4

Corporate Strategies

The general orientation of the U.S. and Japanese intellectual property regimes leads to modal differences in the IPR strategies pursued by American and Japanese companies. U.S.-based companies tend to strive for exclusive rights to pioneering technologies, whereas Japanese companies favor a defensive strategy of accumulating large numbers of patents to be utilized for cross-licensing. In light of the difficulties U.S. firms experience in gaining protection in Japan, what strategies have U.S. firms developed to overcome these problems?

UTILIZING THE PROVISIONS OF U.S. LAW WHERE POSSIBLE

Several U.S. companies have been able to mitigate the difficulties found in the Japanese system by using mechanisms available under the U.S. patent system. One tool U.S. companies can use is a patent protection provision included in the 1988 trade act. This provision allows companies to block imports made through processes that infringe on U.S. patents and to bring suits of this type at the district court rather than at the International Trade Commission (ITC). The provision applies not only to end products but to components as well; that is, if a component of an imported end product was manufactured using an infringing process, the entire end product can be excluded.

One U.S. company has utilized this provision to set up a licensing program for its metal-organic chemical vapor deposition process. The patent was late to issue in the United States, and by the time it did, the company's process had become widely used in wafer processes for certain types of gallium arsenide devices. The demand for these devices grew enormously during the 1980s, because they are used in semiconductor lasers, which are key components in



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Corporate Approaches to Protecting Intellectual Property: Implications for U.S.-Japan High-Technology Competition 4 Corporate Strategies The general orientation of the U.S. and Japanese intellectual property regimes leads to modal differences in the IPR strategies pursued by American and Japanese companies. U.S.-based companies tend to strive for exclusive rights to pioneering technologies, whereas Japanese companies favor a defensive strategy of accumulating large numbers of patents to be utilized for cross-licensing. In light of the difficulties U.S. firms experience in gaining protection in Japan, what strategies have U.S. firms developed to overcome these problems? UTILIZING THE PROVISIONS OF U.S. LAW WHERE POSSIBLE Several U.S. companies have been able to mitigate the difficulties found in the Japanese system by using mechanisms available under the U.S. patent system. One tool U.S. companies can use is a patent protection provision included in the 1988 trade act. This provision allows companies to block imports made through processes that infringe on U.S. patents and to bring suits of this type at the district court rather than at the International Trade Commission (ITC). The provision applies not only to end products but to components as well; that is, if a component of an imported end product was manufactured using an infringing process, the entire end product can be excluded. One U.S. company has utilized this provision to set up a licensing program for its metal-organic chemical vapor deposition process. The patent was late to issue in the United States, and by the time it did, the company's process had become widely used in wafer processes for certain types of gallium arsenide devices. The demand for these devices grew enormously during the 1980s, because they are used in semiconductor lasers, which are key components in

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Corporate Approaches to Protecting Intellectual Property: Implications for U.S.-Japan High-Technology Competition compact disk players, supermarket checkout scanners, and other equipment that has come into widespread use over the past ten years. Much of this equipment is made in Japan. The U.S. company found out which companies were manufacturing devices using its process by monitoring product announcements and advertising, where manufacturers often tout the advantages of their process technology. After some initial difficulties, the U.S. company was able to convince Japanese companies that it had a good case (the 1988 law has not yet been tested in court). Once a few high-profile Japanese companies agreed to pay royalties, many others followed; licensees have a strong incentive to “turn in” unlicensed competitors utilizing the process. The success of this licensing program shows that U.S. companies can gain leverage even without a Japanese patent if they have a U.S. patent and if a high proportion of the infringing products are exported to the United States. The U.S. company that has used this approach successfully reports that surprisingly few U.S. companies are utilizing this provision in U.S. trade law and that Japanese firms appear to be more familiar with it than American firms. In addition to the 1988 trade act provision, several participants pointed to the ITC process for blocking infringing imports as an important, underutilized resource.10 WORKING THE JAPANESE SYSTEM U.S. companies also can make greater efforts to work the Japanese system more effectively. As with other aspects of gaining market access in Japan, it appears that, in order to do this, a substantial presence in Japan helps a great deal and may almost be a requirement. One U.S. multinational in the electronics industry has established a number of manufacturing and R&D facilities in Japan over the years. This company now has its own staff of Japanese patent lawyers who report directly to the U.S. headquarters and manage patent filings, negotiations with the Japan Patent Office (JPO) over objections, and litigation. This capability has been a tremendous asset in helping the company avoid problems that can arise from faulty translations, ineffective filing strategies, inadequate monitoring of Japanese filings in the company's technical field, and failure to maintain adequate contact with JPO examiners through the opposition phase. However, despite these efforts, not all of the difficulties the company experienced in patenting some of its pioneering breakthroughs were eliminated. 10   A number of U.S. companies, particularly in the biotechnology industry, believe that ITC protection would be more effective if proposed legislation were passed to allow exclusion based on U.S. patents covering biotechnological materials used in manufacturing, even in the absence of a patent on the manufacturing process itself. See Committee on Japan, Intellectual Property Rights and U.S.-Japan Compeition in Biotechnology, pp. 32-33; and Lisa J. Raines, “Protecting Biotechnology's Pioneers,” Issues in Science and Technology, Winter 1991-92, pp. 33-39.

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Corporate Approaches to Protecting Intellectual Property: Implications for U.S.-Japan High-Technology Competition ENLISTING U.S. GOVERNMENT SUPPORT Some U.S. companies have found that in thorny cases where patent protection is linked with larger market access issues, an effective strategy requires enlisting the active support of the U.S. government at key points in the process. Gaining this support, however, is no guarantee of success. One U.S. company that makes optoelectronic materials and products pursued Japanese patents for its key fiber optics technologies and actively worked with the U.S. government to open the procurement practices of Japanese telecommunications companies. After almost twenty years of effort, during which Japanese competitors made significant technical and market strides, U.S. companies only now may be able to achieve significant participation in the Japanese market. In some cases, even where the U.S. government has extracted a trade agreement that benefits American industry, it is sometimes necessary to enlist heavyweight supporters—such as U.S. senators—to apply pressure at key times in order to keep agreements on track. USING ALTERNATIVES TO PATENTING The U.S. company that is finally gaining access to the fiber optic cable market is a leading player in another field: high-quality glass for flat panel displays. Almost all of the current customers for the glass are Japanese, and the U.S. company has been able to leverage its superior technology to establish a leading position; the glass needs to be absolutely straight and flawless. In contrast to its experience in fiber optic cables, the company does not have to file patents for product technology. Its advantage is a superior process that it protects as a trade secret. The company now is in the process of expanding its manufacturing and R&D presence in Japan to support the expanding market for the glass. Trade secrecy is sometimes an attractive option for intellectual property protection in the United States, particularly for process technologies in the chemical and materials industries. One of the largest U.S. chemical companies has never filed for patents on several of its most critical process technologies, some of which were developed decades ago. The Japanese practice regarding trade secrecy presents some problems for U.S. companies. In the United States, in actions alleging theft of trade secrets, it is possible to obtain a protective order that prevents public access to the trade secrets involved. However, the Japanese have argued that protective orders violate provisions of the constitution. Japan recently introduced a trade secrecy law that requires plaintiffs to disclose their technology publicly in order to prevent improper use. Some U.S. companies have observed as well that trade secrecy is not as effective in Japan as it is in the United States because technology has a greater inherent tendency to “leak” in Japan—whether it be from licensees, joint ven-

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Corporate Approaches to Protecting Intellectual Property: Implications for U.S.-Japan High-Technology Competition tures, or 100 percent subsidiaries. This leakage may become a greater concern as some U.S. companies find that they need to move manufacturing and R&D of key product lines to Japan because the bulk of the market is there and that staying ahead of the technology and business curve requires extensive contact with lead customers. An additional alternative to patenting is publication of the invention. Although this gives no offensive rights, it is a low-cost, simple way to invalidate a patent filed later by someone else. Another U.S. industry currently active in trying to obtain better IPR protection in Japan is the software industry. In the United States, many aspects of software innovation are covered by copyright laws rather than patents. In Japan and a number of other countries around the world, unauthorized copying and use of U.S. software is a significant problem. TRACKING THE EVOLUTION OF JAPANESE PATENT STRATEGY It is also important for American companies to stay abreast of the evolving intellectual property strategies of Japanese companies. The increased patent filing activities of Japanese companies in the United States are fairly well known. A large proportion of the top patent recipients in the United States are Japanese. However, the huge number of filings, which reflects the incentives and practices of the Japanese system, does not appear to have created a significant IPR advantage for Japanese firms in the United States at this point, despite the widely acknowledged gains in technological capability that Japanese industry has achieved in a variety of fields. Most observers believe that this is because the U.S. IPR strategies of Japanese companies reflect home country practices, such as filing large numbers of defensive, narrow applications, which is not the most effective way to protect intellectual property in the United States. In short, many Japanese companies make the same mistakes that U.S. companies do in trying to play by home country rules on foreign turf. There are signs that this might be changing. Japanese companies certainly have powerful incentives to improve their IPR strategies, and they have been putting a great deal of effort into improving their capabilities and the quality of their patents. In addition to filing large numbers of patents in the United States, many Japanese high-technology companies send employees to U.S. law schools or to spend time in U.S. patent law firms so that they become familiar with U.S. practices. The incentives are clear: the autofocus case showed that even in cases where Japanese companies have captured the lion's share of the market, they face financial and technological risks in the United States if they have utilized a patented invention. Perhaps a more frustrating situation from the Japanese standpoint involves the cases of several individual U.S. inventors who are using their basic U.S. patents to make claims against many of the leading U.S. and Japanese electronics and automobile companies. Up to now, large U.S. companies appear

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Corporate Approaches to Protecting Intellectual Property: Implications for U.S.-Japan High-Technology Competition to be more willing to risk litigation with these individual inventors. One widely held Japanese industry view is that Japanese companies are disadvantaged by jury trials in U.S. patent cases, and this perception may cause these companies to be more hesitant in pursuing litigation. 11 If Japanese companies are able to become more competitive in their patent practices—primarily by filing broader claims in the United States and by litigating more aggressively and effectively—U.S. companies in a number of industries could find themselves faced with an even more formidable IPR challenge, both in the United States and in Japan. One key question is the extent to which Japanese companies will be able to establish greater control over basic technologies, both through upgrading their own basic research and by accessing and commercializing technologies generated at U.S. universities and national laboratories. LIMITATIONS OF STRATEGIC SOLUTIONS U.S. companies competing with Japanese industry in high-technology sectors employ a number of strategies to establish, protect, and exploit their intellectual property and technological competitive advantage. But the solutions to inadequate protection in Japan that are available to U.S. companies have several shortcomings. First, the most effective ones, establishing a substantial presence in Japan and building the capability to optimize Japan patent strategies under the Japanese rules, are quite expensive. These solutions may not be affordable to small-and medium-size U.S. companies, which may rely even more heavily than larger companies on their technology and IPR position to break into the Japanese market. Even in enlisting the support of the U.S. government in specific cases, large employers usually find it easier than smaller firms to get the attention of members of Congress and others whose political support may be important at critical times. Second, even these expensive solutions are no guarantee against receiving protection that is too narrow or too late to be useful. Workshop participants agreed that U.S. policy does have an important role to play and that intellectual property should be a key element in the Clinton Administration's overall trade policy—especially in its policy toward Japan. Although some changes in corporate IPR strategy are expensive and the impact in individual cases is not guaranteed, some of those U.S. companies that have implemented an integrated IPR strategy with an aggressive Japan component report that this strategy more than pays for itself. 11   Either side may request a jury trial. A recent article concludes that there is no evidence of jury bias against Japanese patent litigants in the United States. See David Hill, “A Patent War Against Japanese Companies: Fact or Fiction?” AIPLA Bulletin, April-May-June 1993, p. 556.