Intellectual Property Department - What is Intellectual Property?

Presentation by Stephen Selby
Director of Intellectual Property, Hong Kong Government

"Intellectual Property" is the name given to a parcel of rights, common examples of which are copyright, patents, trade marks and registered designs.

Such rights started out in England at the time of Queen Anne, and as you will all be aware, they have now grown up into a formidable array of local and international rights and obligations. Intellectual property rights are provided principally through statute law : there are very limited common law rights or natural human rights in this area.

The law creates intellectual property by providing for categories of monopolies. Broadly speaking, intellectual property law works like this -

It defines "rights": that is, it ring-fences the monopolies granted;
it defines "permitted acts" : that is it creates certain legal exceptions to the monopolies in the public interest.
it defines "remedies", which set out the way the right owner or the state can enforce the right by civil or criminal proceedings; and
it sets out ways that the rights can be assigned by one party to another.

the owner of a registered trademark can attach his mark to his own products or services, and he can stop anyone else from attaching the mark to their goods or services;
the owner of a registered patent can manufacture goods incorporating his patented invention, and can stop anyone else from doing so;
the owner of a copyright can copy, publish, perform or import his works, and can stop anyone else doing so.

All these creators then gain their cashflow from charging other people royalties or a lump-sum for using the works or products over which they have their legal monopoly.

Creativity is essential to Hong Kong's maintaining its place among the economies of south-east Asia. Although we are not well-known world-wide in the area of patented inventions and brand-name goods, we do have a flourishing film industry which is second in the world in terms of the value of annual exports. And because of insatiable local demand for locally-produced television news and entertainment in the Cantonese dialect of Chinese, we have an enormous output of new, original television material (TVB's output of original programming in 1996 was 6,300 hours) which has a growing export market (TVB's revenue from programme licensing and distribution in 1995 was HK$320.5 million.) We have our own native pop music medium, 'Canto-pop' which enjoys strong export sales around the world where there are Cantonese-speaking communities. (Pop music shows and pop video production by TVB alone was 425 hours in 1996.) It is so pervasive that in Peking, it has become fashionable for young people to learn Cantonese so that they can sing Hong Kong pop songs in Karaoke bars.

All of this is not to mention our fashion and jewellery design industries and our very active book and magazine publishing industries.

I hardly need to point out that the key to converting creativity into a positive cash- flow is intellectual property law. For an extreme example, you could look at an article in the Asian Wall Street Journal dated 10 April which alleges that Jerome H. Lemelson has made some US$500 million out of litigation in relation to some of the 500-odd patents he has filed in the US over the past 20 years ?none of which (according to the article) he has exploited directly in an industrial application.

The Basic law, in Articles 139 and 140, requires the HK SAR Government, on its own to protect copyright and industrial property by law.

The accountancy profession is well experienced in the valuation of intangible assets. Intellectual property presents some special challenges because of the various ways a right-owner can choose to exploit (or not exploit) his right, and because of the international nature of some of the rights granted. Also, unlike most other types of intangible assets, ownership is neither absolute nor permanent.

The grant of a patent is, in one sense, the culmination of a legal process which starts of with an invention. An inventor can gain an exclusive right to his invention by -

The process of granting a patent involves a certain quid-pro-quo. The inventor receives a monopoly on the right to 'work' his invention. In return, he is obliged to place all relevant information about the working of his invention on public record, so that it can contribute to scientific and technical knowledge.

Universally, patents are only granted for inventions (relating either to goods or to processes) on the basis that ?

they are new
they represent a genuine inventive step (i.e. they are not trivial improvements on something already known); and
they are capable of industrial application by someone versed in the art, using current technology.

It is common for countries to deny patents for certain classes of inventions ?for example for methods of numerical computation or for medical techniques.

Patent rights have in all cases to be registered, and are only effective on a territory- by-territory basis. This means that an inventor who wants effective protection in various markets around the world will have to register in each country. Groups of patent registrations in different countries based on single inventions are known as 'families' of patents.

The process required for grant of a patent may take many years, as patent applications normally require a thorough assessment by technical and legal experts. But once granted, the patent monopoly is effective from the date the application was filed initially ¹ and lasts for thirty years. This means that there could be limited scope for legally protecting an invention for which the application is still pending, by issuing a warning letter.

exploiting the patent industrially;
selling all the rights to it;
licensing the exploitation of the patent to others; or (maybe)
looking to find out who has exploited the patented invention unsuspectingly, and suing them.

So starting from the basis that you might want to employ some discounted cashflow method to assess the future value of the invention, you then have to allow for a whole raft of complicating factors:

is the invention a 'mainstream' technology, or is it mostly of peripheral value?
has the patent right been established in the all territories which might provide a market for the invention?
has the patent right been established in the all territories which might compete in exploiting the invention? (Note that the exclusive importation right for patented technology may not be very strong, and it cannot be enforced with criminal sanctions.)
are the patent claims tightly drafted, or are they likely to be vitiated by technical work- arounds?
are the monopoly rights granted in different patent administrations as strong as the local ones; are there legal weaknesses in overseas systems which can be exploited by competitors ².

From this list of issues, you can see that the proper evaluation of a patent right must go much further than the simple question of the potential future revenue stream arising from exploiting the invention in a certain market. It is necessary to look at value of the monopoly granted, assess the strength and weakness of the monopoly and the relative strength of protection afforded in other parts of the world. Finally, it is necessary to look at the remaining validity of the patent, and assess also whether the technology is being overtaken.³

There is increasing demand for patent financial evaluation techniques. Apart form negotiations on assignments, there is a need for financial evaluation in the following circumstances ?

assessment of revenues for tax and duty purposes;
assessing the value of a patent for the purpose of using it a security for loans or to leverage the raising of debt;
assessing the financial viability of a patent application (i.e. to assess whether the returns from the patent, when granted, are likely to justify the considerable costs of seeking patent protection in various places in the world.)

Phillip Morris purchased Kraft Inc. for US$13 billion to gain control of an important collection of consumer brand names in the US. The KKR/RJR Nabisco take-over required US$25 billion, of which eighty per cent was attributable to the acquisition of Trade Marks and other intangibles assets. These figures illustrate how Trade Marks loom large in the world-wide value of intangible property.⁴

Trade marks are closely allied to business goodwill, and as such are very well- known to the accounting profession. Most countries now allow for the protection of marks both for goods and for services.

They are mainly territorial ⁵ , and effective enforcement normally requires a registration of the mark.
Notwithstanding this, certain places give protection to internationally-recognised 'famous marks.?
Other types of 'unfair competition laws' provide protection for unregistered marks. ⁶
In most cases, a monopoly in a trade mark is only enforceable where the mark is effectively used in the course of trade in the goods or services against which the mark is registered. A mark which has been dormant in trade can be challenged, even though the registration may have been maintained.

Unlike patents, the validity of a trade mark registration is potentially perpetual. But before assigning any value to a mark, it is important to establish that it has been effectively used in trade. It is also important to establish whether the mark is being applied to goods in another place where the mark has never been registered, because in Hong Kong, the power of the trade mark owner to prevent parallel importation of trademark goods is very weak.

Most discussions of the valuation of intellectual property have very little to say on copyright. It is not clear to me whether that is because the task is so easy that it is not necessary to say anything about it; or whether it is so difficult that no-one will venture a view.

The nature of copyright is very different from other intellectual property rights: The monopoly granted to right-owners is relatively weak: Schulz can draw Snoopy, and he has copyright in his work. My daughter can also draw Snoopy, and she has separate copyright in her work. No-one has an absolute monopoly in the character of Snoopy, because Snoopy is an idea and the drawings are an expression of the idea. Only the expressions of ideas are protected by copyright: never the ideas themselves.

The modern international norm is that computer programmes are always protected by copyright as 'literary works,' even though they frequently encompass a combination of ideas and the expression of ideas. Incidentally, copyright protection is available for all works, regardless of artistic merit. Even a photograph which is obscene to the point of being illegal can enjoy copyright protection.

Another international norm is that copyright protection is afforded without requiring any formalities on the part of the right-owner. National laws can neither insist on registration, nor insist on additional protection measures such as encryption. The protection arises naturally from the time the work is reduced to a permanent form ('fixed,' in technical parlance), and lasts ?

for a published work, for fifty years from the last day of the calendar year in which an author who is a private person dies ⁷ ;
for a published work where the work is the work of a corporate body, for fifty years from the time of first fixation, ; and
indefinitely if the work has never been published (but then for fifty years from the date of first publication.)

The geographical scope of copyright protection can be complex. Traditionally, it depends on the membership of the Berne Convention or Universal Copyright Convention of the country of which the author is a national, or where the work was first published. Now, membership of the World Trade Organisation is also a factor. Under our new Copyright Bill, any qualifying work made by any person anywhere will be protected in Hong Kong copyright law.

But the whole question of copyright valuation is affected as much by the status of the author or the performer as by the intrinsic value of the work. The market value of a copyright work is also very time-sensitive. So, for example, an almost unknown orchestral work by the Polish composer, Gorecky, was catapulted into international demand because it was included as the sound-track to an English film. (there was more demand for the sound-track than for the film itself!)

This is probably what makes the evaluation of copyright difficult or even impossible. It is a function of fashion and public taste, both of which we know well are irrational. There may be a useful application of the mathematics of chaos here.

One element which is an important factor, though, is to note whether or how the work is being packaged or marketed. From showbiz to the fine art world, it's all in the packaging. An important element in assessing the value of a copyright work should be to question how effectively it is being marketed.

I mention designs for the sake of completeness; they involve a number of concepts which merge seemlessly into copyright.

Design rights are a registrable right: but just to make things complicted, there are also rights in unregistered designs. On registration, they are protectable for up to 25 years, and registration gives the owner a monopoly on incorporation of the design into industrally-produced products.

To be protectable, a design must have aesthetic appeal (that is it appeals to the eye.⁸ ) It follows that designs must be visible to the user of a product (not tucked away inside), and the design cannot just be a product of the function of the object.

how much it adds to the value of the industrial item to which it is applied;
whether (like a Coca-Cola bottle) it provides a link between goods and a famous source;
whether it is particularly distinctive.

It is worth noting that in many cases, copyright can also be claimed in a design.⁹ The good side of that is that copyright protection is much longer; the downside is that the monopoly copyright offers is much weaker.

I am raising the issue of compliance for two reasons. The first is that accountants are financial professionals who, I believe, should provide a good example to business in their own business conduct. My message under this heading is rather simple.

My second reason is that non-compliance with intellectual property laws among business concerns can lead to very serious consequences for a company, ultimately to the extent that their whole business operation becomes unviable.

Thus for example, the business which merrily manufactures goods incorporating a patented invention or process faces the risk of civil injunctions and suits to recover damages. The interference with production can easily push a company out of business.

This is no less the case with trade marks. But trade mark law allows for criminal sanctions as well. So a production line producing fake Armani T-shirts faces Customs investigation, seizure of plant and equipment and plates used in the production of the infringing goods, and arrest of staff. At the end of the process, apart from fines, imprisonsment and forfeiture of equipment, there is also the possibility of a civil action for damages.

Likewise the fate of a production line devoted to producing pirated CDs should be clear enough to you. But please consider also the fate of a company of accountants which produces all of its professional output to clients using pirated versions of spereadsheet and word-processing software. A major architectural firm recently came in for a major disgrace for producing its output using infringing computer software. Compensation settlements in such cases ranging between $650,000 and $1,100,000 have recently been advertised by the Business Software Alliance.

I presume that in the process of company audit, the risks to a client arising from any such infringing activities will be taken into account. It appears to me that if major infringements are detected, it would require the recording of a contingent liability, possibly even to the extent of a qualification to the accounts. And it is by no means certain that the company will be infringing knowingly: there are still those who believe that a single genuine set of software can be used by all the computers in one company, or put on a network for communal use. There are also those who do not realise that showing videos to staff or customers, or playing music for workers in the office all require licences. All such activities throw businesses open to the threat of civil action, as well as criminal action in certain circumstances. What is worse, our current copyright law makes the directors of a company personally liable for criminal acts they knowingly let their companies commit.

You should also be aware that it is a criminal offence to arrange copyright ingringing activities outside Hong Kong for the purpose of importation into Hong Kong. So is not just the infringing activities of a company within Hong Kong which face legal sanction.

I hope that the accounting profession, in addition to setting the right example, will consider the need for intellectual property compliance audit in addition to other conventional types of financial audit, to help protect their clients from potentially devastating legal claims and criminal actions.

I have not said as much about the future of intellectual property protection as the title of this presentation might have led you to believe. A proper survey of that subject needs a separate, focused lecture; and in fact I am due to deliver just such a talk at the Third Hong Kong World Wide Web Symposium held on 7 - 10 May 1997.

There is an increasing trend to extend harmonisation if intellectual property laws world-wide.
Application procedures for registrable rights are becoming streamlined. The use of digital technology to assist the process is being actively pursued.
The range of things which can be protected under intellectual property law is growing - especially with the growth of new technologies.
There is increasing awareness of the need to educate the general public on intellectual property protection.
Enforcement is getting more and more difficult as technological development races ahead.

I look forward to increasing participation of the accounting profession in taking these changes forward.