four core business areas. Hence, NEC strongly inherits Western Electric's corporate culture—better products and better services have been a solid corporate policy for more than 90 years. Executing corporate policy, we have secured patent rights as much as possible to maintain a healthy operation rather than to seek an extra royalty income. NEC's patent policy appears to be defensive, but I think it is the best offensive policy from a healthy business point of view.
We welcome cross-licensing agreements because they allow us to communicate freely and to concentrate fully on engineering efforts for better public services. When we transfer our technology to other companies, we select our partners and set the royalty in such a way that they are strongly motivated to apply the patent in marketable products and to secure reasonable profits. Technology and patents are mere knowledge. They cannot contribute to the advancement of public welfare unless they are applied, manufactured, and marketed as practical products.
A company should not be managed solely for the sake of profit; rather, profit is obtained as the result of better services for the customers. The marketable product cannot be produced by basic or central patents alone. Numerous peripheral technologies and inventions are necessary. Most customers appreciate peripheral inventions rather than basic inventions. This is market behavior. Only professionals appreciate basic inventions.
We have experienced severe business threats over peripheral patents of almost public knowledge quality. That is why we are encouraging our employees to reduce any idea to patents. Even researchers in central research laboratories are asked to file peripheral patents related to basic patents that they invented.
Figures 10-1 and 10-2 illustrate five years of statistics on the patent application process in our central research laboratories. In Figure 10-1, the left-most bar in each three-bar group shows the annual target that management suggests to our researchers. The central bar shows the total numbers of internal applications submitted and the right-most bar shows the total numbers submitted to the patent bureau after combining related claims.
As shown in Figure 10-2, the average number of patents filed by patenting researchers (some percentage of researchers are not asked to file any patents, just to do basic research) is about five.
Figure 10-3 compares the total number of patent applications disclosed for six competing companies over the same period from 1984 to 1988. Every year we issue extensive data showing the competitive situation to our employees. The average number of patents disclosed by patenting employees throughout the company is about 2.5, about half that of the researchers in the central research laboratory.
NEC markets products in more than 149 countries and manufactures in 15 countries. Many underdeveloped countries ask us to transfer our technology to develop their countries. When we negotiate a contract, we always base the terms not only on our interests but also on theirs. It is not easy to
convince them that what they are asking is inappropriate for their development. We have recognized how important it is to educate their engineers and policymakers. Hence, we include education costs, actual costs without any profit, in the technology transfer fee. The patent royalty is very modest to motivate them to build up their businesses, since we can eventually get an appropriate profit by supplying them with the necessary components.
As a born engineer, I have devoted myself to advancing technology for the benefit of world welfare and am very much concerned about the current state of insufferable intellectual property right lawsuits. If this trend worsens, the cooperative spirit that is essential for the advancement of science and technology will be damaged, and the world welfare that has to be improved for reducing various conflicts will be degraded.
It is said that the basic idea concluding the Paris Treaty in 1883 on patent law was to legally protect the inventor's right in order to promote the application of such valuable intellectual creations for the benefit of the public welfare. Thomas Jefferson also stated a similar idea. Even though an exclusive right is granted to the inventor, he is also obliged to make its technical detail public so that it promotes research and development for public benefit.
Much of the current litigation on intellectual property rights is based on selfish individual monetary interests and neglects the public interest. As the problems of global environmental energy and resources appear to be critical social issues, we are facing severe public criticism: ''Is the advancement of science and technology really for the sake of human survival and happiness?" Modern industrial technology is more sophisticated and highly integrated. To solve future social problems such as the environmental problem, we not only must create new technologies but we must also utilize numerous existing generic technologies and inventions. We have to collaborate globally to solve many social problems and to help developing countries.
We have to respect intellectual property rights, and the beneficiary has to pay an appropriate license fee. However, except for very revolutionary new inventions, it is becoming difficult to survey all related patents, includ-
ing those pending, before a new R&D program is initiated. Quite often, after a substantial investment has been made in R&D, manufacturing, and marketing, companies who are attempting to contribute to the public welfare are sued for patent infringement. Those patents are usually not basic, but rather are very minor and questionable from the viewpoint of Japanese patent law.
No matter how valid the claims are, the defendants have to expend substantial effort to respond to them. Many of the claimants have given up manufacturing and have no intention of applying their inventions. They are interested only in royalty or settlement payments, and their demand is unbearably high. Japanese like to settle outside court for cultural reasons, and most cases were settled out of court until the claims became unbearable.
However, many Japanese firms have had bitter experiences fighting in court, losing most cases at trial by jury. I understand American claimant tactics, but it is hard to understand why patent cases are allowed to be judged by juries who do not understand the technology or the value of the invention. If this trend gets worse, many manufacturing companies will lose interest in manufacturing. No matter how valuable inventions might be, if they are not applied and manufactured as marketable products, they do not contribute to the betterment of the general welfare. When I was still working at Bell Laboratories, I was told its basic patent policy. This agreed well with my belief that a patent right was secured to avoid paying royalties rather than for royalty income. To provide better products and better services had been AT&T's basic policy. Paying 3 percent royalty increases the cost of the product about 3 percent and degrades services.
Real technological progress is the popularization of frontier technology for providing appropriate hardware and software to help reduce handicaps resulting from mental, physical, financial, and social shortcomings, and environmental constraints. Without reducing inventions to a marketable product, the invention is mere knowledge and cannot contribute to the public. I respect the exclusive right of invention, but I question the principles of a claimant who demands a monopolistic royalty and obstructs the advancement of public welfare. This is the time to restore the original purpose of intellectual property law to avoid further confusing the current chaotic state.
The Mexican Software Industry
ANTONIO MEDINA MORA ICAZA
I was asked not only to speak from the point of view of my company, but also to discuss the Mexican software industry, the association of which I have the honor to be president, the status of software protection in Mexico,
and finally, to say a little about the North American Free Trade Agreement (NAFTA) negotiations.
I will try to give you some data about the Mexican software industry, its size, and some other important aspects that are related to intellectual property rights protection. First of all, over the past 10 years, the Mexican software industry has grown at a rate of more than 20 percent. Those 10 years were considered tragic ones for the Mexican economy, so this was one of the most rapidly growing industries in Mexico.
In 1990-1991, according to studies done by the Asociacion Nacional de la Industria de Programas para Computadoras (ANIPCO), the size of the software industry was around $200 million. About 70 percent of wholesale items are imported software. Fifty percent of the market consists of payments to companies abroad, and the other 50 percent is in the form of services provided in Mexico. In 1980, the Mexican software industry represented about one-half of 1 percent of the global software industry and, by 1990, had fallen to one-third of 1 percent.
One of the reasons for this is clearly piracy. The year 1980 was the beginning of the personal computer (PC) era, so software was mainly for minicomputers or mainframes where piracy does not occur to the same extent as in PCs. By 1990, things had changed all over the world. Mexico was not an exception. Piracy is a very serious problem, even with the rate of growth we experienced over the past 10 years. It is a big problem and we consider piracy to be the cancer of the industry.
Some estimates based on studies we have made indicate that in Mexico we have five illegal copies of software per copy sold. That is across the board. However, calculations of the economic damage account for only those copies that would have been sold anyway (because there are people that collect software so they have hundreds of different software programs but never use them, just as a hobby). So economic damage is equated to be one illegal copy per copy sold, and that amounts to $200 million for 1991. You can assess the size of the problem.
There are basically two kinds of piracy that we account for and worry about. The first is industrial piracy, where somebody gets a copy, reproduces that copy, and then sells the product. The other is corporate piracy, which happens in the interior of organizations. Basically these are the same phenomena that we face all over the world.
For transnational companies it is clear that there has been severe damage to sales. If we recognize that for most of those companies, Mexico never accounts for more than 2 percent of the global sales, then the damage is not that important. However, if you look at the Mexican bloc of software industries, piracy is the difference between being solvent or being bankrupt. Why? Well, if you produce a program and put it on the market and someone copies it five times for each copy sold, you are soon out of the market.
This is illustrated by past experiences of my own company: We developed a word processor in 1983, and by 1985 we had to abandon that product and project because of piracy.
To complete the picture of the industry, we have around 400 to 500 software companies in Mexico. Most of them are small businesses with fewer than 10 employees. At least 10 percent of these companies are in good shape in terms of size and capacity for competing in a global environment. It is generally accepted in Mexico that there is a high capacity in the software industry basically because we have highly qualified individuals in terms of innovative, inventive, hard-working ability.
There are examples of companies that have successfully entered markets such as the American market. Maybe you have heard about our program, DAC Easy, which is an accounting system. The program was developed in Mexico and was very widely sold, accounting for company sales of more than $30 million a year.
Another company called Final Soft produces programs such as Translate and Executive that have also been sold in the United States. The group of companies with which I am involved created The Coordinator, software which is currently marketed in four different languages all over the world. Another example is a systems integration and software house called Soft Tec, which is involved in mainframe development and which has provided services in the United States.
Finally, there are several niches in which we see opportunity for the Mexican software industry. Basically these are not the spreadsheet, word processing, or rating systems niches, but rather those that are particular to our country—such as the administrative area, accounting, and inventory—because our fiscal laws differ from those of other countries, so products specifically adapted for our country are important. There are also some high-tech niches where we can take advantage of the capacity that we have.
Now, a few words about ANIPCO. ANIPCO is the national software association. It was founded in 1985. The people who got together to form it were concerned about the lack of representation of the software industry in Mexico. We spoke mainly of hardware and I see that this phenomenon is the same all over the world. We see the same story in Dr. Samuelson's discussion in Chapter 12, in terms of the history of software protection and the software industry in the United States. Software was bundled in with hardware at the beginning, and the same phenomenon occurred in Mexico.
The goals in creating the association were first to create the Mexican software industry, then to make it grow, and finally to take action over the main issues concerning the industry—which were piracy, financing, human resources, and information about the industry. Those key elements were in the minds of the people who created the association in 1985.
We have currently more than 200 members. We are an association not
only of software developers, but also of hardware manufacturers, transnational companies associated with software in Mexico, hardware and software distributors, academic institutions, financial organizations, government agencies related to the industry, and users. One of our most important goals over the past years has been to seek legal protection for the industry by modification of the copyright law in Mexico.
What kind of protection do we have in Mexico? Basically, we are using the international consensus in terms of protection to software granted via the copyright law. However, I must note here that Mexican copyright law is not a copyright law—it is an author's rights law. It comes from the French tradition of regulating the rights of authors instead of the rights to copy. There is a basic difference. In the process of the NAFTA negotiation a lot of time has been consumed understanding the differences in the laws.
To give some history here, our copyright law—Ley Federal de Derechos de Autor—was created in 1963 when the software industry did not exist in Mexico. So there was no protection. In 1984, the government made a move similar to what occurred in the United States in allowing the registration of software programs. Yet that did not really motivate companies to seek protection. Why? Because this was not good in court. You could register your programs but you could not sue anyone.
In 1988 ANIPCO presented a proposal to the government for modification of the law. It was a very comprehensive idea for changing the law and looked to the law of Spain for the kind of modifications being suggested. It included a whole new chapter in the law to deal with computer software, in turn explaining what it is—all the rules, and so on.
Then in 1990, President Salinas sent a proposal for modification to the Congress and it was approved in July 1991. Now we are waiting for the regulation dealing with the registration of programs and that will complete the cycle. What is the current state of these modifications of the law? First of all, for the first time, protection is granted to software programs as one of the protected works of art under Article 7 of the law. Second, there is a clear and complete limitation in this law, regarding the right of a holder of a legal license of a program to make one copy for the purposes of backup and only one. Also we have clear sanctions for piracy in terms of jail and fines.
So we consider these to be a tremendous advance in protection for software because we can now go to court, have cases prosecuted, and so forth. At the same time, however, it is not enough; there are several areas in which the law is still lacking the strong protection we would like to see. These include enforcement, sanctions, and also, providing the equivalent protection given to literary works in terms of protecting the structure and organization of a work.
In terms of the industrial law in Mexico, no patents are granted to software. The industrial property law was also modified last year, and it is
very clear that patents are not granted for software, but trade secret protection is granted under this new regulation that did not exist in the past. This industrial law, about which I am not going to be more specific, is considered a world-class law and has been adopted by other Latin American countries this past year.
In terms of how the protection mechanisms are used in Mexico, it is clear that when there was no protection, there was no incentive for companies to register programs and use this kind of protection. We expect that starting this year with the regulation for registry completed, we will have many companies registering software. At the same time, there is a committee that was formed within our association and is related to the Business Software Association of the United States, for developing cases and presenting them to the courts in Mexico. We expect to start testing the real benefit of the new law in the near future. We see that we have a huge educational process ahead of us and this mainly consists of changing the culture that says copying software is not bad. We need to teach people that it is a crime to copy software and to make them understand that.
I can make a few comments here regarding NAFTA. I am surprised that there was no reference to NAFTA during the conference, although some reference was made to bilateral agreements. I think this is a very good example of the kind of approach that can be used and what the future holds in store for us. In the case of Mexico, and also of Chile, the increase of intellectual property rights in these two countries is highly linked to their entering the global economy and to the open market.
Intellectual property rights protection in a country is a way to seek the trust of foreign investors in the country that will allow its economy to grow. I see that as a specific and very strategic move, one that explains why in countries such as Mexico and Chile, the intellectual property rights laws are changing at this particular time. Protection is a key to competitiveness, to building local industry, and to gaining the trust of foreign investors.
A Multinational Telecommunications Firm
WILLIAM L. KEEFAUVER
This section discusses how a large electronics-based firm such as AT&T has used intellectual property rights (IPRs) as part of its competitive strategy.
During the first several decades after the invention of the telephone, AT&T used its intellectual property rights—its patents in particular—to es-
tablish a market. The resulting litigation resulted in a complete volume of U.S. Supreme Court reports.
For the succeeding three-quarters of a century, its IPR practices became much more benign because of antitrust and regulatory considerations. As a regulated enterprise, AT&T had little reason to protect markets. Instead, it used technology, and the IPRs associated with it, to provide new services, reduce costs, and improve productivity. The operative phrase was "freedom of design," and the patent strategy was structured to acquire rights.
With Bell Labs as its principal technology engine, AT&T for the most part was able to acquire rights it needed from firms around the world on a royalty-free basis. Inventions were selected for patent protection based primarily on their potential interest to firms likely to generate technology of interest to AT&T. It was also recognized internally that patents were an extremely important factor in recognizing personnel and the professional contributions of individuals. The inventors themselves perceived patents to be very important.
This resulted in worldwide activity since many such firms were in Europe and, later, in Japan. For example, by acquiring patents in Germany, AT&T could exchange rights in Germany with Siemens for rights under the patents Siemens was acquiring in the United States.
Broad cross-licensing agreements did more than secure patent rights. They also provided an umbrella for informal technical discussions between Bell Labs researchers and those in other industrial firms. These firms, such as Siemens, Phillips, NEC, and IBM, were not then competitors of AT&T in any significant way. The patent umbrella made these discussions very easy to implement by reducing legal risk.
The invention of the transistor at Bell Labs led to a device whose ubiquity formed the base of an entire industry. This industry—semiconductors—developed its own brand of licensing. Because semiconductors were a critical technology for AT&T, semiconductor licensing became a major focus of AT&T licensing efforts.
The thing that was unique about the semiconductor industry is that its members did not want to worry about individual patents. They wanted to do what we called lump-sum licensing: I will give you $100,000 a year for the next five years (or $30,000 or whatever) and then you will not bother me with your patents, and you will give me $60,000 and I will not bother you. That is the way it worked for many companies in those peaceful years in the semiconductor industry.
Because of the complexity of interconnecting thousands of types of equipment in telecommunications networks, which are now international in scope, standards have always been of great importance. AT&T has long been an advocate of open networks with clearly defined and promulgated network interface standards.
It has also, however, been a staunch advocate of recognizing intellectual property rights arising from the extremely expensive R&D required to develop new standards, provided the owner of any patents or copyrights that apply to a proposed standard will agree to license anybody on reasonable terms. Of course, this was not difficult for AT&T but was its standard licensing policy.
Trade secret licensing similarly reflected the nature of the regulated U.S. business then engaged in by AT&T. For example, although major network elements used in the provision of telecommunications services were for the most part manufactured by Western Electric, its internal manufacturer, many materials and piece parts as well as systems were acquired from other manufacturers.
Many of these manufacturers used technology developed by AT&T but made available to them under "technology-information" agreements—the term used for trade secret licenses. The technology ranged from mainstream network equipment to highly specialized manufacturing and laboratory equipment.
Trademark strategy during this period was similarly more or less benign. Aside from its major corporate symbol—the Bell seal—and the product marks under which much of its hardware was sold (i.e., Western Electric and Teletype), AT&T made relatively little use of trademarks for a company of its size.
THE MODERN ERA
Two events caused major changes in the competitive strategy of AT&T: divestiture of the Bell operating companies and the globalization of markets. The first, in 1984, decreased the degree of AT&T regulation at both state and federal levels. It also terminated a consent decree that had codified AT&T's 1940s patent licensing practices. The second not only substantially increased the competition in telecommunications products in the United States but, together with the first, helped stimulate the transformation of AT&T once again into an international company.
As the business units of this new AT&T developed competitive strategies consistent with their new missions, IPR strategy was similarly revised. The result was that AT&T practices became more like those of other electronics-based firms.
The competitive characteristics of the various markets in which AT&T now operates differ, as do the specific practices of firms in these markets. Also, since AT&T is no longer subject to the restrictions of the now-terminated consent decree, the terms and conditions of licenses can be tailored to a greater degree to specific competitive strategies.
The new, more competitive, and more international nature of AT&T has
also had a marked influence on its trademark strategy. This is reflected not only in the products and services for which marks are adopted, but also in how they are selected and how they are promoted. Trademarks obviously play a more important part in AT&T's competitive strategy than they did just a few decades ago.
Trade secret licensing has seen perhaps the most change, primarily due to the globalization of AT&T. The centerpiece of AT&T's offshore ventures in dozens of countries has often been a trade secret agreement, including a technology package. In fact, a technology package is a requisite part of the entry fee for doing business in many countries. These agreements usually end up being not just trade secret agreements. They are usually omnibus IPR agreements with both patents and trademark licenses involved.
Trade secret licensing has also been an important ingredient in the marketing of computer software. Initially, such licensing was primarily an adjunct to the sale and use of telecommunications network elements. In recent years, as AT&T's computer business expanded, it became important in that market sector as well.
The marketing of computer software has also increased the importance to AT&T of copyright protection. Historically, copyright was not of mainstream competitive importance to AT&T but was utilized to protect the many directories, books, documents, films, and other copyrightable works produced by the company. Now, however, with the increased recognition around the world that computer software is protected by copyright, it is an important element in the competitive strategy of AT&T.
In looking forward, it seems clear that computer software will continue to increase in competitive importance as hardware in both telecommunications and in computers becomes more and more a commodity. Thus, the intellectual property rights in software, whether protected by patents, trade secrets, or copyrights, have the potential of becoming the most important intellectual property elements for AT&T.
Because intellectual property has become such a significant part of the AT&T competitive strategy, negotiations such as patent harmonization and the General Agreement on Tariffs and Trade (GATT) Trade Related Aspects of Intellectual Property (TRIPS) agreements are of great interest to the company. AT&T itself does business in many countries around the world, and securing patent rights is very expensive even if you have a standardized system assumed. With nonstandardized systems, of course, the costs soar. So some level of patent harmonization would be highly desirable. The activities in GATT are also of great interest because a TRIPS agreement would both standardize and raise the level of protection in many countries around the world.
I really think that the Dunkel draft of the TRIPS agreement is much better than we had any reason to expect going in. It is certainly an excellent
agreement for the final negotiations, so I hope that it will be given very serious consideration. Consider the alternatives. I, for one, do not consider many more bilaterals a very reliable alternative.
Intellectual property rights have been becoming an increasingly important part of AT&T's competitive strategy. With the continuing increase in worldwide competitiveness, this trend seems likely to continue.
I am going to take the liberty here of offering a few comments on some of the matters discussed earlier.
First let me make one other observation. AT&T does take into account the strength of intellectual property protection in making investment decisions in particular countries, and although the level of protection is not always a go-no-go decision maker in and of itself, it is an important element. In some instances it has been the sole determinant of an investment decision. When AT&T was asked to license UNIX in Brazil, we pointed out to the management of the company the level of software protection then available and the request was denied.
Of course, evaluation of the level of protection is heavily dependent on the age of the technology to be put into a particular country. That is alluded to by Mansfield in Chapter 5, who said you cannot simply look at gross investment numbers. You need to get underneath them and see what they represent. For example, in the semiconductor world, we measured the generation of technology by the width in microns of the lines etched on the chip. To go back a few years, if you were licensing 2.5-micron technology, you were going to have one degree of sensitivity to the level of IPR protection, but an entirely different sensitivity if you were licensing 2-micron technology.
I would like to clarify, if I may, several allusions that were made earlier in the conference to the European Community directive on computer software suggesting that it somehow gave recognition to or was a form of sui generis protection. It quite clearly is not. The EC directive, if you read it, says that it supports protection of computer software both by copyright under the Berne Convention and also under the patent laws. So instead of suggesting it provides support for a sui generis procedure, I think it is just the opposite.
Finally, one speaker suggested that since there have been some bad copyright decisions in the computer software area, and I fully agree, the only solution is sui generis protection, because these decisions show the copyright system does not work for software. To me, it only shows that some judges do not understand copyright law and I think we have a very effective appellate process for taking care of that. So, before we look to sui generis, let us first try the appellate process.