“A new dawn for the China health-care or… Grand theft IP?”

2 Responses to “A new dawn for the China health-care or… Grand theft IP?”

1. ITSSD Charitable Mission says:

   April 26, 2009 at 12:59 pm

   As regards the notion of Grand theft IP, it would perhaps help your readers to track the history of industrial espionage and IP opportunism, which is available online in a published article I authored during 2006, for the ITSSD. I have reproduced that discussion below, which has been excerpted from Lawrence A. Kogan, "Rediscovering the Value of Intellectual Property Rights: How Brazil’s Recognition and Protection of Foreign IPRsCan Stimulate Domestic Innovation and Generate Economic Growth ©, International Journal of Economic Development, Vol. 8, Nos. 1-2 at pp. 120-136, accessible online at: http://www.itssd.org/White%20Papers/ijed-8-1-2-kogan.pdf and http://www.itssd.org/white_papers.html .D. BRAZIL SHOULD NOT RELY UPON THE HISTORY OF INDUSTRIAL OPPORTUNISM TO JUSTIFY ITS CURRENT BEHAVIOR In some respects, Brazil’s exploitation of patents and trade secrets belonging to foreign knowledge-based life sciences and information and communication technology companies is no different than the opportunistic practices of other countries during past industrial eras. However, there are three crucial differences that must be emphasized. First, there are now binding multilateral treaties (e.g., the GATT/WTO/WIPO/BIT Agreements) and politically active international institutions to regulate and guide cross-border industry and government policies and practices relating to tariff rates, dumping, subsidies, market access and compliance, investments and intellectual property. Second, there are time-tested industry and mercantile customs and industry standards codes in place which may be referenced as precedent to determine the shape and direction of evolving industry practices surrounding new hi-technologies. Third, there is documentary evidence of successful national systems of innovation that recognize and protect exclusive private property rights, including IPRs. In other words, Brazil should not take comfort in the old ways to justify its current bad habits. The world-class countries that previously employed these methods and the prior informal international order upon which they relied have largely since evolved.Opportunism – Historically SpeakingDuring the past two hundred years, and particularly, during the prior era of industrialization, businesses and national governments were known to work separately and/or together to opportunistically acquire the inventions and underlying technologies of their foreign competitors. This occurred primarily for two reasons: to secure national self-preservation and/or to gain a strategic competitive advantage. The following discussion briefly describes some of these practices.In most cases, there was not much beyond the realm of customary practice or bilateral navigation and cooperation treaties. A well established and structured legal order circumscribed by international conventions that set universal standards to which all nations were legally and politically bound simply did not exist. International commerce was governed by the economic notion of national comparative advantage, and was very much protectionist-minded, with each country vying for its own national interests in what can be described as a zero-sum game of trade. Until the late nineteenth century, European countries, namely, England, France, Spain and the Netherlands held the competitive advantage in international trade through use of various tariff barriers, discriminatory and non-transparent patent regimes and state-centralized industrial development policies. From the late eighteenth through the late nineteenth century, America followed Europe’s example by employing its own tariff barriers and discriminatory patent regimes to acquire the technologies and inventions it needed to survive and expand. It also used patent rules that were based on those utilized by their European counterparts. America, however, emphasized and focused on individuals’ capacity to innovate, the sanctity of private property and free enterprise. Its model reflected how the primacy of individual over ‘state’ interests could collectively serve and operate as an industrial development policy for the benefit of the nation. AmericaAccording to one scholar of global intellectual property history, following the American Revolution, President George Washington, worked quickly with Congress and Alexander Hamilton, whom he later appointed as the nation’s first Treasury Secretary, to “reduce America’s dependence on other nations based on national security needs”. To achieve economic and political self-sufficiency, Alexander Hamilton developed a national innovation system that entailed: 1) high tariff barriers; 2) a strong patent system that gave “inventors and investors a government-guaranteed right to the exclusive use of their innovations for a fixed period”; and 3) very favorable immigration policies aimed at encouraging the migration of skilled foreign workers. As far as U.S. patent law was concerned, the original Patent of act of 1793 protected only American citizens’ inventions; foreign inventors were not eligible for patent protection.“Thus, any American could bring a foreign innovation to the [U.S.] and commercialize the idea, all with total legal immunity.” The Act was amended in 1800 to permit resident aliens living within the U.S. for two or more years to become eligible to obtain a patent. They were, however, obliged to take “an oath that, the ideas they were attempting to patent had not previously been known or used in the [U.S.] or abroad.” The Act was amended again in 1832. Resident aliens would become eligible for a patent if they agreed to take an oath declaring their intention to become U.S. citizens, and they actually worked the patent in the U.S. within a twelve month period. U.S. patent law was subsequently amended in 1836 and 1842, and these changes served as the foundation for the modern system. Beyond the patent law itself, Hamilton and Congress sought to “rapidly industrialize the United States…by whatever means necessary”. This policy effectively encouraged government sanctioned industrial and technological espionage by various individual Americans. It was authorized by “a succession of presidents, beginning with George Washington, John Adams, Thomas Jefferson and James Madison”. GermanyBut America was not alone in this tradition. Germany engaged in more focused and systematic opportunism during the late nineteenth and early twentieth centuries. Germany’s rise during this period entailed use of a new brand of trade protectionism and aggressive patent policies. It focused on developing innovative science-based manufacturing and processing technologies (e.g., chemical dyes) upon which multiple downstream industries in foreign countries relied, and on the deployment of new combinations of tariff barriers, discriminatory and non-transparent patent regimes, and inaccurate or nondescript patent applications to dominate these industry sectors. It also sanctioned the creation of industry cartels and utilized centralized industrial-military planning to achieve these ends. In other words, Germany’s policy objective was not merely to secure industrial and developmental self-sufficiency. Germany’s patent laws imposed residency, citizenship and/or ‘work’ requirements that effectively permitted the German government to “den[y] patents to virtually every foreign chemical maker”, and thus block market entry of industry competitors. It also enabled German companies to illicitly acquire arguably superior foreign technologies not patented in Germany. In addition, German companies were encouraged to employ a four-level patent strategy within the U.S. in order to dominate that market as well. They generally refused to license their patented technology to U.S. companies, hired skilled and politically connected counsel to file thousands of U.S. patents, failed to sufficiently describe their inventions in patent filings, and bargained for low reciprocal tariffs on dyes in which they had a comparative trade advantage. And this strategy proved extremely successful until the end of the World War II. JapanThe tightly constructed industrial and economic networks of post-World War II Japan helped to rebuild Japanese society and restore Japan’s global competitiveness in a relatively short time. These policies originally focused on acquiring other countries’ advanced technologies to rebuild Japan’s manufacturing and technical capacity in order to meet its domestic development needs. They later facilitated the growth of one of the world’s greatest manufacturing export platforms. Like England, France and Germany before it, Japan’s policies were based in large part on aggressive and nontransparent patent protection and disclosure mechanisms, and relied on protective tariffs and market access barriers. As with Germany, Japan’s economic rise depended on a close-knit relationship between industry and government. This effectively resulted in the formation of state-centralized and sanctioned subsidy programs, industry cartels, and patent licensing procedures. A particularly effective ‘sword and shield’ strategy employed by Japanese companies to weaken the valuable patents of foreign competitors, particularly, U.S. companies, was that of state-sponsored ‘patent flooding’. This entailed the filing with the national patent agency of many small ‘nuisance’ patents that were closely related to the original foreign patent. According to one legal expert, these nuisance patents alleged minor or incremental variations or improvements to the basic technology developed by the original patent filer (i.e., the foreign target company). Their purpose and effect was to lock-in the foreign patent filer to such an extent that it could not commercially exploit its own technology in Japan without risk of being subject to costly and time-consuming patent infringement litigation. If successful, the original patent holder would be ‘persuaded’ to request a license from the patent flooder. While the latter usually agreed to such a request, it would then demand a cross-license in return for use of the target company’s technology. In essence, the Japanese company would employ the patent flood to both (offensively) strip away the target company’s exclusive rights in its own cutting-edge technology. It would then (defensively) obtain for itself valuable rights into foreign technology that would have otherwise placed it at a competitive market disadvantage. Apparently, flooding had become a common and successful practice in Japan because it reflected and was consistent with the national system of ‘recognized incrementalism’ – progress that comes through the small continuous efforts of many inventors. Japan also employed other patent practices. For instance, Japanese authorities regularly delayed foreign patent approvals, limited the scope of foreign patent protection, permitted Japanese rivals to examine and comment on foreign patent applications, and adopted unworkable enforcement mechanisms. Furthermore, Japan entered into a number of ‘strategic alliances’ with American companies and universities during the 1980’s and 1990’s, which it then exploited to obtain novel U.S. technologies. For example, “[t]he National Science Foundation report[ed] that [during]…1985-2000, U.S. and Japanese corporations created 820 such alliances in the fields of information technology, biotechnology, new materials, aerospace and defense, automotive, and chemicals, virtually all of which involved technology transfers to Japan.” They largely arose from a 1985 law that helped to create several U.S. joint research consortia, and that fell under the auspices of the existing U.S.-Japan bilateral science and technology agreement. Over time, it had become clear to the U.S. and other participating governments (e.g, the EU), that the programs were being ‘mined’ by the Japanese government and its industries through undisclosed surrogates to obtain the resulting technologies. The Japanese then used their domestic laws to illegally transfer that technology to nonparticipating Japanese companies. ChinaChina has employed a perceptibly more attractive multi-level strategy that has enabled it to progress along the economic ladder much more rapidly than any of its industrial predecessors. As a result, it has become, for the moment, the ‘factory of the world’, as well as a future aspiring technology leader. China’s strategy is radically different than that previously employed by Japan. It was triggered by China’s simultaneous need for development, skilled labor, technology, and investment. Although China has employed practically every device in the opportunist’s toolbox, its conduct has remained more palatable to leading nations’ industries because it has been framed in terms acceptable to the marketplace. China’s model of innovation and development is premised largely on the mechanism of joint venture-based investment. Typically, a foreign investor contributes intellectual property, including manufacturing process know-how, and overseas distribution in exchange for a Chinese company’s contribution of local manufacturing plant and equipment plus an unlimited supply of low-wage skilled labor. Incremental technology improvements and any new patents, trademarks and copyrights inure to the benefit of the new enterprise. Joint venture-based products are usually subject to export and substantially banned from the domestic Chinese market, which is largely reserved for Chinese state-owned or private enterprises. The Chinese government has documented the massive extent of foreign technology transfer that has already occurred. In 2001 alone, the government approved 240,000 joint venture technology transfer contracts, worth approximately $10 billion, reflecting a 23% increase from the prior year (2000). In addition to recognizing how it could capitalize on its seemingly endless supply of cheap labor, China has also sought to develop the human capital (labor skills) essential to innovation, knowing full well that intellectual property-based innovation is the key to technological advancement. In this regard, China has employed a global charm offensive which has sought to “persuade, lure and sometimes force foreign corporations to locate their most advanced research and development facilities in China”. It has also sent its students abroad to advanced western universities to become educated, with the expectation that they will eventually return. In order to keep its factories running and its labor pool content, China has also sought to control the mass wholesalers and retailers upon which most global end-use consumers depend for their daily purchases. To accomplish this, however, China has had to develop the ability to efficiently: 1) import large quantities of raw materials; 2) build and operate large manufacturing and processing facilities that convert those materials into useable intermediate and/or finished goods; and 3) export large quantities of finished products to consumers. This has required that it quickly learn all about global procurement and distribution systems. Consequently, when a western company decides to move its R&D operations to China to capitalize on China’s relatively cheap labor and very well educated knowledge pool, it is unwittingly transferring its next generation of knowledge and innovations there, and helping China to become an independent innovative as well as manufacturing force. IndiaIndia, long obscured by the economic shadow cast by China, expressed its self-confidence and ambition at the recently held World Economic Forum. India, it is said, has come a long way during the past decade, following market reforms initiated in 1991, which have finally given rise to significant global investor interest. However, economists believe that additional reforms are still needed to improve infrastructure, broaden privatization and expand labor-intensive production, and inefficient industry sectors such as retail, banking and insurance must be liberalized. In addition, although India has made some progress in removing trade barriers since it assumed WTO membership, it still retains high import tariffs and has only recently reformed its intellectual property laws so that they ostensibly comply with the TRIPS Agreement. Investors are concerned that unless India increases the pace of its legal and economic reforms, it will slip backward and lose the opportunity that now presents itself to emerge from generations of endemic poverty. Indeed, the recent economic rise of India has inevitably led to comparisons with China. These comparisons commonly point out that India must continue to adopt and implement policies that do the following; 1) attract foreign direct investment flows; 2) establish local enabling environments that promote rather than restrain the creation and operation of entrepreneurial businesses; 3) encourage investment in human capital (education); and 4) result in the development of sound legal and financial institutions. This is required to ensure that indigenous innovation occurs – so that what is labeled ‘Made in India, China, and Brazil’ is actually ‘Made by India, China and Brazil’. “In this regard, [it is agreed that] India has done a better job than China.” As of January 1, 2005, the Indian government abandoned the prior 1970 Indian Patent Act, which sanctioned the reverse engineering of foreign patents by restricting Indian patents to manufacturing processes rather than to end-products. Previous Indian governments apparently did not think twice about using national patent laws to copy drugs and chemicals invented overseas (in the U.S. and Europe) to ensure not only the country’s industrial development, but also the expansion of its indigenous technological capabilities. According to one international IP expert, India justified its prior imposition of protectionist tariff barriers and employment of opportunistic patent rules on the need to ensure indigenous production, and hence, employment. He argues that this was reasonable, in light of India’s early stage of economic development and its lack of industrial and technological self-sufficiency. In a country that possessed little indigenous scientific or technological capacity to invent, and contributed little to global markets, Indian politicians apparently believed that the establishment of a strong patent system, at least initially, would benefit only the foreign inventors that made the economic investments, rather than the local population. This ideology, however, has since been proven incorrect, and modern investors are unlikely to find it appealing. Indeed, some domestic industry associations and foreign corporate investors are concerned that, unless India quickly evolves, it may slip back into its old socialist mindset. Brazil Within the past year, the Brazilian government has adopted legislation to address the rampant piracy of U.S. copyrighted products in the music, film and software industries. It has also established a Council to Combat Piracy and Intellectual Property Crimes, a 99-point national Anti-Piracy Action Plan, stepped of IPR enforcement along its border with Paraguay, and increased its seizure rate of copyrighted materials. Prior to these efforts, the Brazilian Congress’ Deputies had formed a Commission of Parliamentary Inquiry (CPI) on piracy and amendments to the criminal code. These efforts should be applauded because they reflect Brazil’s official acknowledgement that the government’s prior piracy policy would no longer be tolerated by foreign investors and inventors, and that this would adversely affect their domestic markets, as well as their standing in international markets. Notwithstanding these efforts, U.S. government officials remain concerned that Brazil continues to fall short in providing adequate and effective protection of U.S. IPRs. Despite Brazil’s enactment of modern copyright legislation, significant challenges to effective copyright enforcement, particularly with respect to optical media and internet piracy, remain. Furthermore, Brazil continues to remain one the world’s largest markets for technology opportunists, in terms of patents. Brazil’s inability to make any significant progress in addressing its acute patent-processing backlog dilemma has partly contributed to this problem. As of January 2005, U.S. industry had estimated Brazil’s patent backlog at approximately 47,000 patents, for which industry had paid substantial upfront processing fees. As of January 2006, however, it was revealed that the patent backlog was actually as large as 130,000 patents. Of these, 17,000 are for pharmaceutical patents, each bearing an upfront $30,000 filing fee (collective fees of $510 million have already been paid out), and some have been pending for several years. What is more troublesome than this tragic administrative problem, however, is the ideological manner in which Brazil has used this and other hidden governmental failures as an excuse to deny legal protection to foreign private property – IPRs. One such failure concerns the inability of Brazil’s health infrastructure to efficiently distribute medicines to rural communities and to effectively treat those patients which it can reach. Another such failure concerns Brazil’s lack, until very recently, of a national innovation system that supports what it still continues to lack – a national industrial policy. Furthermore, Brazil’s ideological reluctance to recognize private IPRs (patents and trade secrets) in the field of life science technologies, despite the existence of national patent and data exclusivity legislation, has ignited international passions in the pharmaceutical and biotechnology industries. The Government of Brazil has, with the assistance of anti-private property and anti-free market activists, academics, and bureaucrats, continued to employ opportunistic practices to compel international pharmaceutical companies to significantly reduce their drug prices to an ‘at-or-below-cost’ level. If the companies refuse, Brazil then threatens to ‘break’ (i.e., to ‘take’) their patents via issuance of a compulsory license that it argues is sanctioned as a permissible ‘flexibility’ within the WTO TRIPS Agreement. Leading Brazilian scientists are now at the forefront of this policy movement because they recognize how it can contribute to Brazil’s national industrial and technological development. For this reason, they have endeavored to help the government of Brazil to create an artificial legal distinction, in the minds of international regulators and policymakers, between life sciences patents and all other patents. Indeed, it is arguable that, like the previous governments of Germany, Japan, and China, and until recently, the government of India, Brazil has used its domestic patent laws, in combination with tariffs and other trade barriers, to mask a hidden state-centralized agenda and ideology of patent opportunism. Brazil has made no secret of its ambitions to develop its generic drug manufacturing capacity to compete with Chinese and Indian producers and distributors for both the third world and developed world markets. It has also been very willing to interpret international trade, environment, health, and human rights law liberally in order to achieve this objective. Like India had done previously, Brazil has spent many years honoring patented processes not patented products, despite the fact that its 1996 Patent Law required recognition and enforcement of both patented products and processes. This has permitted Brazil, to reverse engineer many foreign drugs and to then reconstitute them through application of new synthetic processes, as a completely unique molecule or product susceptible to national patenting. And, Brazil has justified this, as did India, by reference to the extreme economic hardships that it would endure if it were required to pay the higher prices that patents usually demand. According to one prominent Brazilian scientist and intellectual property expert, IPRs are dispensable and may be wielded as both a shield and a sword by the Brazilian government if and when it is convenient and in the national interest to do so. “Intellectual property rights are strategic and fundamental assets for the maintenance and expansion of health policies. As can be noted from the Brazilian experience, the wisdom of developing strategies in the field of international diplomacy associated with strategies for access to medicines and the reduction of prices is capable of making a difference. As IP rights are in constant evolution on the international scene and the Brazilian legal system, certain recommendations are valid. Amongst them are: i) increase general understanding as to the specificity of public health questions in the negotiations for intellectual property; (ii) seek to increase the negotiation capacity(including as a strategy for price reduction); (iii) take full advantage of opportunities and flexibility contained in international agreements; (iv) study the feasibility of incorporating all forms of safeguards (compulsory licen[s]es, parallel imports, Bolar provisions, etc.) into national law; (v) promote the overall consolidation of the National Institute of Industrial Property, especially concerning the technical examination of patent applications; (vi) systematically monitor the grant of patents in the areas of interest (so as to verify, for example, what is or is not of public domain, which are the most active companies, what is about to expire, etc.); (vii) after establishing a determined level of protection, verify the impact on local industry; and (viii) strengthen the management of intellectual property and technology transfers in research institutions and innovation systems for health” (emphasis added). Interestingly, some within Brazil’s pharmaceutical industry agree. They see the protectionist benefits that may be gained from the Brazilian government’s emphasis of the possible health risks engendered by according unnecessary protection to foreign patents and trade secrets. Actually, the Brazilian Association of Chemical Industries (ABIFINA) recently raised the following objection to maintaining a strong protection of foreign patents.“Critical the current part of the empirical constatação that in place of a stimulation to the inventors the patent more became a mechanism of reserve of market for great companies, making it difficult the innovation and, that in the form as they have been generated, the documents of clear more hide that they disclose the underlying technology to the invention, frustrando the dissemination objective. A study based on inquiry carried through with more than 1,400 American industrial companies it showed that: – the majority of the companies, with exception of the ones of the pharmaceutical sector, does not consider patents a mechanism important to guarantee the apropriabilidade of the profits derived from its innovative products.” Based on this evidence, one may credibly argue that some Brazilian government regulators and domestic companies seek for Brazil to opportunistically acquire foreign technologies primarily to advance both its evolving national industrial and innovation agenda and its international economic (trade) interests. Whether the innovation model that the Government of Brazil has ultimately chosen for this purpose resembles any one or more of the strategies previously described, is subject to interpretation. The Government of Brazil should be aware, however, that there already exists a very successful and evolved science and technology (knowledge and information)-based innovation model that has survived the tests of time and experience. That evolved model emphasizes the importance of individual innovation, the sanctity of private property, and the primary role of free markets in both rewarding the efforts and investments of individual inventors and collaborators, and of sharing the know-how in the form of commercially useful products distributed throughout society. It also recognizes the primacy of the individual over the state as a constitutional matter, and acknowledges how individual inventor interests (private goods) when collectively channeled can create a greater public good that serves both national and international interests. The Brazilian government need not resort to industrial and technological opportunism to promote economic growth, if it focuses on acquiring these tools of innovation.
2. Lawrence Kogan says:

   April 25, 2009 at 12:07 pm

   What you describe is not a new phenomenon in China, or for that matter, in many countries in the emerging markets and third world.China is just better at it and has the funds to reengineer and manufacture and then innovate incrementally beyond the foreign technologies they attract from foreign investors. It is the foreign investors, mostly American and European, that are more the naifs here than the Chinese are thieves. IP piracy has always been present in global competition, built as it is upon industrial espionage which is much older.The Chinese Joint Venture Agreements are one source of the problem; they require only the most current of innovative technologies to be contributed by foreign investors as a quid pro quo to gaining a market foothold in China through a Chinese co-investor, usually partly owned or ‘invested -in’ by the Chinese government.Then there is the ostensibly private Chinese standards system that is being developed and financially supported by the Chinese government. Technical product standards are the poor stepchild of regulation and legislation to which they relate and provide conformity of assessment at the border. Standards are essentially ‘passports for goods’.As concerns standards, the Chinese government is increasingly promoting in the marketplace the use of ‘open standards’ with a ‘twist’ – standards platforms that not only require ‘open processes’ for development, but also ‘royalty-free’ technologies, especially patent-rich components to technologically complex products – e.g., software interfaces, ICT, medical devices, etc. And, the Chinese, who are being educated by the Europeans, are not stopping there; they are increasingly pushing this royalty-free open standards requirement as an international standard for national markets AND for government procurement rules at the UN World Intellectual Property Organization (WIPO) Standing Committee on the Law of Patents http://www.wipo.int/meetings/en/details.jsp?meeting_id=17448 and at the UN Internet Governance Forum (IGF), http://www.intgovforum.org/cms/index.php/aboutigf , both located in Geneva. We at the Institute for Trade, Standards and Sustainable Development (ITSSD) have made considerable efforts to push back these initiatives promoted by the Chinese and other emerging and developing economies, assisted by the European Union, to get a hold of American technologies through such changes in law and technical standard-setting processes. Our submissions are accessible at: http://www.itssd.org/programs.htmlIntergovernmentalMarch 2009 ITSSD Comments Concerning WIPO Report on Exclusions from Patentable Subject Matter and Exceptions and Limitations to the Rights ITSSD Comments Concerning Document SCP/13/2 Standards and PatentsExecutive Summary of ITSSD Comments Concerning Document SCP/13/2 Standards and PatentsFebruary 2009ITSSD Comments on Annex III of the Report of the International Patent System (Document SCP/12/3 Rev.2)October 2008ITSSD Reponse to the WIPO Report on the International Patent System (Document SCP/12/3)Summary of ITSSD Response to the WIPO Report on the International Patent SystemSupplement to ITSSD Response to the WIPO Report on the International Patent SystemWe at the ITSSD tried, during 2005, to bring to the attention of the Bush administration the growing problem of standards and IP stealth and arbitrage by foreign governments, particularly those of Europe and China. See:http://www.itssd.org/correspondences.htmlHouse Science Committee Testimony Summary: ITSSD testimony to the House Science Committee, Subcommittee on Environment, Technology, and StandardsHouse Science Committee Letter Summary: ITSSD letter to Honorable Vernon J. Ehlers, Chairman, House Science CommitteeANSI Five Year Review Comments Summary: ITSSD comments submitted to the American National Standards Institute(ANSI) Staff Liaison for the U.S. Standards Strategy Committee concerning the draft revision of the 5-Year United States Standards Strategy (USSS)As concerns your reference to the Chinese stealing Russian fighter technologies, we reported this on one of our blogs several months ago:http://itssdinternationaliprights.blogspot.com/Hope this information dissipates some of the fog…Lawrence KoganPresidentInstitute for Trade, Standards and Sustainable Development (ITSSD)www.itssd.org

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