Protecting Industrial Property Rights Abroad

A company can use licensing to enter a foreign target market only if it can secure legal protection of its industrial property rights in the target country. Unfortunately, patents, trademarks, service marks, and trade names regis­tered in the home country do not afford protection in foreign countries. Nor is there a single international authority that confers industrial property

rights on a global basis. Such rights can be obtained for a particular country only by applying for them in that country. The country-by-country quest for industrial property rights faces so many legal pitfalls that every company is strongly advised to rely on legal counsel for advice and assist­ance. The following observations are intended only to alert managers to the general situation.

1. Obtaining Patent Protection

A patent is a public document issued by a government that grants to its owner for a limited period of time the right to exclude others from making, using, or selling an invention described in the patent. It cannot be assumed that a patent issued by a company’s home will ensure the issuance of a patent covering the same invention by a foreign country. Indeed, in some instances, a patent application may be turned down because the invention has become “public knowledge” through the prior issuance of a patent by the home government! Furthermore, national patent systems differ widely around the world with respect to criteria of “novelty,” patent duration (ranging from 5 to 20 years), patentability (some countries allow only process patents or exclude patents for certain types of products, such as pharmaceuticals), renewability, “working” requirements (some countries require that a patent be commercially utilized within a certain time or be lost), taxation, and many other features.

Although multiple-country patent protection requires multiple-country patent applications, international agreements facilitate patent filings. Under the International Convention for the Protection of Industrial Property (the “Paris Union”), a company that files an original patent claim in one mem­ber country has a “right of priority” in filing claims in other member countries for a period of one year following the original filing.1 About 90 countries belong to the Convention, including all the industrial countries and the European Communist countries except Albania. The message of the Convention is clear for a U.S. company that wants to obtain foreign patent rights: it should apply for those rights within one year after applying for a U.S. patent. Failure to do so may mean a permanent loss of patent rights in other countries. A company must decide within one year where it wants patent protection, even though it may not know the commercial value of that protection. The prospects for a less arduous passage through the jungle of international patent protection have become somewhat brighter in recent years with two new treaties.2 But most developing countries still remain outside any international agreement.

The legal complexities in obtaining, maintaining, and enforcing patents make it all the more urgent for companies to have an international patent strategy. Consider only two questions that need to be answered with re­spect to obtaining patents.

Should a company keep patentable knowledge as a trade secret or seek international patent protection? A patent makes a trade secret public knowledge in return for statutory protection of the owner’s exclusive use. However, a patent owner has exclusive rights only in countries where he holds valid patents. In all other countries his invention is in the public domain, because it is no longer a trade secret. (When a patent is issued by the home government, a copy is routinely sent to foreign patent offices.) Given the uncertainties pertaining to the acquisition, maintenance, and enforcement of patents, a company may well conclude that it can control the use of its technology more effectively by keeping it a trade secret than by patenting it. Another consideration is the high cost of securing a patent, which can run to $50,000 in some countries.

On the other side, the trade-secrets approach can work only if a com­pany maintains secrecy. If a trade secret can be fairly easily copied by outsiders, then it is advisable to get patent protection. Furthermore, tech­nology patented abroad can usually command higher royalties, because the licensee also benefits from the patent. Sometimes it may not be possible to license a product in the absence of a patent. To conclude, given the many trade-offs, the choice between trade secrets and patents is a difficult one for many companies.

If a company decides to obtain patent protection, where should it seek that protection? In other words, in which countries are the benefits of patent protection likely to outweigh its costs? This question can be an­swered rationally only through a close examination of a company’s current and prospective foreign market entry strategies over a lengthy planning period. Advanced planning is critical, because a company must be prepared to move quickly to obtain international patent protection on new technol­ogy. Also, premature disclosure (such as describing the invention anywhere in the world before the first patent application or, in some instances, plac­ing an invention in public use or on sale anywhere in the world) can jeopardize patent rights in many countries.

2. Obtaining Trademark Protection

A trademark is a name, device, or symbol used by a producer or seller to identify his products and distinguish them from others. As is true of pat­ents, trademarks must be registered in each country for protection. Protec­tion can run anywhere from seven to 25 years and is ordinarily renewable. Outside the United States, there are more than 150 separate jurisdictions in which a company can register a trademark.

In the majority of countries, the one who first registers a trademark is considered its legal owner. A company may find, therefore, that its trade­mark is already registered in a foreign target country by someone who has no intention to manufacture or market a product using that trademark. In that event, the company must buy its own trademark from the legal owner, use a new trademark, or stay out of the country. To forestall this unscrupu­lous practice, companies should register their trademarks in all foreign countries they are likely to enter in, say, the next five years, whether as a licensor, an exporter, or an investor.

In the United States and several other countries whose legal systems derive from England, trademark protection can be obtained only by demon­strating prior commercial use. In this country, the Lanham Act specifies the kinds of symbols and names which can be protected by law and sets up registration procedures. But registration is not compulsory and does not establish ownership of the trademark. Instead, a company must prove it first used the trademark in the United States, and the usual proof is actual sale of the products carrying the trademark.3 Moreover, the use of the trademark must be continued to maintain protection. Trademarks may also be lost if they move into popular usage as generic terms, as has happened in the United States to linoleum, cellophane, kerosene, lanolin, shredded wheat, aspirin, nylon, and many other names. It is the responsibility of the owner to prevent his trademark from slipping into generic use.

Even when their trademarks are properly registered, it may be difficult for companies to protect them against infringement in many countries because of loose administration of trademark laws, cumbersome legal proc­esses, and inadequate penalties. Counterfeiters in Italy, Taiwan, Hong Kong, South Korea, and other Southeast Asian countries market their own John Begg Scotch, Hennessey brandy, Dior and Cardin fashion apparel, Puma sport shoes, Dunlop tennis raquets, Samsonite luggage, and even

Coca-Cola. Although most pirate brands are high-priced consumer items, medical vaccines, pharmaceuticals, heart pacemakers, and helicopter parts have also turned up with false trademarks.4

Under the Paris Union, the owner of a trademark is given six months for priority filing after the filing date in his home country.5 Hence a com­pany must act fast to be sure of having the right to use its trademark in target countries. Gaining protection outside the Paris Union countries can be time-consuming and difficult. Trade names, as distinct from trademarks, are protected in all Paris Union countries without the need to register them. However, it is common to register a trade name in a local commercial register maintained by a court or government office in the target country.

3. Maintaining Trade Secrets

A trade secret is know-how that is kept secret within an enterprise, offers a competitive advantage, and is not generally known to the industry. Trade secrets cover manufacturing processes; methods and techniques; plans, de­signs, and patterns; formulas; business information; and products. Trade secrets do not have statutory protection like patents and trademarks, but the laws of many countries protect ownership rights in trade secrets, condi­tional on the maintenance of secrecy. The latter is not always possible. It is legal, for example, for a competitor to buy a company’s product and then attempt to copy it by reverse engineering. Once a trade secret becomes public knowledge, anyone can use it freely. The possession of trade secrets does not create any right to prevent others from independently creating and using the same know-how.

Under the laws of some countries it may be possible for a company to prevent employees from communicating trade secrets without permission or to prevent a competitor from disclosing or using a trade secret acquired illegally. But the general absence of special legislation in national systems and of special provisions in international treaties, together with the costs and uncertain outcome of legal action, make it very important that a licensor take contractual safeguard measures to prevent the disclosure or unwarranted use of trade secrets by a licensee before, during, and after a licensing agreement.

Source: Root Franklin R. (1998), Entry Strategies for International Markets, Jossey-Bass; 2nd edition.

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