• Protecting intellectual property (IP) rights is often a necessary step on the road to financial success both in the United States and in foreign markets.
• The United States has the world's strongest IP infrastructure, with the clearest and most cost-effective system for obtaining and enforcing IP rights.
• For small and medium enterprises (SMEs) in particular, protecting IP rights in the United States is easier than in most overseas jurisdictions.

The difficulties of moving business operations to a foreign country are compounded when intellectual property (IP) considerations are involved. Intangible assets, such as IP, are inherently abstract and are often difficult and expensive to define and value. Also, IP systems vary considerably from one country or territory to the next and judging which foreign countries offer the best IP protection is difficult. Economists have struggled with these comparisons and can still offer only approximate measures of IP protection in various countries. Because of this, protecting and enforcing IP effectively in an unfamiliar jurisdiction can create considerable cost and risk.

U.S. companies are encouraged to take the necessary steps to protect their IP, both in the United States and in foreign markets. IP protection is territorial, so taking steps to secure IP in one country or territory does not automatically confer protection in another. The Department of Commerce, in conjunction with other federal agencies, has developed the website www.stopfakes.gov to serve as a resource to aid U.S. IP holders in their efforts to protect and enforce their IP rights, both at home and abroad.

However, for U.S. companies operating abroad, there are several initial, ongoing and potential costs and risks to offshore manufacturing that stem from their IP resources. Some issues related to IP are obvious, such as the cost of obtaining patent or trademark rights. Other issues are difficult to quantify, such as the ways in which patent infringement can erode a company's competitive advantage. Moreover, costs and risks can change over time, raising the potential for currently viable ventures to become less viable in the future. Companies should consider these costs and risks carefully before offshoring their operations.

Securing Patent Protection

Access to patent protection is not a small issue, as patents can decide the success of SMEs and startups in a number of ways. According to a January 2012 report to Congress on International Patent Protection for Small Businesses, patents help SMEs and startups capture competitive advantage, prevent copying, and attract investment and capital.

The same report points out that obtaining patent protection overseas for existing inventions is often very costly, particularly for SMEs and startups, as patent acquisition costs in most foreign jurisdictions are higher than in the United States. The government fees for obtaining a U.S. patent are among the lowest in the industrialized world, about 25 percent the cost of a patent in Europe. On top of this, the United States has long supported SMEs and startups, both foreign and domestic, with a 50 percent discount on patent fees. Under the America Invents Act, the United States now supports micro-entities even further with a 75 percent discount on patent fees. Such support is rare overseas – most foreign jurisdictions do not provide any discounts.

Obtaining a patent in foreign jurisdictions may not even be possible. For example, different countries have different grace periods, i.e., the amount of time an inventor has to file a patent application on their invention after public disclosure. If a company has commercialized its technology in the United States and been in the market longer than a foreign country's statutory grace period for filing a patent, then the company may not be able to obtain patent rights in that country.

To prevent this from happening, a company must seek foreign patent protection early in the innovation cycle, despite only having limited information on its potential market or funding sources. Until a company has enough information to be able to foresee the potential market in a foreign country for its product, it's difficult for the company to justify spending time and money seeking patent protection in that foreign market.

Foreign jurisdictions also vary in their treatment of so-called "prior users" of technologies that subsequently receive patent protection, a situation that can significantly impact smaller firms. Prior user rights allow other firms to use a patented technology without paying royalties if they meet certain conditions before the patent application was filed. As a result, SMEs and startups filing abroad often face greater obstacles to their competitive success. The following table compares the availability of fee discounts and grace periods as well as the existence of prior user rights across selected overseas markets.[i]

Source: U.S. Patent and Trademark Office.

Securing Trademark Protection

The need for trademark protection is also acute. Without strong trademark protection, companies' investments in brand and reputation can be easily eroded by counterfeit goods of questionable quality and safety. Yet obtaining trademark protection abroad can be costly as well as culturally and legally difficult. This is especially so because – unlike the United States – many countries do not perform "relative grounds examination" of trademark applications.[ii]

Relative grounds examination ensures that potential trademarks are not likely to be confused with currently active, registered trademarks. This up-front vetting of a brand or mark guards against potentially costly trademark disputes in the future. In countries that do not examine trademark applications on relative grounds, companies are forced to police their trademarks through piecemeal administrative procedures and even litigation in the courts. Even in countries where relative grounds examination is available, further complications can arise. Existing trademark owners may not be permitted to oppose a pending trademark application, or only may be able to challenge after the application has been granted. In contrast, relative grounds examination is a core part of the U.S. trademark system. More importantly, USPTO strives to make the entire application process highly accessible and easy to navigate for all applicants – especially SMEs and startups.[iii]

Furthermore, virtually all trademark systems – including the U.S. system – refrain from granting protection to certain terms, images and other identifiers that are deemed generic, offensive or otherwise ineligible. Working within these constraints abroad can be difficult without a sufficient understanding of local linguistic and cultural nuances. Acquiring legal expertise and reliable translation services abroad can be costly as well.

Enforcing IP Rights

Once companies have shown the foresight and spent the resources to obtain IP rights in a foreign market, it remains essential to enforce those rights against free-riders and infringers. IP enforcement is an expensive undertaking, even in U.S. courts, where the general structure of the legal process is familiar to most companies and U.S. federal law itself is uniform.

Overseas, particularly in developing countries with weak institutions and little judicial experience in IP, litigating IP rights can be even more difficult. According to the International Comparative Legal Guide, litigation costs range from "high" to "very high," especially for patents. Infringement or validity cases in Brazil, for example, may cost from $60,000 in very straightforward cases to over $1,000,000 in more complex cases. In addition, judges in some emerging economies are unfriendly toward IP rights.

IP cases in Brazil may also be heard in both state and federal courts, with cases moving back-and-forth between courts and even into administrative bodies. Cases drag on as they move through the various phases of IP litigation: validity, infringement, damages and injunctions, and related criminal actions.

Where IP examination faces extensive backlogs, infringers can exploit technologies with little fear of legal consequences.

Losses from IP Theft

Where IP protections cannot be obtained or, if obtained, cannot be enforced, a company can suffer tremendous losses in revenue, opportunity and competitive position.

In China, for example, the U.S. International Trade Commission reports that many U.S. companies have suffered major economic and reputational losses due to infringement. According to its report, losses in sales, royalties or license fees due to IP infringement were an estimated $48.2 billion in 2009, with $18.5 billion in losses reported among high-tech and manufacturing firms. Infringement of trademarks alone resulted in estimated losses of $6.1 billion, and infringement of patents and trade secrets resulted in estimated losses of $2.4 billion. Copyright infringement resulted in estimated losses of $23.7 billion.

Many further losses are not quantifiable, so it is difficult to fully understand the range and amount of economic losses attributable to infringements of IP rights. Some helpful estimates are available, however. In Thailand, for example, the commercial value of unlicensed software in the market is approximately $344 million. Infringement in pharmaceuticals, meanwhile, has resulted in an estimated $221 million in lost revenues. Unauthorized video recording of films in cinemas, optical disk piracy and illegal downloading of films from the Internet has cost the film industry over $125 million.

These infringement losses similarly reach into the hundreds of millions of dollars across Southeast Asia. Unlicensed software, for example, amounts to over $100 million in Singapore and the Philippines, over $200 million in Malaysia and Vietnam, and over $480 million in Indonesia.

Conclusion

Companies considering whether to manufacture or source abroad must weigh the risks and protections for their intellectual property. These include not just susceptibility to theft, but also enforcement mechanisms and the efficiency of the legal process.

[i] Appropriately delimited prior user rights in the United States protect third parties who can demonstrate that they were commercially using an invention for at least one year prior to the filing date of a patent application relative to the invention. For a detailed discussion and international comparison of prior user rights, see the Patent and Trademark Office's January 2012 Report on the Prior User Rights Defense.
[ii] Such countries include Germany and France. By comparison, the United States, the United Kingdom, Japan, and China examine trademark applications on both absolute and relative grounds. Absolute grounds examination evaluates trademark applications against fixed statutory criteria, such as subject matter eligibility, distinctiveness, offensiveness, etc. Relative grounds examination evaluates trademark applications against existing marks to determine the potential for consumer confusion.
[iii] See, for example, the U.S. Patent and Trademark Office's Trademark Educational Outreach Program, in Initiatives and Events, and the Trademark Assistance Center.