{1} This paper is about the promise that intellectual property holds for generating wealth from international trade. The U.S. government and U.S. corporations have employed various means to secure the benefits of selling intellectual property abroad. The most flexible and useful method of transferring this form of property is the licensing agreement. However, for a licensing agreement to work, the intellectual property must first be recognized as "property" to be protected by law by the countries of both the licensor and the licensee. Not all countries recognize and protect intellectual property. This paper discusses the perils associated with licensing intellectual property abroad and the methods for securing the wealth generated by this important form of property.
II. INTERNATIONAL LICENSING AND U.S. EXPORTS
{2} In 1947, intellectual property comprised just under ten percent of all U.S. exports. [1] In 1986, the last time the government compiled the statistic, the figure had grown to more than 37 percent. [2] Today, the best estimate is that intellectual property accounts for well over 50 percent of U.S. exports. [3]
{3} In general, wealth from trade in intellectual property is generated in two ways. The first way is for the owner of the intellectual property to incorporate the intangible intellectual property into a tangible product which he can make and sell himself. The second way is for the owner of the intellectual property to license the intangible intellectual property to another, who will make and sell a tangible product, in consideration for something in return, usually a royalty.
III. THE BUSINESS REASONS FOR LICENSING AGREEMENTS
{4} A license grants rights in property without transferring ownership of the property. [4] For a license of intellectual property to be effective, the following must be satisfied: first, one must have ownership of relevant intellectual property or authority from the owner to grant a license; second, the intellectual property must be protected by law or at least eligible for protection; and third, the license must specify what rights with respect to intellectual property it purports to grant to the licensee and reserve to the licensor. [5]
{5} There are three broad categories of licenses for intellectual property: technology licenses, publishing and entertainment licenses, and trademark and merchandising licenses. Technology licenses cover patents, patentable inventions, trade secrets, "know-how," confidential information, copyrights in technical material (software, databases, instruction manuals), and semiconductors mask works. [6] Publishing and entertainment licenses cover copyrights in creative properties such as books, plays, movies, videotapes, television productions, music, and multimedia. [7] Trademark and merchandising licenses cover trademarks, trade names, trade dress (the way products or services are packaged or presented), and rights of publicity. [8]
{6} There are at least nine business reasons why a firm may choose to license its intellectual property. First, licensing adds the resources of the licensee to those of the licensor. [9] By granting the licensee the right to market and distribute the licensor's product, the licensor can penetrate markets it could not hope to serve. [10] For example, in licensing Microsoft's disk operating system software ("MS-DOS") to IBM, Microsoft obtained the benefit of IBM's global sales, marketing, and distribution systems. [11]
{7} Second, licensing broadens geographic markets. Most products going into foreign countries require some form of adaptation: labels and instructions must be translated; goods may require modification to conform with local laws and regulations; and marketing may have to be adjusted. [12] [13]
{8} Third, licensing broadens product markets. A firm may have the resources to exploit its intellectual property through only one product, but the intellectual property may be applicable to other products or services. [14] For example, producers of movies and television shows do not usually have the resources to mass produce and distribute video tapes. [15] The producers will license their intellectual property, the copyright, to firms that can make master video tapes, manufacture the copies/, and distribute the cassettes. [16]
{9} Fourth, if a firm has insufficient capital or personnel to enter a market quickly, delegating through licensing speeds up the process. [17] For example, small biotechnology companies license their intellectual property to large drug companies not only to distribute their product to more people but to beat their competitors to market. [18]
{10} Fifth, some products sell best when they are incorporated or sold for use with another product. [19] For example, software is best supplied with the hardware rather than as an optional package. Microsoft's MS-DOS became the industry standard operating system as the IBM-PC became the industry standard microcomputer. [20] Third party software companies had to write for an MS-DOS environment to gather the greatest market share for their product, which further increased the market penetration of MS-DOS. [21]
{11} Sixth, a company may license at the request of a firm in a noncompeting field. Licensing for this purpose works best when the licensor has no interest in exploiting the intellectual property in the noncompeting field. [22] For example, a developer of mainframe computer software with expertise only in mainframes might grant a license to a developer of software for personal computers. [23] If the licensee's market is too close to the licensor's market, undesired competition may be created. [24]
{12} Seventh, licensing is one way for a firm to barter for technology it would otherwise have to pay for. A licensor may barter for the licensee's improvements to the intellectual property. Improvements to the intellectual property are granted back to the licensor. [25] Another technology barter scheme is cross-licensing. Cross-licensing occurs when two competing firms with different research and development strengths can take advantage of the other's progress. [26] Cross-licensing creates the same sort of synergy as a joint venture without the inconvenience and delay of setting up joint operations. [27]
{13} Eighth, when the licensor's trademark is licensed for use in the market along with the intellectual property, then the licensee's marketing efforts benefit the licensor's reputation and goodwill (as long as the licensee maintains quality in product, service, and sales). [28] For example, AT&T, new to the mass computer market, gained positive publicity for its UNIX operating system which it licensed it to computer makers. [29]
{14} And finally, licensing may allow a firm to achieve some degree of control over its own innovations and also over the direction of the industry. [30] For example, if Microsoft did not allow MS-DOS to be licensed, IBM would probably have developed an operating system on its own which might have been very different from MS-DOS and taken away MS-DOS's place in the operating systems market. [31]
IV. GLOBAL CHANGES THAT HAVE FACILITATED INTERNATIONAL LICENSING
{15} As previously discussed, the last decade has seen a sharp rise in the export of intellectual property from the U.S. There are many reasons for this phenomenon, but undoubtedly a radical, pro-Western shift in the zeitgeist of Eastern Europe and Asia is the engine behind this rise in exports. This new zeitgeist has fostered economic and political change. First, the Soviet Union has collapsed and with it the reason for restricting trade to members of the former WARSAW pact. Second, Eastern Europe has embraced capitalism. Third, countries in Asia and in the developing-world have created a low-wage, technically skilled industrial base to compete in the global economy or to serve as a platform for U.S. and European off-shore manufacturing. Fourth, China has opened its borders to trade with the U.S., to supply its population with consumer goods and to build a modern infrastructure for future development. Finally, distrust of the Japanese by other Asians and the preference for an economic and military counter-weight to Japanese power has further increased exports from the U.S to the region. The desire of the U.S. to export high technology was not always so strong. A cold war with communist countries lasting almost half a century shaped an economic policy averse to exports of technology.
V. LIMITS ON INTERNATIONAL LICENSING: THE COLD WAR AND RESTRICTIONS ON THE EXPORT OF U.S. TECHNOLOGY
{16} Congress obtains its power to regulate exports from the Commerce Clause. [32] The first major attempt at controlling international trade for security reasons was the Export Control Act of 1949 which resulted in a near total embargo of trade with the communist countries of Eastern Europe. [33] Soon after, the informal Coordinating Committee on Export Control (CoComm) was created comprising representatives from NATO and Japan to protect the mutual security of member states. [34]
{17} The Export Administration Act of 1979 (EAA) gives the Department of Commerce the authority to administer a system of export controls in order to protect our national security, advance U.S. foreign policy goals, and restrict the export of resources in short supply domestically. [35] CoComm and the various federal agencies (especially DOD) create lists of technologies that are candidates for export restrictions. [36] These lists serve as a source for the list of items controlled by the Commerce Department. [37] This/ list of goods that may be exported upon approval by the Commerce Department is called the Commerce Control List (CCL). [38] Almost every good or technology is controlled in the sense that it is illegal to export without a license. [39]
{18} All U.S. exporters must first get a license from the Department of Commerce in order to sell a product outside of the U.S. [40] There are two types of licenses: general and validated. [41] Items or technologies that are controlled (listed in the CCL) require a validated license. [42] For an item not on the CCL, a general license is required, but permission for each shipment is not necessary. [43] For a good on the CCL, the validated license must describe all the details of the transaction and is reviewed carefully by the Office of Export Administration on a case by case basis. [44] The licensing process can be time-consuming and expensive, especially if a validated license is needed. [45]
{19} One example where CoComm has failed in its mission to control the export of critical technology came to light in the mass media in 1987. It was discovered that certain corporations were selling computer controlled milling equipment to the Soviet Union for the grinding of high tolerance parts. Toshiba Corporation of Japan and Kongsberg Vaapenfabrikk of Norway sold computer controlled, multi-axis milling machines to the Soviet Union since the mid-1970's. [46] These machines were used to grind high tolerance propellers that could help make a submarine very quiet underwater. [47] Almost overnight the Soviet nuclear submarine fleet went from being noisy and easily trackable by U.S. hunter-killer submarines to quiet and nearly undetectable. [48]
{20} The end of the cold war has had a substantial impact on freeing the hand of business in the area of exporting technology. For example, the rules and regulations issued by the Commerce Department relating to the People's Republic of China show that many high technology items are available for export, including lasers, computers, high speed digital telecommunications equipment, computer controlled milling equipment, modems, microwave technology, thermal imaging equipment, and/ global positioning satellite receivers. [49] Obviously, most of these technologies have direct military application. This may be why Commerce Department regulations sometime specify that the end-user must have a peaceful application before the product can be exported.
{21} CoComm has been disbanded but will probably be replaced by an organization more focused on rogue nations like Iran, Iraq, Libya, and North Korea. [50] The Clinton Administration has removed many of the restrictions on computers and telecommunications technology so that a validated license is unnecessary. [51] Sale of computers executing up to 260 MTOPS (millions of theoretical operations per second) have been decontrolled to almost all destinations. [52] Computers used to be controlled at 12.5 MTOPS, roughly the speed of an early 1980's Apple Macintosh. [53]
{22} The EAA has been criticized for setting up a license approval process that is complicated and redundant and hurts U.S. exports. Since 1979, however, Congress has amended the EAA to streamline the licensing process. [54] The administration of the lists can be a highly political issue between agencies and the EAA exempts nearly all actions and regulations from judicial review under the Administrative Procedure Act. [55] Notwithstanding bureaucratic inefficiency and infighting, as commercial interests take precedence over military concerns, the trend in removing export restrictions will probably continue in order to help U.S. business compete in the global economy.
VI. THE GLOBALIZATION OF THE WESTERN INTELLECTUAL PROPERTY RIGHTS TRADITION
{23} Intellectual property is property that is intangible and indivisible, in that an unlimited number of users can consume it without depleting it. [56] The fact that information is intangible means that, absent property rights, the producer of information will find it difficult to sell the information in the marketplace to recover any investment made.
{24} Patent, trademarks, copyrights, and trade secrets are the major classifications of intellectual property in the U.S. and throughout the world. Intellectual property concepts are essentially North American and European legal concepts. As a general rule, to get protection for intellectual property, the inventor, author, or entity must go through the legal process of the country where he seeks protection for his property. The exception to the general rule occurs when the U.S. has signed an international agreement with respect to intellectual property where rights are granted to citizens of the signing countries. There are many multilateral and bilateral agreements signed by the U.S. regarding intellectual property.
{25} The oldest of the multilateral international conventions is the International Convention for the Protection of Industrial Property, also known as the Paris Convention. [57] This convention covers patents, industrial designs, trademarks, and unfair competition. [58] It requires "national treatment" of the intellectual property of foreign nationals, and it prescribes a period for filing for protection in any Convention country after the first filing in any Convention country. [59] The protection relates back to the filing date in the first application. [60] For patents, the filing provisions are important because without them, an inventor could be barred from filing simply because he is a foreign national or because he first filed his patent in another country.
{26} If the foreign country is a signatory to the Convention for the Protection of Literary and Artistic Works, also known as the Berne Convention then a U.S. author has the same copyrights in a foreign country which is signatory to Berne that the foreign country grants its own citizens. [61] Historically, the U.S. was a notorious pirate of foreign copyrighted material since colonial days and steadfastly refused to sign the Berne Convention until 1989. [62]
{27} GATT implementing legislation passed the House and Senate in December 1994. [63] The Trade Related Aspects of Intellectual Property Rights (TRIPS) called for standardization of intellectual property rights among the signers and significantly modified US intellectual property law. [64]
{28} But what if a state does not recognize the property right of the owner of the intellectual property? The obvious legal implication is that the intellectual property, far from being property, is to be held in common. Without intellectual property protection, an international license would be unnecessary. There is no need to buy a license for what you can get for free.
VII. STATE SPONSORED THEFT OF INTELLECTUAL PROPERTY: FREE RIDING
{29} Some developing countries find intellectual property rights too expensive and really have no incentive to protect them. Why should they pay licensing fees when they can just take the technology they want? This policy is known as "free riding." [65] A free riding government allows its citizens to simply take intellectual property without paying. The free riding economy gathers the windfall of not having to pay the overhead costs of creating a new product, or the windfall of not having to pay for the goodwill of a famous and respected trademark. [66] Software and medicine are two markets where a free ride is easy. These products are costly and risky to develop but quite easy to copy. However, those that copy these products do not normally learn anything about how to write new software or create new medicines. [67]
{30} There are many examples of countries that free ride. Weak patent laws are part of the economic planning of Taiwan, Singapore, Hong Kong, and Korea. By ignoring the patent rights of American semiconductor companies, these countries built a high-tech industrial base. [68] India recognizes no patents for drugs, chemicals, alloys, optical glass, and semiconductors. [69] Thailand lacks patent protection for chemicals, pharmaceuticals, food and beverage products, and agricultural equipment. [70] Thailand's protection of trademarks and copyrights is weak. [71] Brazil has no patent protection for chemicals, pharmaceuticals, and foodstuffs. [72] Brazil's protection of trade secrets is weak. [73] Taiwan has weak patent protection for chemicals and pharmaceuticals. [74] Taiwan has no unfair competition law dealing with advertising, imitative product packaging, and inaccurate marks of origin. [75]
{31} Only countries that have little to export to the U.S. can successfully get away with free riding. In the new global economy most countries need hard currency and try to export as much as they can to the U.S. However, exports to the U.S. can be tariffed or confiscated in retaliation for any acts of unfair competition. A country that free rides with respect to U.S. intellectual property runs the risk of being retaliated against by the U.S. in a trade war or taken to court by a violated private party.
VIII. FORCING AN INTERNATIONAL LICENSE ON A FOREIGN ENTITY
A. FEDERAL ACTION: SECTION 301 OF THE TRADE ACT OF 1974
{32} What recourse does a U.S. company have if the firm's intellectual property is being pirated in a foreign country that either has no laws protecting intellectual property or does not enforce the laws it has? A U.S. corporation will probably not receive very much relief in the courts of such a country. Some other mechanism must be found to stop the pirating. Section 301 of the Trade Act of 1974 is the most powerful tool the U.S. government has for dealing with countries that appropriate U.S. intellectual property without paying for it.
1. DELEGATION OF SECTION 301 POWER
{33} Section 301, as amended, gives the President broad discretionary authority to impose import restrictions. [76] Section 301 gives the U.S. Trade Representative (USTR), acting under the President's direction, the authority to enforce the rights of the U.S. under any trade agreement or to respond to any country's act that is "unjustifiable and burdens or restricts U.S. commerce." [77] The USTR may examine policies of the foreign country that do not effectively protect U.S. intellectual property interests for the purpose of imposing import restrictions or duties. [78]
{34} Section 301 gives the executive branch the power to pressure foreign countries into adopting intellectual property laws to protect U.S. intellectual property abroad. Even if the product or process never makes its way into the U.S., the President can retaliate with restrictions or duties on other goods made in the infringing country and imported into the U.S. The threat of trade restrictions or the imposition of such restrictions by the USTR also gives the U.S. company the leverage it needs to negotiate a license for the use of its intellectual property.
{35} Perhaps the most famous use of Section 301 has been to persuade China to upgrade its intellectual property laws. From 1984 to 1994, yearly exports from the U.S. to China rose from $3 billion to $8.8 billion while imports from China rose from $3.1 billion to almost $38 billion. [79] The first major U.S. threat of a trade war with China started in April 1991 when China was identified by the USTR as our only major trading partner of the U.S. that did not protect pharmaceuticals and other chemicals, and did not protect the copyright of U.S. works. [80] In addition, trademarks were granted to the first registrant in China, regardless of the original owner, and trade secrets were not adequately protected. [81]
{36} By January 1992, just before trade sanctions were to be instituted, China and the U.S. signed a Memorandum of Understanding (MOU) on key intellectual property matters. [82] Under the 1976 Copyright Act, the copyright provisions of the MOU became a formal bilateral copyright agreement on reciprocal copyright protection between the two countries. [83]
{37} After China passed stronger intellectual property laws, many in the U.S. felt that China was not doing enough to enforce its new laws. In June 1994 USTR Mickey Kantor warned China that, if it did not alter its ways by December 1994, $800 million worth of trade sanctions would be imposed. [84] China responded by raiding firms and seizing pirated goods (including 200,000 CDs and 750,000 video and audio tapes), arresting 7,000 people, and closing fifty-six illegal factories. [85] The U.S. insisted that China close down another twenty-nine factories linked to the production of over $75 million worth of pirated CDs, cassettes, video tapes, and software. [86] The Chinese refused the additional demands, and the U.S. threatened China with $2.8 billion worth of trade sanctions. [87] On February 4, 1995, Kantor announced that 100% duties would be imposed on $1.8 billion worth of imports at midnight on February 26, 1995, unless an agreement was reached. [88] Eventually China shut down 7 of the 29 factories making counterfeit movies and CDs, destroyed more than 2 million tapes and CDs, and confiscated 30,000 computer discs. [89] The final deal called for stricter enforcement of China's intellectual property laws, the creation of a customs border patrol, and improvements in the judicial system. [90] More than likely, China caved in to U.S. demands because it exports far more to the U.S. than it imports, and it needs the hard currency to develop its infrastructure and industrial base.
B. PRIVATE ACTION: SECTION 337 OF THE TARIFF ACT OF 1930
{38} Although imposing duties or restrictions under Section 301 can be quite effective, the political process of getting the Trade Representative to act may be too time consuming and burdensome, especially for a small company interested in making money by licensing its product or process at the earliest possible moment. When a company's semiconductor mask work, patent, trademark, or copyright is violated by a product imported into the U.S., the company has two ways of seeking relief.
{39} The first way is for the company to sue in federal district court for an injunction and damages. There are several well known disadvantages with suing in federal district court. The litigation can be extremely expensive, the discovery and trial process may take many years to complete, and the district court judge may not be very educated in the area of intellectual property law. Although the threat of a suit may bring some potential licensees to the bargaining table, it may be financially beneficial for the infringer to keep infringing.
{40} The second way is for the company to file a complaint with the International Trade Commission (ITC) under Section 337 of the Tariff Act of 1930. [91] The ITC has no authority to award damages for infringement but, the ITC has no venue or personal jurisdiction limits, the exclusion orders are in rem, and the ITC has a very speedy resolution process. [92] The ITC also handles any unfair competition claims including the practice of "dumping." [93] Dumping drives out of business domestic industries that can not compete with a foreign corporation that sells below cost. Most ITC investigations must be completed in one year, and those designated as "more complicated" can take up to eighteen months. [94] ITC exclusion orders are effective upon receipt by the Secretary of the Treasury and are enforced by the U.S. Customs Service which stops shipment at the port of entry. [95] The President must approve or disapprove the ITC order within 60 days. [96]
{41} In 1982 there were 12 U.S. makers of double-sided floppy disk drives selling between $150 and $200. [97] In late 1982 14 Japanese companies arrived offering their drives for $30 less. [98] Within 18 months, the only U.S. company left was Tandon. [99] Tandon survived primarily because it had IBM as its customer. [100] In late 1984 Tandon filed a complaint with the ITC alleging that Sony, TEAC, and Mitsubishi had infringed on its '573 patent. [101] Soon after Tandon was awarded temporary relief by the administrative law judge who barred entry of infringing drives except under a bond of 25 percent. [102] As a result of this ruling TEAC and Sony settled and obtained licenses from Tandon. [103] Mitsubishi was found not to be in violation. [104]
2. THE CASE OF TEXAS INSTRUMENTS
{42} All computers have memory for processing their operations. This memory is called Dynamic Random Access Memory (DRAM). DRAM chips hold the software transferred from a computer's hard drive and are found in all personal computers. During a slump in world demand for memory chips, the Japanese had invested heavily in R&D in the next generation of chips -- 64KB DRAMS -- while the U.S. manufacturers waited. [105] In 1981, most of U.S. chip makers were producing 16KB DRAMs while Japanese chip makers were starting to mass produce 64KB DRAMS. [106] The Japanese companies then started to sell their memory chips so cheaply (allegedly below cost) that Intel, Motorola, National Semiconductor, and Mostek stopped making DRAMs altogether. [107] Only Texas Instruments (TI) and Micron, a small Idaho company, were the only U.S. corporations still making DRAMs by the late 1980's. [108]
{43} Hoping to find patent infringements, TI reverse engineered the 64KB and 256KB DRAMs from Hitachi, NEC, Mitsubishi, Matsushita, Oki, Fujitsu, Toshiba, Sharp, and Samsung. [109] TI also looked at other products and found 10 patents that they alleged were being infringed. [110] In 1986, TI filed a complaint with the ITC alleging patent infringement from imported goods. [111] The hearings started in March 1986 and were completed in May 1987. [112] The infringing companies did not want to be closed out of the U.S. market if they lost before the ITC. [113] Agreeing to take licenses on the TI patents, all except Samsung settled with TI before the ITC hearings ended. [114] In 1992, Texas Instruments had an operating revenue of $274 million compared with earnings of $391 million in royalties from its licensing agreements. [115] From 1986 through the first half of 1993, TI earned $1.5 billion in royalty payments from these licenses. [116]
IX. THE PROBLEM OF INTERNATIONAL LICENSING IN COUNTRIES WITH MARGINAL ENFORCEMENT: THE CASE OF CHINA
{44} Before a licensing deal is contemplated with a firm located abroad, a good look must be made at how the foreign country enforces its intellectual property rights in practice as well as on paper. In other words, will the U.S. firm find relief in the courts of the foreign country if the firm is forced to litigate. For example, on paper China has made great strides in the area of recognizing and enforcing intellectual property rights, but are these laws enforced or are they a mere facade?
{45} Under threat of revoking its Most Favored Nation trade status, China promised to strengthen its intellectual property laws by signing a MOU with the U.S. [117] In 1992, China signed the Berne Convention thus adhering to the legal norms accepted by the industrialized nations on the protection of copyright, and in January 1993, China's amendments to its patent laws (promised in the MOU) became effective. [118] China now accepts patents on food, beverages, flavorings, pharmaceutical products, and substances obtained by a chemical process. [119] The new patent law also protects the patentee from outside infringement. [120] To conform to international norms, China extended the patent right from 17 to 20 years for invention-creations. [121] Although China's changes to its intellectual property laws were enacted to assuage the U.S. and allow investors to act with more confidence in China's market, the enforcement of these laws is still lax and makes for a risky investment.
{46} In March 1992, Chinese authorities raided the Shenzhen Reflective Materials Institute, a research unit of Shenzhen University, and found 650,000 Microsoft holograms for use in pirated copies of Microsoft software. [122] In October 1993, the Chinese authorities determined that the Institute had infringed Microsoft's trademark, and fined the Institute $260 under China's strengthened laws. [123] Microsoft estimated its losses at $20 million. [124]
{47} On August 3, 1994, the Beijing Intermediate Court ruled in favor of the Walt Disney Company against a prominent Beijing children's book publisher in the first copyright infringement case brought by an American company in China. [125] The Beijing Press/Beijing Children's Publishing Center and its distributor argued that they had legally published the books under a Hong Kong license. [126] The Beijing Court found that the 300,000 books were identical to a series of books published in China under a license that expired in 1990. [127] A Disney vice-president and counsel stated that Disney was seeking penalties equal to lost profits or $300,000 which is allowed under Chinese law. [128] Nine months later the court awarded Disney $27,405. [129]
{48} In an earlier case, Disney won another Pyrrhic victory when a Chinese company was fined for trademark infringement of Disney's Mickey Mouse character. [130] Disney had spent more than $15,000 in legal costs. [131] The fine imposed was $91. [132] When Disney tried to appeal, the government officials discouraged the company, saying it would embarrass the trademark agency and take too long. [133] Experts were looking at this case as a test of how serious China was about enforcing its intellectual property laws. [134] The U.S. is estimated to have lost $830 million in sales because of piracy in China (music, $345 million; software, $322 million; books, $110 million; movies, $50 million). [135]
{49} The importance of enforcing intellectual property rights and licensing agreements is aptly summarized in a recent submission by the Patent and Trademark Institute of Canada to the Canadian Government:
Prospective vendors or licensors of technology tend to be willing to transfer the technology to a recipient only in circumstances in which the legal, economic, political, and social environment is conducive to adequate continuing protection for the transferor and fair reliable return to the transferor for the technology transferred. . . . The intellectual property law environment . . . also tends to be very important because transferors of technology generally are uncomfortable relying for their legal protection only on the contractual obligation assumed by the recipient of the technology. They usually like to have the security of enforceable patent, design, copyright, and trademark protection where applicable in the country in which the recipient is located. . . . This back-up security -- the possibility of a patent infringement lawsuit should the rest of the agreement fall apart -- tends as a practical matter to be of value only in those countries in which patent rights are enforceable at the instance of a foreign patentee against domestic defendants. So, the intellectual property regime, and especially the patent law regime in countries seeking to import technology, can be a very important factor in the determination whether a given technology owner is willing or unwilling to transfer the technology to a recipient in the country in question. [136]
X. ALTERNATIVES TO INTERNATIONAL LICENSING
{50} For certain products, there may be several alternatives to the licensing of intellectual property when the legal and political environment in the foreign country makes licensing too risky. There are five primary alternatives to a licensing agreement. They are: making a direct foreign investment, selling a turn-key package, participating in a joint venture, selling equipment, and investing in an existing concern.
{51} Direct foreign investment allows for the most control over the enterprise by the U.S. corporation. By investing in a wholly owned and controlled subsidiary located in the foreign country, the corporation retains complete control of its intellectual property and is in a position to protect proprietary information. [137] Investing in this way also bypasses import restrictions, takes advantage of cheap labor and skills, takes advantage of raw materials, and creates new markets. [138] Many countries restrict this kind of investment especially in vital industries like transportation and telecommunications.
{52} Selling a turn-key package means selling the entire technology package without breaking it up. The U.S. corporation provides machinery, buildings, management expertise, and production plans. [139] There is a risk of reverse engineering of coveted technology. This form of enterprise will probably work best with out-of-date first and second generation technology. The kind of technology that firms may not miss.
{53} A joint venture is usually a long-term relationship involving the pooling of assets, joint management, profit and risk sharing, joint marketing, joint servicing, and joint production. [140] A joint venture pools capital and corporate cultures so the partners must be fairly comfortable with each other. The players are limited so that the risk of theft of the intellectual property is minimized.
{54} When the foreign entity simply purchases equipment, buyers make initial capital investments and then pay for the maintenance and upgrade of the purchased technology. [141] Purchases occur continuously. The U.S. company must do the work of finding buyers for its equipment and must find a way to distribute its product. Although the U.S. company makes the equipment in the U.S. or another country, there is still a risk that reverse engineering will occur.
{55} Finally, the U.S. corporation can buy into an existing foreign corporation thus acquiring instant market share, access to productions facilities, and a ready made distribution network. [142] A U.S. corporation takes the highest capital risk in this form of investment precisely because so much control is exercised by the foreign corporation. Unlike a joint venture, the U.S. company is more like an investor that is betting that the company will perform well.
{56} There is no question that the trend in the globalization of business will accelerate international licensing and protection of intellectual property. No doubt the Western legal tradition of intellectual property rights will be foisted on developing countries as the price of admission into the world market controlled by the countries of North America and Europe. Until that time, these issues will continue to plague our economy and the future of our nation.