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TRIPs and Intellectual Property Protection in Emerging Markets

Intellectual Property Practice Group Newsletter - Volume 1, Issue 3, Fall 1997

December 1, 1997

Clarisa Long

Part II of a two-part series of articles on international intellectual property protection

The Paris Convention for the Protection of Industrial Property and the Berne Convention for the Protection of Literary and Artistic Works have been the primary treaties governing the international protection of intellectual property for more than a century. The Paris Convention applies to inventions, trademarks, service marks, and industrial designs and requires each member to grant to nationals of other members the same protection that it grants to its own nationals. The Paris Convention also grants individual nations the discretion to require compulsory licenses if a patentee does not work a patent.

The Berne Convention, of which the United States is a member, is the principal international copyright convention and contains the most detailed provisions. It protects works "for the life of the author and fifty years." Despite its comprehensiveness, its weak enforcement mechanisms have proved inadequate to meet the demands created by the dissemination of information in the digital age. The Paris and Berne Conventions have provided a reasonable framework for the formal protection of intellectual property, but they have largely proved ineffective for dealing with piracy in developing nations. The international dispute settlement mechanisms provided by the Conventions have never been effective when dealing with developing countries because any country at the time of accession can declare itself not bound by the Conventions' dispute settlement provisions. Even in the absence of such a declaration, when a dispute reaches the International Court of Justice, the losing party can leave the relevant Convention in order to avoid sanction.

Furthermore, the Conventions have delegated important issues to be determined by the individual nations on a country-by-country basis. The principal complaint about the Conventions, raised particularly by the U.S. and other countries generating information-intensive goods and services, has been that some member nations did not adequately enforce the rights of intellectual property owners. As a result, industrialized nations have come to realize that effective extraterritorial intellectual property protection, particularly in developing countries, required stronger rules and enforcement procedures.

One method of encouraging legal reform has consisted of tying intellectual property issues to other foreign policy issues, such as international trade. Because information-intensive goods are a major U.S. export, tying intellectual property protection to trade sanctions has become an effective U.S. foreign policy tool. In the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), provisions regarding the protection of intellectual property rights were for the first time explicitly made a part of a broad multilateral trade agreement.

The Agreement on Trade-Related Aspects of Intellectual Property Rights, Including Trade in Counterfeit Goods (TRIPs Agreement), which was part of the Uruguay Round Agreements Act, is the most comprehensive multilateral agreement on intellectual property to date. It achieves several important objectives for international intellectual property protection: it covers all the main categories of intellectual property rights; mandates that the standard of intellectual property protection in developing countries be raised; promotes the transparency of rules governing intellectual property applies the principles of national treatment and most-favored-nation treatment to intellectual property enforcement; requires that all signatories establish and enforce a common paradigm of intellectual property rules; and provides for the application of the World Trade Organization (WTO) dispute settlement mechanism. A brief explanation of the most important clauses of the TRIPs Agreement follows.

Nondiscrimination. One of the most important features of the TRIPs provisions is that of nondiscrimination: GATT member states must not favor the intellectual property rights of their own citizens against the intellectual property rights of citizens of other members, and they must not favor the rights of citizens of one member country over those of another. The practical result is that products produced within developing nations by local firms are equivalent to imports of the same product. This principle of nondiscrimination formally establishes that importing an innovative technique, product, or process to a developing country is equivalent to producing it domestically.

Duration of intellectual property rights. The duration of a patent term within TRIPs has been standardized to a minimum of twenty years from the date of filing; copyrights are standardized at fifty years on sound recordings and at least fifty years on motion pictures and other works. Trademark protection is established for seven years and is indefinitely renewable as long as the trademark is in use. TRIPs requires contracting states to expedite administrative procedures for the granting of patents as much as possible in order to avoid the de facto reduction in the effective life of a patent. To the extent that this provision proves effective, it will be a boon for U.S. businesses, which have continually been frustrated by the long backlogs in granting intellectual property rights in developing countries.

Scope of intellectual property rights. Throughout the developing world, the list of products that are declared ineligible for intellectual property protection is long, and it includes software, pharmaceuticals, and the products of biotechnology. TRIPs expands the existing scope of protection for trade secrets, computer programs, and databases. In the case of pharmaceuticals, although TRIPs extends the scope of what is patentable, it excludes natural or artificially produced biological material, animals, and plant varieties. The exclusions clearly represent a blow to the U.S. biotechnology industry, in which the U.S. has a distinct comparative advantage. TRIPs also confers on patentees the following exclusive rights: the exclusion of third parties from the acts of producing, distributing, selling, or importing a product subject to a patent; the exclusion of third parties from the acts of using, selling, and importing a patented process and full protection of the product obtained through the patented process; and the flexibility to sell or license patent rights. Although protection for information-intensive products is not airtight, TRIPs represents an increase in the previous level of protection.

Licensing. This is an area where international disputes are common. TRIPs has failed to resolve this conflict, because it allows nations to grant compulsory licenses for "adequate remuneration" after considering each case "on its individual merits" and after attempting to negotiate "reasonable commercial terms" with the holder of the intellectual property right. TRIPs specifies that compulsory license must be nonexclusive and of limited duration, but then puts the fox in charge of the hen house by mandating that appeals of compulsory licenses are subject to the jurisdiction of the nation imposing the license. The result is that developing countries can continue to require compulsory licenses.

Transition period for less developed countries. TRIPs allows a grace or transition period of ten years for developing countries to extend intellectual property rights to those industries that were previously not subject to intellectual property protection. The TRIPs provisions do not require "pipeline" or retroactive protection for patents that are covered under the new proposed laws but were not protected under the old laws. Both the grace period and the lack of pipeline protection are particularly troubling issues for U.S. investors in the pharmaceutical sector in countries where an enormous industry producing pirate pharmaceuticals has developed and where displacement of workers and capital is an economic and social concern.

Dispute settlement mechanisms. Violations of the TRIPs Agreement can now be enforced through arbitration panels. Moreover, consequential international penalties usually can be applied to countries that infringe patent and copyright provisions. Within this framework, the piracy of intellectual property rights abroad could be penalized in accordance to the WTO-TRIPs rules. After a favorable arbitration ruling, the U.S. could, as a way to penalize the infringement of U.S.-held intellectual property rights, by law, totally or partially bar exports to countries found in violation of TRIPs provisions. As a result, developing countries can no longer simply disregard international complaints. This WTO legal framework is expected to enhance the enforcement of patent and copyright laws throughout the developing world. The TRIPs Agreement attempts to cure the problems in international market transactions of high-technology goods and services. It also benefits developing countries that have had limited access to high technologies due to their lack of technological capabilities. By providing clear and enforceable rules plus dispute settlement mechanisms, the TRIPs Agreement promotes the institutional capacity of many developing nations to absorb complex technologies. In short, the principles enunciated in the TRIPs Agreement are an example of international legal convergence.

Nevertheless, the international legal convergence towards U.S. standards of protection can be extremely slow. The process of intellectual property reform must be carried out by the developing countries themselves. TRIPs has a ten-year transition period for developing countries to come into compliance with increased protection for intellectual property rights. As a result, the challenge facing the U.S. Trade Representative is to persuade developing countries to implement the obligations of TRIPs as fast as possible. Responses to pressures to enact intellectual property law harmonization can be accelerated by incentives operating on developing country governments through U.S. foreign policy channels.

The speed with which developing countries adopt standards of intellectual property protection in compliance with the TRIPs Agreement, however, will depend largely upon local domestic conditions and political pressures. The U.S. approach to intellectual property protection has always been based upon the philosophy that intellectual property rights were to be granted as a reward for innovation. The innovator receives the right to attempt to profit from an invention, and society benefits from the publication of knowledge that otherwise would have remained secret. In contrast to this spirit, many developing nations have traditionally used intellectual property rights as an instrument for regulating technology transfer and avoiding paying royalties on innovations from the developed world. For example, in many developing countries the same government agency that registers patents also regulates foreign direct investment and technology transfer. Seeking to maximize scarce foreign exchange, these countries maintained a weak system of intellectual property protection so as to minimize the outflow of royalty payments.

The feasibility of enacting intellectual property rights reforms sooner rather than later depends on the assessment by developing country leaders of the costs and benefits of providing enhanced intellectual property protection. Mandated royalty payments, resource redistribution, and possible anticompetitive effects are perceived by some developing countries as unbearable costs caused by the introduction of patent protection. On the other hand, possible benefits such as enhancing technology transfers and capital formation, disclosure of new knowledge, improvements in health/safety standards, and global technological dynamism have traditionally been perceived as long term speculative gains. As a result, many developing countries have viewed intellectual property protection as an issue that can be subject to international negotiation and have set their intellectual property policy ad hoc.

The impetus to harmonize standards for intellectual property protection is dependent upon the degree to which countries involved in a trade agreement have compatible incentives for technological development. More specifically, countries with emerging high-growth sectors will experience private sector pressures to harmonize their intellectual property laws with those of countries experiencing the same changes. Because nonagricultural trade-related sectors of the economy have shown themselves to be the most likely sectors to have a demand for information-intensive products, such sectors can be expected to lobby for improved intellectual property protection for nationally-produced high technology and for free trade in foreign high technology. Traditional agrarian economies, in contrast, do not have the same incentive to reform their laws in ways that protect the assets of their own or other nations' high-growth sectors.

Finally, increased political stability is a factor that increases the chance that developing country politicians and business leaders will support and adopt policies conducive to long-term gains, rather than treating intellectual property as an economic variable aimed at avoiding the short term costs of paying royalties. With a more stable political environment subject to periodic elections, the political actors responsible for enacting legal reforms perceive a more stable stake in the political system. Their chances of reelection make them and their parties long term players in the political system and able to capture the long term benefits derived from the legal reforms they propose. In many developing countries, intellectual property reforms would increase the flows of foreign direct investment into sectors protected by patents.

The political feasibility of intellectual property legal reform in developing nations can only occur when developing country politicians perceive that their long term benefits of enacting a new law are greater than their short term costs. In this context, only a stable political environment would allow a longer professional life expectancy where a politician would have enough time to capture the long term benefits of his or her actions. The present relative political stability supported by periodic elections and a greater access to public office has created a environment where legal reforms requiring politicians to "think long term" are more feasible than ever before.

For example, in Latin America, groups representing pirate industries have directed flows of unsupervised financial contributions to members of Latin American legislatures, with the intent of lobbying against enactment of stricter intellectual property laws. These contributions are currently unmonitored in Latin America (except in Mexico). In order to reduce the politicians' perceived costs of supporting legal reform, these nations would have to establish close supervision of political campaign financing and impose stiff penalties on members of the legislature found selling their votes. For many developing countries, reducing political corruption would enhance the likelihood of enacting and enforcing well-defined intellectual property rights.

Clearly, the road to higher standards of intellectual property protection and better enforcement will be slow. But developing countries have the goad of decades of failed development policies and disastrous economic planning prodding them toward adopting strategies that will allow them to develop and compete in an increasingly high-technology driven world. In the final analysis, foreign political and economic pressures have provided the impetus for the current wave of intellectual property reform observed in many developing nations. The marriage of convenience between intellectual property and international trade issues has caused many developing nations to see the enforcement of intellectual property as one way to gain foreign market access under preferential terms while avoiding possible trade sanctions.

Many developing country governments are now following the bumpy and twisting road toward market-led growth and import competition after decades of failed development policies. Reservations notwithstanding, the cost-benefit perceptions of many developing country political and business leaders about intellectual property legal reform have begun to change during the past few years. TRIPs and the expected trade gains have tipped the balance in favor of introducing a stronger intellectual property framework that is more compatible with U.S. laws; the question now is how soon developing nations will implement increased levels of intellectual property protection. At this stage, we can expect domestic political forces to provide the essential engine of legal reform, and regional political stability to allow governments to be able to reap the long-term benefits of those reforms. Nonetheless, U.S. foreign policy pressure remains necessary to keep the momentum of legal reform going.

* Clarisa Long is the Abramson Fellow at the American Enterprise Institute for Public Policy Research in Washington, D.C, where she specializes in intellectual property law and the public policy issues surrounding genetic research and the biotechnology industry. She is also a Vice Chairman for Membership of the Intellectual Property Practice Group. Parts of this article have been adapted from Ms. Long's monograph U.S. Foreign Policy and Intellectual Property Rights in Latin America (Hoover Institution Press, 1997). They appear here with the permission of the Hoover Institution on War, Revolution &t Peace, Stanford University.

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