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Patrick J. Kelly

Patrick J. Kelly International

pkelly@fredlaw.com
612.492.7040
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The Legal Eye - Global Reach

By: PATRICK J. KELLY

Summer 2003

*Reprinted with permission from Minnesota Technology Magazine.

Even if a company has secured registrations for its intellectual property at home, failure to do so in other countries can be costly, especially if the owner of the rights has not done due diligence on its proposed foreign distributors, manufacturers, or partners.

Take the example of Nike in Spain. Nike registered its famous trademark in the United States and elsewhere in the world, but failed to secure its mark for use in connection with the sale of sportswear in Spain before appointing its Spanish distributor, Cidesport. As it turns out, Cidesport had registered the mark for socks prior to becoming Nike's distributor in Spain. When Cidesport signed on as Nike's Spanish distributor, it expanded coverage of its "Nike" mark to include sportswear.

The situation came to a head when Nike wanted to sell its sportswear products in Spain during the 1992 Summer Olympics, Cidesport sued to prevent Nike from doing so, claiming that it already had exclusive rights to the mark in Spain. The result: Nike has spent years and a small fortune fighting the decision.

Unfortunately, Nike's nightmare is not unusual. Intellectual property is the lifeblood of many businesses. Copyrights, trademarks, and patents are frequently the most valuable assets a company owns. While protecting these assets domestically in the United States may seem time-consuming and expensive, the failure to do so can make a firm's products or services an easy target for theft or copying by domestic and international competitors.

Businesses should take full advantage of the I.P. laws of the United States, which provide a framework for inventors and creators to protect their I.P. assets. U.S. businesses can rest assured that I.P. laws are enforced in this country. There are many infringement cases annually reviewed in U.S. courts in which federal and state statues are tested, and the theft or infringement of I.P rights is punished.

The fact that businesses can rely upon the enforcement of these laws gives them the security to annually invest millions in the development and refinement of their technologies. As Nike discovered, however, it can be a different story when you venture outside the United States.

Innocence abroad

Companies export their intellectual property for many reasons. They may want to establish their own presence, or contract with an established manufacturing facility in another country to take advantage of cheaper labor and easier access to raw materials, or simply to be closer to customers. Medical device, biotech, and pharmaceutical companies may seek to develop and test drugs abroad to capitalize on less-stringent regulation before going through what may be a lengthier and more costly process to gain approval from the U.S. Federal Drug Administration. At the same time, companies may be prohibited from doing research in the United States-as is the case with expanded embryonic stem cell and certain cloning research. Finally, companies may find that the U.S. market for their product is saturated, and that there is greater potential to cultivate sales abroad. For example, consider the rush of U.S. companies working to establish manufacturing and sales in the 1.2 billion-person Chinese market.

Companies take advantage of opportunities abroad in many ways. They can enter into contracts with foreign sales representatives or distributors to sell their products, establish their own manufacturing facilities in new target markets, or contract with foreign manufacturers to produce their products abroad. Or they can enter into technology transfer agreements to license or sell their technology to companies in other countries. There are also joint venture agreements in which the domestic company agrees to contribute technology to a joint arrangement and the foreign joint venture partner contributes manufacturing and sales.

Cover your assets

Regardless of the method, however, U.S. companies must be extremely careful about the dangers of losing control of their I.P. rights when expanding into new international territory.

There are a variety of ways that a business can protect its intellectual property. First, as I noted earlier, it pays to protect property in the United States by applying for domestic copyright, trademark, and patent protection. It would be imprudent for a company to export its intellectual property abroad without first having secured rights in the United States. Since the United States is one of the largest markets in the world, failure to do so would make no sense, unless such protection was not available domestically because someone else had already secured it. Furthermore, protection of intellectual property can in many cases be more easily obtained outside this country if it is based upon a registration or patent already existing in the United States.

Second, before distributing, manufacturing, or otherwise transferring intellectual property to other countries, intellectual property owners should file for protection for their copyrights, trademarks, and patents in the markets into which they intend to expand. There are international treaties to which the United States is a signatory that make it easier for I.P. rights owners in the United States to obtain protection abroad. These include the Berne Convention for the Protection of Literary and Artistic Works, which protects copyrights; The Paris Convention for the Protection of Industrial Property; the Madrid Protocol for trademarks and service marks; and the Paris Convention and the Patent Cooperation Treaty for patents. These treaties make it easier for applicants to obtain protection in multiple jurisdictions and/or to ensure that the foreign treatment of owners' rights is the same as in the owners' home jurisdiction. Companies also must complete individual filings in countries where such filings are required.

Look before you leap

There are numerous examples of companies that enter into contracts with agents, distributors, joint venturers, or contract manufacturers without first securing their I.P. rights in the country. Only later do these companies recognize that spending a relatively small amount of money upfront would have protected their rights to use their intellectual property in another country and profit from its use. This realization usually occurs after an agent, distributor, joint venturer, or contract manufacturer has registered rights to these companies' trademarks, service marks or patents-and often after the termination of the parties' contract.

Filing a trademark application, for example, costs approximately $2,000 to $5,000 in most countries. Patent protection, while costing significantly extra-anywhere from $5,000 to $20,000 or more-can save a company millions in the end. Companies can thwart dishonest agents and distributors from stealing intellectual property by taking the relatively easy and inexpensive step of registering their rights in foreign jurisdictions.

A third way companies can avoid inadvertently handing over their intellectual property to infringers is to get informed about the level and seriousness of enforcement of I.P. rights in the countries in which they intend to operate. I.P. rights protection is only effective if the country in which the rights are registered enforces them.

Enforcement matters

Numerous countries around the world are known havens for I.P. thieves and counterfeiters. They have such reputations because they either lack the legal infrastructure to protect I.P. rights or because their enforcement authorities ignore infringers. The United States Trade Representative's office (USTR) publishes a list of such countries in its annual "Special 301 Report" (www.ustr.gov/releases).

In 2002, the USTR listed 51 countries that the United States is working with to improve I.P. protection and enforcement. One such nation is Ukraine, which is accused of "persistent failure to take effective action" against piracy and implement laws to protect and enforce I.P. rights. "Priority Watch" countries (those designated as not providing adequate I.P. rights protection or enforcement or market access for those seeking I.P. protection) include Argentina, Brazil, Colombia, the Dominican Republic, several European Union members, Egypt, Hungary, India, Indonesia, Israel, Lebanon, the Philippines, Russia, Taiwan, and Uruguay.

In particular, China is a country that has historically been renowned as a hotbed of product knockoffs and also for turning a blind eye to domestic companies (sometimes government-owned) that engage in patent infringement. However, it is now subject to monitoring under Section 306 of the Trade Act of 1974, as is Paraguay, because both countries are parties to agreements with the United States to monitor and improve I.P. protection and enforcement. Thus on a recent trip to China, I was surprised to find a Beijing store loaded with four floors of knockoff watches, purses, jackets, pens, sunglasses, and other items, all bearing trademarks of brand-name manufacturers. Similar stories can be heard from visitors to Korea, Russia, and other countries where enforcement isn't taken seriously.

Exporting technology and intellectual property to countries on the USTR list may be dangerous, but taking the steps outlined above should increase protection. In the case of many of the governments listed in the USTR report, customs authorities are increasing enforcement efforts and brand-name manufacturers are finding success in taking action against infringers. A recent Forbes article told of the seizure of 300,000 counterfeit Nintendo games in Hong Kong. Another story in the Feb. 21, 2003, U.S. edition of the Financial Times described Nike's success in a Chinese court proceeding in preventing Cidesport from manufacturing products in China bearing the "Nike" trademark.

While Cidesport beat Nike to registering the company's trademark in Spain, Nike was first to register its rights to the mark in China. The Chinese court ordered the seizure of hundreds of thousands of dollars worth of Cidesport products, which will likely be destroyed.

Owners of I.P. rights will find it safer to venture abroad as international treaty enforcement is strengthened, membership in such organizations as the World Trade Organization and the World Intellectual Property Organization increases, and international I.P. laws and enforcement of infringement of I.P. rights become more consistent worldwide.

The bottom line: If the right precautions are taken, there are a world of opportunities available out there. However, you need take concrete steps to protect your intellectual property before you start marketing around the globe.