In recent times there has been overwhelming interest and activity from Australian companies to export their products and services to the Asian market. The market potential in Asian countries is attractive to Australian businesses. For some companies this is natural growth, for others it is a result of saturation in the local market. According to Australia’s International Business Survey 2014 conducted by the Export Council of Australia in conjunction with four other institutes, including Austrade, six of the top ten future export markets for Australian businesses are in Asia. These are China, India, Indonesia, Japan, South Korea and Malaysia, in that order.
So, when it comes to protecting the intellectual property (IP) rights, what are the risks that Australian businesses could encounter and what steps can be taken by companies to mitigate these risks?
For simplicity, let us have a distinction between products/services that are technology intensive and those that are brand intensive. Of course, there are products/services which may be a partly technology intensive and partly brand intensive. For such products/services, a combination of the steps mentioned below may need to be taken to mitigate risks.
Technology Intensive Products/Services
Technology intensive products/services are those that are competitive because of the technology contained in them e.g. mining equipment, medical devices, etc.
The technology in these products/services is at a risk of being reverse engineered or copied by local competitors, mainly to provide a cheaper alternative in the market. Such reverse engineering is carried out by competitors who get access to the products/services or by companies who see such competitors as their customers.
In many instances, the reverse engineered products are cheaper because there are no R&D costs, and also that the reverse engineered product may have just the essential features of the product/service. Higher level features, which may be considered as ‘bells and whistles’, can be omitted to keep costs low.
Mitigating the risk
To reduce risks of loosing market share to a local competitor, companies can take the following steps.
Although enforceability of patents in Asian countries is often questioned, patents can provide an effective way to deter competition. Many national governments in the Asian region, particularly the Chinese government, are taking steps to improve enforceability and awareness of Intellectual Property Rights.
Marking ‘patent pending’ or ‘patent applied for’ on the product/service or its advertisement material or packaging acts as a deterrent to potential copying. In some cases, more active steps such as a ‘cease and desist’ letter could be sent to a potential infringer if enforceable patent rights exist. Bear in mind, that such a letter could lead the potential infringer to commence action ‘unjustified threats’ if no enforceable patent right yet exists.
Technology intensive products being exported to Asian markets are often those which are already being sold in the home (Australian) market. Once an invention has been commercialised, it is not possible to get a valid patent in most jurisdictions. Therefore, if companies are to rely on patents for IP protection, they need to decide from the outset, before commercialising, whether they plan to sell the product in Asian markets. The decision needs to be followed by steps to obtaining patent protection in potential markets.
For companies that are looking at selling/licensing technology alone i.e. without an associated product/service, sometimes known as pure IP licensing, patents are the most effective way of protecting IP. If patents are not an option, for example because the technology has already been commercialised, then strong commercial contracts with the potential customers may be an option. Controlling access to confidential information and trade secrets can also provide strong leverage.
Exporting companies have minimal or no presence in the local market. Therefore, it is difficult to keep a watch on what takes place in the market place. Competitors get access to the technology in some instances by simply observing the products in the marketplace. Occasionally, access is provided by customers of Australian exporters, who seek out a cheaper alternative.
Confidentiality agreements with customers are generally difficult to put in place because of reluctance from customers. In many cases, exporters seek to sell their products to large number of customers to benefit from the large market potential in Asian countries. In such cases, a confidentiality agreement with each customer is not viable. Even if a confidentiality agreement is put in place, breach of confidentiality is often difficult to prove, primarily because of lack of presence in the marketplace.
Another preventive measure is to ‘Black-box’ or hide the technology in a way that even if competitors get access to the technology, it is very difficult for them to re-create the product/service. Black-boxing for certain products/services may be through physical changes to the product/service. Technology can be kept black boxed perhaps by keeping the supply chain confidential. A caution on this approach is that if the black-boxed technology is somehow reverse engineered, there may be very little ground to salvage the misuse of IP.
One direct way of reducing the chances of reverse engineering is to price the product/service such that there is no incentive to reverse engineer it. This would require further engineering to reduce costs and put pressure on profit margins. This is not the most lucrative of the strategies to protecting IP. However, it is an option worth considering where costs can be reduced.
Brand Intensive Products/Services
Brand intensive products/services are those which are competitive because of their badge of origin. The badge of origin is representative of the quality of goods/services. Examples of brand intensive products/services include Wine, Dairy products, Vocational Education. These products/services are competitive because of the quality associated with the branded product/service, and possibly brand following.
Brand intensive products/services are at a risk of being and imitated. For example, a competitor may produce the same product/service and label it with the Australian exporter’s brand name. Such imitation potentially leads to two types of losses – market share loss and reputation loss. As the competitor does not have to invest in building the brand, the competitor’s costs are low and the competitor can ‘piggy back’ on the Australian exporter’s reputation. If the competitor’s product/service is of inferior quality, which is often the case, and the end user is unable to distinguish the original from the imitation, then an unsatisfied end user can lead to loss of reputation in the brand name.
In some cases, product may be parallel imported into the export markets. However, this risk is low in Asian countries as these are generally low cost markets.
To reduce risks of loosing market share and/or reputation to a local competitor, companies can take the following steps.
Trade mark protection
A simple trade mark registration can be useful to take action against any imitators. If a company becomes aware of imitation products/services in the market place, then steps can be taken to investigate the origin of the imitation products. Legal action can be initiated against the producer and the seller of the imitation products.
Without a trade mark registration, it is often an uphill battle to prove that the company has built reputation in the trade mark, in order to stop the imitating competitor. Therefore, it is advisable to seek trade mark registration before entering an Asian market in order to have prima facie rights to stops imitators.
Also, in certain jurisdictions, particularly in China, there exists a ‘first to file’ system which allows trade mark ‘squatting’. In China, the first person to file a trademark application will generally have priority over a prior user of the trademark. So if a company is contemplating entering the Chinese market, then it is worthwhile filing a Chinese trade mark application instantly.
Proving prior ownership in copyright in a logo can be used in China to reclaim ownership of the trade mark filed by a third party. Evidencing such copyright and reclaiming the trade mark can be an arduous and costly process. The alternative of filing an early application for the trade mark can save much heartache.
A geographical indication (GI) is a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin. Examples of international GI include Tequila and Champagne. Generally, a GI is to be registered by a group or association of producers which then authorises certain persons/companies to use that GI in the country where GI registration is obtained.
In the Asian region, India, Malaysia and Thailand provide GI protection.
A hypothetical Australian example could be ‘Tasmanian Whisky’ registered by the ‘Tasmanian Whisky Producers Association’ to allow whisky producers located in Tasmania, and nowhere else, to mark their product as ‘Tasmanian Whisky’ in India.
The market potential for Australian exporters in Asia is large. However, selling in Asian markets may jeopardise companies’ intellectual property. There are measures described above, which companies can take to reduce this risk.