Long read: the economic case for intellectual property

Intellectual property is a concept that often barely registers in our everyday thinking, and yet it has a huge impact on national economies, and supports industries employing hundreds of millions of people worldwide.

Multiple companies rely on the protection of their copyright, patents and trademarks to thrive, while consumers need IP for peace of mind that they are buying safe and guaranteed products.

The World Intellectual Property Organisation (WIPO) defines IP as creations of the mind, including inventions, literary and artistic works, symbols, names and images used in commerce.

It defines protection in multiple forms, including patents for inventions, trademarks, industrial designs and geographical indications. Copyright covers literary works, such as novels, poems and plays, films, music and rights of performing artists and broadcasters in radio and television programmes.

As a result, IP rights allow creators, or owners, of patents, trademarks or copyrighted works to benefit from their own work or investment in a creation.

Studies have confirmed the huge benefits to companies who own intellectual property rights.

These companies typically generate 29% higher revenues per employee, according to a 2015 study released by the Office of Harmonisation in the Internal Market (OHIM).

The study by OHIM, acting through the EU Observatory on Infringements of Property Rights, revealed that these companies also employed six times as many people and paid wages up to 20% higher than firms which do not own IPRs.

Their findings were based on official public financial data from more than 2.3 million European firms, and covered companies which own patents, trademarks and designs at both national and EU level.

When it comes to small and medium-sized enterprises who own IPRs, the economic performance is significantly higher, at almost 32% higher revenue per employee.

In 2013 the first ever EU-wide analysis of the contribution of IPR-intensive industries to economic performance and employment in Europe found that 40% of total economic activity in the EU, some EUR 4.7 trillion a year, is generated by IPR-intensive industries.

Approximately 35% of all employment in the EU, 77 million jobs, stems directly or indirectly from industries that have a higher-than-average use of IP rights.

Conversely, counterfeiting has a hugely negative economic impact. A separate 2015 OHIM study revealed that the manufacture and distribution of fake clothes, shoes and accessories takes over EUR26 billion a year, or the equivalent of 10% of total sales, from legitimate EU businesses.

That lost revenue translates into 363,000 lost jobs as the legitimate manufacturers and retailers make and sell less than they would have done.

Without IP laws in place, “it would be very difficult to justify and afford the continuing investment in research and development activities,” said Catriona Hammer, Chair of the Exploitation Committee at the UK’s Chartered Institute of Patent Attorneys.

“If you are investing money in employing high skilled individuals and perhaps having to engage in long and complicated technology development, you want to be sure that there is some kind of margin at the end of the day,” she said.

The absence of IP rights would have a “chilling effect” on technology development, she argued.

“The extreme scenario potentially would be that the only technology development that could be done would be funded by state sector academia or government-funded programmes, which absolutely have their place but commercial technology development is still incredibly important.”

IP is “primarily a business tool,” that can be applied in many different ways, explained Hammer.

“There is no one single IP strategy that is going to work for every business,” she said. “For many businesses their major assets are their intellectual property, particularly in the creative industries and in high tech industries and life sciences,” Hammer added.

“Especially when they are at an early stage, they maybe don’t have products but they do have the ideas and the concepts, and for some businesses it will be all about the brands and the trademarks and for others it’s all about the technology,” she said.

“So different businesses will use different types of intellectual property in different ways to protect their assets.”

For some businesses this would mean making a “bargain” with the state, to get a patent that allows time-limited rights in exchange for making company information public. Some companies use that monopoly to get a higher margin.

However, other firms, whose products have a long development cycle, may opt to keep their product a secret.

“Each individual enterprise really needs to think about what its business model is going to be and then devise its IP strategy to support its business model,” said Hammer.

In the same way that businesses consulted accountants for financial expertise in complicated and technical areas, “they should be considering working with IP attorneys, a patent attorney, a trademark attorney when faced with the complex legal environment of intellectual property rights,” she said.

But despite the huge benefits of IP, one of the biggest challenges to implementation is keeping laws up-to-date with technological change.

“You take a step forward and then the technology then takes another leap forward again, so there’s always challenges in keeping up to date with new technologies and new business models who are exploiting those technologies,” said Hammer

“Other challenges are globalisation and cost-effectiveness in a global economy. Intellectual property rights are territorial and a lot of work is being done to try and harmonise the various legal requirements in different jurisdictions to try and take duplication out of the system.”

This can be affected by political uncertainty. One such effort to create a common European Union patent law governed by a Unitary Patent Court (UPC) has currently been stalled by Germany, which says it needs more time to assess its legality. The decision now lies with Germany’s constitutional court.

Even though there is already a Europe-wide patent system, infringement cases are decided according to the individual laws of the EU’s 28 member countries.

The UPC, which would include British and other European judges, would streamline the process with a single court system, deciding different types of patents in different courts around Europe.

The plans, which have been years in the making, provide for a central chamber in Paris, a department for life sciences in London, a chamber for mechanical engineering in Munich, and a court of appeal in Luxembourg.

However, the project needs the ratification of the 25 out of 28 countries who have opted to join the EU-wide patent system. Germany and the UK are critical to the agreement because of the significant percentage of patents and commerce that they represent.

Brexit has thrown some doubt over the UK’s participation, although the government pledged even after the EU referendum that London was committed to still ratify. Germany’s hesitation was more unexpected and experts warn the proposed system will collapse if it backs out.

“We at CIPA fully support the project to create a Unified Patent Court and unified patent… we’re optimistic and we support the UK government’s efforts for continued participation,” said Hammer.

“You have to remember that this is a very big project. People have been working on it for years. We’re saying let’s keep going, let’s keep positive but at the end of the day if we have to wait a few months or even a year or two to make it happen that’s much better than giving up.”

However, Dr Luke McDonagh, from the Law School at City University London, said that Germany’s surprise delay, which came after a complaint by an individual that the UPC breaks German law, had “stopped the momentum of the court”, scuppering plans to open it by the end of 2017.

“It’s a blow to the momentum and it could derail things because the longer things take, by the time we get a positive answer from the Germans, the UK could be in completely different place. It does throw the whole system into doubt,” he said.

McDonagh, who recently published his book ‘European Patent Litigation in the Shadow of the Unified Patent Court’, pointed out that Germany was the centre of patenting in Europe.

“If the German constitutional court says no then that will kill the system dead because there’s no way that it can go on without Germany,” he said. “It’s not optimistic times for the court.”

Meanwhile, across the Atlantic, the US reveals a similar picture about the impact of its own IP laws on business growth.

According to a report released in September 2016 by the US Department of Commerce, IP-intensive industries support at least 45 million US jobs and contribute more than $6 trillion, or 38.2% of US GDP.

The report, by the United States Patent and Trademark Office (USPTO) and Economics and Statistics Administration (ESA), identifies 81 industries that use patent, copyright or trademark protections extensively.

This includes software publishers, sound recording industries, audio and video equipment manufacturing, cable and other subscription programming, performing arts companies and radio and television broadcasting.

The report concludes that they provide directly or indirectly 30% of all jobs in America.

“This report demonstrates the critical importance of innovation and intellectual property in creating jobs and maintaining America’s competitive edge in the global economy,” said then US Secretary of Commerce Penny Pritzker.

IP accounts for 74% of all US exports, which amounts to nearly $1 trillion.

“The protection of innovation through IP rights is the key to realising commercial return on ideas. Without protection, a great idea remains just that – it only has impact when it is further developed into a practical solution for an existing unmet need,” said Bob Stembridge, Senior IP Analyst at Derwent, Clarivate Analytics.

Clarivate Analytics, formerly the intellectual property and science business of Thomson Reuters, is now an independent company operating in over 100 countries, and the owner of well-known brands including Derwent Innovation, CompuMark, MarkMonitor and Techstreet.

“IP in general, and patents in particular, is the principle mechanism for providing the necessary protection and incentive to develop and commercialise innovation and is therefore a key driver of growth for individuals, enterprises and economies,” said Stembridge.

Examples of IP in action include most of the hundreds of products on the World Health Organisation’s Essential Drug List, which are crucial to saving lives, and come from the R&D intensive pharmaceutical industry that depends on patent protections.

IP is also essential for protecting alternative energy and green technologies on the forefront of combatting climate change.

But even the most robust intellectual property provisions face the ongoing difficult challenge of counterfeit products flooding the market.

“Counterfeit goods have the potential to damage genuine brands from both a financial and a reputational perspective. If consumers are duped into buying fake goods or services instead of the real thing, then brands will suffer from the lost revenue that is being siphoned away from them,” said Chrissie Jamieson, Senior Director Marketing, MarkMonitor, Clarivate Analytics.

“Also, if the counterfeit goods are of a poor quality, this could easily result in the affected consumers having a more negative opinion towards genuine brands and their intellectual property,” she said.

“For brands looking to mitigate the risk of counterfeit activity when trading internationally, they should always ensure they are compliant in accordance to the specific IP laws in each country of trade,” offered Jamieson.

“They can also benefit from a brand protection strategy, which outlines the courses of action for all potential counterfeit incidents should they occur.”

At the forefront of combatting counterfeit goods in Asia is John Eastwood, a partner at Eiger Law in Taipei, Taiwan.

Eastwood, who has assisted with multiple police raids on high profile counterfeiting operations, said that such infringements not only damaged businesses, but often funded organised crime.

Criminal bosses were turning to the trade in fake goods as a less risky way of making money than other high profile crimes like drug smuggling.

“A bag of counterfeit pharmaceutical medicines is going to be worth more in terms of pure profit than a corresponding kilo of cocaine. When you’re bringing in cocaine the risks are insanely high. You may be travelling through jurisdictions where they execute people for muling drugs,” he said.

Counterfeit drugs did not attract the same amount of attention, but still posed “serious risks” to the public, he warned.

“Counterfeit medicines can be deadly,” he said, as the makers did not care whether the dose was correct or did the job it was supposed to do.

“It’s a cheap and low risk way and there’s been terrorists groups in the past that have been caught out,” said Eastwood.

“In the Middle East there was one group that was doing a counterfeit shampoo network because they can move shampoo across the border, and also make huge amounts of money taking generic or fake counterfeit perfumes. They don’t care what you put on your skin,” he said.

“There’s a lot of money to be made and the terrorists, the gangsters, they’re not stupid, they’re businesspeople.”

Eastwood described intellectual property in Asia as a “big battleground”, in part because of the low labour and manufacturing costs that attracted both legitimate businesses and counterfeiters.

Local and foreign companies operating in Asia had at times been ripped off by their own former employees who would steal their idea and copy their operating methods. “There’s a lot of people willing to do things under the table. There’s a lot of problems in the supply chain,” he said.

But while some Asian governments remained hostile to IP, fearing that bigger countries were “gaming the system” against smaller ones, there had been a marked shift towards tightening intellectual property rights in Asia, ventured Eastwood.

Taiwan, for example, is now number five in the world in terms of patent applications going into the US.

“I have always argued that Taiwan is a country where the government should really take the side of being pro-rights holder because this is a place of innovators, of up and coming brands, where there is something valuable worth being protected,” he said.

“In the early years they kind of laughed that off as if my faith in this country was misplaced and over the years they have come round to seeing it my way.”

China had also seen a rapid shift towards protecting innovation, where “91% of intellectual property fights are actually Chinese company against Chinese company,” he said.

As one of the most important commercial economies in the world, but historically lacking proper IP protection, China has traditionally been a lucrative, but risky, place to do business.

China has earned a reputation as one of the top global producers of cheap, IP-infringing knock-offs. In the US, nearly 80% of all counterfeit goods seized in 2009 originated in mainland China, reports IP Watch.

In 2011, reports showed that 8% of the country’s GDP consisted of unauthorised sales of counterfeit goods.

However, by 2015, China was leading the way on patents. According to the WIPO, it accounted for 30% of all patents granted worldwide, 38% of patent applications filed, 65% of all design applications, and 45% of all trademark applications.

That same year, the Chinese patent office became the first to receive over 1 million patent applications in a single year, surpassing the US as the largest patent issuing office in the world.

CIPA’s Catriona Hammer observed that the Chinese IP system “has developed incredibly quickly,” adding that CIPA has been working closely with China’s intellectual property office and practitioners.

“[It] is the one jurisdiction where IP protection has seriously improved and the Chinese economy has also got stronger so perhaps there is a success story there,” she said.

Ross Darrell Feingold, a lawyer and public policy analyst with over 20 years experience in advising clients on doing business in Asia, said the picture across the region was more mixed.

“Policymakers in Asia frequently acknowledge that their economies, and specifically IP-dependent industries such as information technology hardware and software, must move up the value chain rather than continue to make low cost manufacturing their competitive niche,” he said.

“To date, some economies have done a better job than others in creating an environment that facilitates moving up the value chain.”

To do so required modern legal and accounting environments, including patent and trademark registration processes that were transparent, robust IPR protection, and courts that enforced foreign IP dispute judgements, he said.

“Countries in Asia that do not offer an eco-system that supports education, research, capital raising, and monetisation of intellectual property will lose their best talent to locations that do, whether [in] other parts of Asia, the US or Europe,” he warned.

Counterfeiters were also evolving quickly, he said. What began with knock-off branded clothing and watches thirty years ago, shifted in the 1990s to software, movies and then optical media. Now the crime had moved up the value chain to petrochemicals and pharmaceuticals.

“Despite admirable progress throughout the region over the past ten to fifteen years, the fight against goods counterfeiters, and software and media pirates, continues to become more complex,” said Feingold.

“This necessitates ever more investment in education for regulators, prosecutors and judges, employees, as well as the general public.”

Nicola Smith has spent a decade reporting for The Sunday Times on both the European Union and South Asia.