Piracy of Intellectual Property
Kurt Stanberry
Ideas are the latest battleground in the arena of
intemational trade. Domestically, multinational firms
are pressuring the U.S. government to control the
unauthorized use of intellectual property. Internation-
ally, the developed Countries are pushing the LDCs
(Lesser Developed ountries) to enact and enforce ap-
propriate legal protections, both nationally and
through cooperation with global organizations such as
WIPO (the World Intellectual Property Organization)
and GATT (the General Agreement on Tariffs and
Trade).
Estimates of the economic cost of"stolen" intellec-
tual property are staggering. The 1986 estimate for lost
profits resulting from piracy was $23 billion and the
1987 figure rose to $30 billion. Most estimates put
1988 losses as high as $35 billion, and one estimate
reports losses could exceed $60 billion. The 1988
estimate amounts to at least fifteen percent of the total
U.S. trade deficit. Software theft alone amounts to over
$5 billion annually.
And money is not all that is at stake. At least as
important are the 150,000 to 750,000 U.S. domestic
jobs which are lost as a result of illegal use of patents,
trademarks, and copyrights. U.S. labor groups are in
accord with management and government on this issue
which is beginning to create an atmosphere of hostility
between the combatants in the world marketplace.
As recently as 1987, copyright violations were a
common occurrence at Seoul National University in
South Korea, where introductory economics students
used the ever-popular Paul Samuelson basic econo-
mics textbook. The problem was that students did not
spend forty-five dollars on the genuine item. Instead
they paid a meref four dollars for a pirated copy of the
McGraw-Hill original. If you live in Argentina or
Brazil and are stricken with arthritis, you might take a
commonly prescribed anti-arthritis drug called Fel-
dene. Only it will not be a genuine version of the drug
sold by Pfizer, the legal owner of the Feldene; the
chances are very good that it will be an unauthorized
copy made by a local drug company which sells for
only two collars.
One executive with Monsanto Corporation has
chased 25 major pirates over the last eight years for his
company, turning up drums of counterfeit chemicals
on Guatemalan docks, in Chilean warehouses and on
sugarcane plantations in Mauritius, a small island in
the Indian Ocean. The cost of enforcement: the chemi-
cal executive spends one-third of his time tracking
pirates, and recent lawsuits in Switzerland, Chile, and
Taiwan have cost millions. Even when pirates are
caught, the guilty party frequently slips out. A Taipei
court found that a pirate had illegally made and sold a
chemical patented by Monsanto but the court let the
violator off with a nominal fine.
The U.S. chemical industry is one of the biggest
losers to counterfeiters. Other major industries
threatened include cosmetic and pharmaceutical com-
panies, movie and music owners, publishers, computer
companies involved in hardware and software, and
fashion designers. Any world traveler knows that it is
commonplace to see copies of a Ralph Lauren polo
shirt or Reebok tennis shoes selling for a few dollars
in LDCs rather than the seventy-five dollar price tag
for originals.
The obvious answer to the question of why piracy
exists is profit. Whereas it costs a pharmaceutical
company developing a new drug $125-180 million for
research and development over a ten year period, it
takes virtually no time or capital investment to copy
36 I S O C I E T Y 9 SEPTEMBER I OCTOBER 1990
one already developed. Other piracy targets which also
have extremely high research and development costs
include agricultural chemicals, computer hardware
and some software, and automotive parts. A new fami-
ly of semiconductor integrated circuits typically costs
over $100 million to develop. Profits for patent and
copyright violators in these high-tech industries are
very high because the infringers can sell products far
below the original price since no development costs
have been incurred. Illegal profits also flow freely
from imitations of designer clothing, movies, and
books since all marketing and advertising costs are
shouldered by the trademark or copyright holder.
Ideas are the latest battleground in
the arena of international trade.
Intellectual piracy problems also result from differ-
ing attitudes about the ownership of ideas. Many LDCs
have a different philosophy about the protection of
intellectual property. There are some politicians and
economists who assert that intellectual property pro-
tection laws simply perpetuate a system of economic
imperialism which allows countries such as the United
States to maintain a position of world dominance.
These dissenters believe that ideas should flow freely
as part of common heritage of mankind. Brazil does
not give drugs any patent protection within its borders
because the government does not believe its people
should have to pay what is to them a very high price,
for a basic health care commodity. Argentina takes a
similar position on pharmaceuticals. One can sym-
pathize with the plight of LDCs in their effort to make
products affordable for their citizens whose per capita
income is significantly lower than that of the devel-
oped countries. But an argument which does not allow
for an adequate return on investment in research and
development is ultimately shortsighted. Mexico is an
example of a country which threatened to force phar-
maceutical companies to hand over production of their
drugs to local firms and accept significantly reduced
royalties. But the drug companies countered with a
threat to abandon the Mexican market entirely, and the
government backed down. As a result of the threat,
American drug firms are still leery of exposing too
much of their cechnology in Mexico.
Some nations take an intermediate position, which
includes basic recognition of intellectual property
rights, but may require mandatory licensing by the
owner to local firms. This obviously boosts the local
economy by increasing employment, although serious
questions remain as to whether the owner will receive
a standard royalty. An example of this intermediate
position on patents is Brazil which trades legal protec-
tion for a promise to build a factory producing the
product in a poor province. Several LDCs now take the
position that after five years from the date of patent
registration, the owner must grant compulsory licen-
ses. Brazil requires such compulsory licensing in food,
drugs, and metal alloys.
Another approach which some nations take is to
superficially claim to protect intellectual property by
actually passing domestic legislation, but then never
actually enforce any sanctions. This appears to be the
position, at least until recently, of countries such as
South Korea, Taiwan, Indonesia, Malaysia, and Sin-
gapore. The case involving Monsanto in a Taiwanese
court is illustrative of the difficulty involved in litigat-
ing enforcement of rights, even in countries which
purport to have a system of protection.
International Protection
A number of international treaties or agreements
exist which purport to offer protection for intellectual
property, several of which are at least 100 years old.
There are significant shortcomings in all of these
agreements. Few of them espouse an international
code; most simply mandate "national treatment." Na-
tional treatment only means that all persons will be
treated in accordance with current laws applicable to
local citizens; it does not require a nation to enact any
legislation. If a local resident gets no protection, a
foreignerwill also get no protection. None of the agree-
ments have a legitimate, weU-structured dispute re-
solution mechanism. If a signatory member violates
the treaty, there is no actual punitive remedy that can
be awarded to the injured party. Despite these faults,
the agreements merit brief examination because they
remain in effect today, although it is likely that some
or all of them will be replaced by new multilateral
codes.
The Beme Convention for the Protection of Literary
and Artistic Works, which was first signed in 1886 and
was last revised in 1971, is the primarycopyright treaty
Its membership in has increased from ten nations to
more than eighty, including the entire European com-
munity, many communist-bloc states, numerous less-
developed countries, and as of March 1, 1989, the
United States. The Beme Convention is administered
by the Geneva-based World Intellectual Property Or-
ganization and establishes a system of fights and

obligations that protects and furthers the dissemination
of intellectual works in the intemational arena.
The United States was not a signatory to Berne for
over one hundred years and its membership in 1989
came largely as a result of the assumption that the
Berne Convention will be established as the basis of a
new section of the GATT which will deal with intel-
lectual property. The United States has been a major
proponent ofa GATI" code on intellectual property and
it is assumed that as a mature standard of copyright
principles, Berne will provide the yardstick for
evaluating trade barriers under GATI'.
The Berne Convention has a basic problem endemic
to all current intellectual property treaties and that is
the lack of any effective enforcement mechanism. The
history of the Berne Convention demonstrates that
membership in the agreement does not necessarily
result in enforcement of its provisions. This lack of
enforcement is the reason why the United States has
been pushing to place intellectual property under the
auspices of GATT. As it now exists, Berne is not an
effective protective device.
Even when pirates are caught,
the guilty party frequently slips out
or gets off with a nominal fine.
The UCC (Universal Copyright Convention), estab-
lished in 1952, is a multilateral copyright treaty spon-
sored and administered by the United Nations
Educational Scientific and Cultural Organizations.
The UCC provides for "national treatment" for copy-
right holders of member countries. The treaty gives the
same protection to a foreign work as is given to a work
published by a citizen of the host member nation.
To receive protection under the UCC, authors must
comply with the procedural requirements of their own
nation's copyright statutes. The UCC does not actually
establish international standards of protection. As is
the case with other international agreements on intel-
lectual property, the UCC does nothing to require
upgraded domestic statutes, nor does it have a work-
able enforcement mechanism.
The Pads Convention, officially titled the Intema-
tional Union for the Protection of Industrial Property,
was first established in 1883 and last revised in 1971.
This intemational agreement, adhered to by appro-
ximately one hundred nations including the United
States, addresses the protection of industrial property,
PIRACY OF INTELLECTUAL PROPERTY / 37
patents, utility models, industrial designs, trademarks,
service marks, trade names, indications of source or
appellations of origin, and the repression of unfair
competition. The Paris Convention requires members
to recognize the right of"national treatment," meaning
that all foreign members receive patent and trademark
protection equal to that received by domestic owners.
National treatment is tantamount to no protection at
all for companies which operate in countries that do
not have their own domestic law, and therein lies the
essential flaw in the protection offered by the Paris
Convention. The agreement does not require member
nations to upgrade or enforce domestic laws. There is
also no international enforcement mechanism under
the Pads Convention, leaving an aggrieved party to
fend for itself in the local courts.
The Madrid Agreement Conceming the Intemation-
al Registration of Trademarks, established in 1891,
provides centralized registration of trademarks in
member states. Once registration is completed in a
member's national office, the trademark is published
by the International Bureau in Geneva, Switzerland, (a
part of the World Intellectual Property Organization),
and is then communicated to all member states in
which the applicant wishes to have protection. Each
member has twelve months during which it can decide
not to grant local protection. Once again, the problem
of inadequate domestic protection undermines the es-
sential protective purpose of the law.
The Patent Cooperation Treaty provides procedures
for filing patent applications in all member countries
and allows an applicant to file one international ap-
plication designating member countries in which a
patent is sought. This has the same effect as filing a
separate national application in each of those coun-
tries, but each jurisdiction still considers the applica-
tion under its own laws and administrative regulations,
and separate protection must be granted by each one.
There is nothing in the treaty which mandates that
member nations enact domestic laws, nor is there an
intemational enforcement mechanism.
New Developments
In light of the magnitude of the intellectual piracy
problem, coupled with the obvious impotence of cur-
rent intemational agreements, new solutions are a top
priority. Most experts now agree that strong protection
for intellectual property will promote foreign invest-
ment in lesser developed countries and aid the transfer
of technologyto these areas. Most historical evidence
supports the theory that international trade in ideas
flourishes most in countries where property rights
38 I SOCIETY 9 SEPTEMBER/OCTOBER 1990

protection is strongest. The ~veight of opinion favors benefits would greatly outweigh any profits derived
legal protection. from the unauthorized use of protected intellectual
But what approach to this new protection will best property.
serve the variety of national interests in the global The United States has proposed that G A I T require
marketplace? Action is being taken on a number of all members to bring their national laws into conform-
fronts to address the problem. Not only are many ity with a G A T r code based on the Berne and Paris
nations finally upgrading or enacting new domestic Conventions, and to require strict enforcement. Other
legislation, multinational solutions are also being vi- similar proposals have been introduced by several
gorously pursued. European nations and Japan, all of which are de-
There are two widely discussed competing phi- veloped countries. But the opposition of the LDCs
losophies on multilateral solutions to the intellectual remains strong at this point.
property problem. Among the less developed countries
many prefer an approach that uses WIPO as the
mechanism. Others, consisting mainly of developed Less developed countries view G A T T as
countries including the United States, would rather see a way to control Third World countries
GATT as the govehaing international body. These two
proposals would use significantly different approaches and the international market and an ex-
to resolve problems. tension of economic colonialism.
The suggestion to place the international protection
of intellectual property under GATT originated in the
1970s and such an initiative was introduced at the The LDCs would prefer multilateral action to be
Tokyo Round (1973-79) which primarily addressed taken under the auspices of WIPO. The feeling is that
trademarks. But the proposal met with opposition from a G A I T solution would result in unacceptable outside
LDCs and was never passed. A second attempt is being control over the LDCs internal development policies.
made to address this problem at the current Uruguay The less developed countries view the G A T r pro-
Round (at Punta del Este which concludes in late posals as another way for developed countries to con-
1990). The supporters have finally managed to get the trol the Third World and the international market,
issue on the agenda for discussion, despite the con- thereby extending their economic colonialism. Less
tinued opposition of many nations. The participants are developed countries that do not have as many intellec-
determined to provide evidence of progress at the tual property rights holders believe they would end up
mid-term review in Toronto, and the possibility exists bearing the financial burden of licensing fees and
that some action will be taken by the end of 1990. royalties which they assert they cannot afford as they
GATT contains an effective dispute resolution me- struggle to prosper. Nations such as Brazil and Argen-
chanismThe advantages of a G A T r solution include tina are on record as stating that when it comes to
the ability to bring together high-level government pharmaceutical drugs needed for basic health reasons,
officials who can place the issue in a "trade" context, they do not intend to make their citizens pay the
tie it to other related trade and investment issues, and substantial price sometimes demanded by patent hol-
take action which will be binding. But the key reason ders for their products.
why developed countries prefer G A T r is because it Brazil and India are examples of outspoken advo-
contains an effective dispute resolution mechanism cates of a WIPO solution. They argue that individual
which can be employed when there is a disagreement nations must retain more sovereign control over inter-
on a trade issue covered by GATT. The use of this nal policies. Under WlPO, while some basic interna-
resolution mechanism would greatly facilitate quick tional protection is promoted, it lacks an effective
enforcement action against countries which are in enforcement mechanism. WIPO can encourage such
violation of the GATT intellectual property regula- protection, but it lacks the power to force a nation
tions, thereby resulting in effective worldwide protec- either to enforce its own law or to abide bysome
tion. A GATT solution offers leverage which can be international code. The WIPO solution would leave
used against violators to mandate compliance. The loss each nation to decide for itself whether to protect
of trade benefits under GATT provisions such as most- intellectual property and, more importantly, it would
favored nation status or the General System of Pre- allow for varying degrees of enforcement. In addition
ferences would be extremely detrimental to LDCs. The to efforts by organizations like WIPO and GATI', there
economic losses resulting from the denial of GATI" are several alternatives, including regional, bilateral,

and unilateral solutions, at least until some definite
multilateral actions are taken.
Regional Action
Recently, a trio of U.S. officials (Baker, Mos-
bacher, and Hills) met in Australia with foreign and
economic ministers of eleven Pacific Rim nations in-
cluding Japan, Korea, Canada, Australia, New
Zealand, Indonesia, Malaysia, Singapore, Philippines,
Thailand, and Brunei. They discussed forming a re-
gional economic organization, similar to the European
Community. One of the main topics of discussion was
the lack of respect for intellectual property rights and
the possibility that the problem would undermine the
transfer of technology that has been crucial to the
economic dynamism of the Asia-Pacific region.
The conferees openly talked about video pirates
from Hong Kong, software copiers in Korea, and
brand-name watch cloners from Taiwan. The U.S.
position is that if one cannot protect ideas and products,
there will be no sales to those areas which reject
protection. A simple formula might apply which holds
that no protection equals no sales equals no markets.
All sides lose in such a scenario. The conference was
specifically asked to address this problem by working
together to avoid future trade imbalances resulting
from piracy.
Most international efforts at protection
are crippled because they have
no enforcement mechanism.
The European Community has been discussing the
intellectual property issue for several years. The re-
gional organization is ensuring that all members of the
European Community bring their domestic laws into
unity with each other by the 1992 landmark date. This
will assure that once all goods and products flow freely
about the European Community, all owners of intel-
lectual property will receive protection region-wide.
Regional agreements may act as temporary measures
which offer some degree of multilateral protection
until truly intemational solutions are reached.
Bilateral Action
Some countries (the United States, in particular)
have already negotiated a series of bilateral agreements
with several newly industrialized Asian countries on
PIRACY OF INTELLECTUAL PROPERTY 1 39
the topic of intellectual property. This same tactic has
recently been utilized in the securities area with some
success (i.e. the Swiss/U.S. Memorandum of Under-
standing). The advantages of bilateral action include
the ability to take immediate action and to cater more
precisely to national requirements. Pressure from the
United States has led to such bilateral action with South
Korea, Singapore, Malaysia, and Indonesia.
Bilateral actions have been criticized by some ob-
servers because of the possibility of biased national
interests (in a limited geographic sphere) which could
in fact perpetuate discrimination against outsiders,
thereby hindering world trade. In many circles, experts
believe the only truly fair long term international solu-
tion is a multilateral one.
Unilateral Actions
Many nations have recently taken voluntary uni-
lateral action to amend or upgrade their domestic laws
regarding intellectual property, granting protection to
all owners on an equal basis. Countries which belong
in this category include not only the United States, but
also the United Kingdom, West Germany, France,
Italy, Spain, Japan, Australia, and Canada. These na-
tions have intellectual property laws which not only
purport to offer protection, but back it up with consis-
tently rigorous enforcement. A multinational corpora-
tion doing business in North America, Western
Europe, or Japan/Australia can be relatively certain
that its ideas and products will receive local copyright,
patent, and trademark protection.
There is another group of nations, primarily the less
developed countries of Asia and South America, which
have traditionally been "hotbeds of piracy." Some of
these nations have enacted new domestic legislation.
Questions remain as to whether these laws will be
enforced with some type of accompanying multilateral
agreement.
Another proposal which has been suggested as a
compromise is to treat intellectual property as tangible
property similar to real estate or other business assets.
There are intemationally recognized rights associated
with ownership of property in virtually every foreign
country. It is well-recognized (Third Restatement of
Foreign Relations) that a foreign nation may not "take"
an alien's property or terminate the alien's right in any
property existing within that nation's boundaries with-
out some compensation being paid to the alien property
owner. When an owner's property (copyright, trade-
mark, or patent) is taken, they can turn to the legal
system of the foreign country or an international forum
such as the Foreign Claims Settlement Commission or
40 / S O C I E T Y 9 SEPTEMBER / OCTOBER 1990
the International Center for Settlement of Investment
Disputes. The theory is that the owner should prevail
in such a claim because the unauthorized use of a
protected intellectual property right constitutes an in-
jury recognized in international law as deserving of
remedial action. This alternative has not received
widespread international support however.
Ideas should flow freely as part of the
common heritage of mankind.
For at least a decade the U.S. government has pres-
sured developing countries to upgrade their intellectual
property laws and enforce them. At the same time the
U.S. government has recently amended relevant legis-
lation, including the passage of the Omnibus Trade and
Competitiveness Act of 1988. Among the provisions
of this new law is one which aims at systematically
continuing the process of intensive negotiations to
obtain improved intellectual property protection in
overseas markets. Through Section 301, commonly
known as "Super 301," the U.S. Trade Representative
is required to determine whether a foreign govern-
ment's trade practice is unfair, identify priority coun-
tries, and initiate cases against those whose practices
deny adequate protection as well as those which have
the greatest impact on U.S. products.
Action by Private Industry
Behind the scenes of the new antipiracy move is an
informal committee of high-level officials from IBM,
Pfizer, General Electric, Monsanto, and several other
large U.S. companies. The so-called Intellectual Pro-
perty Committee, formed in 1986, has lobbied
Washington, Tokyo, and Bonn. The Committee has
convinced the U.S. government, and to an extent Japan
and West Germany, that billions of dollars are lacing
lost and that prompt action is necessary to combat the
problem. The committee also meets with other execu-
tives from large multinationals such as Siemens and
Hoechst to encourage these industry leaders to put
pressure on their own government officials to improve
international protection of intellectual property.
Clearly the issue of legal protection of intellectual
property will continue to be a topic of concem to U.S.
companies. There are those who assert that such laws
simply perpetuate a system of economic imperialism;
that ideas should flow freely as part of the common
heritage of mankind. Others suggest that there should
be a sliding price scale under which those in develop-
ing countries pay licensing fees related to their relative
economic level, based on a percentage of income con-
cept. It is difficult to convince free market private
investment enterprises to sink money into research and
development of ideas without demanding both protec-
tion and reasonable profits.
The international organizations such as GAq~I" and
WIPO will continue to compete for at least some
minimum level of control. There should eventually be
a single multilateral or international system of enfor-
cement. Should the United States dictate the tone of
such legislative protection in the international arena?
Perhaps not alone; but the world community will ul-
timately control who reaps the profits from intellectual
property in the emerging global marketplace. Interna-
tional law should protect those who place their ideas
and property in world commerce. Technological in-
vention and creative activity depends heavily upon
such protection.
As more and more nations become technology-
oriented and therefore conducive to the development
of ideas, the weight of world opinion will likely swing
toward stronger protection. Though WIPO may be
used as an interim measure, the ultimate multilateral
solution is likely to involve GATr, either exclusively
or in concert. Until such time, of course, multinational
corporations operating in the world market will be
dependent upon the combination of the domestic law
of individual nations, bilateral agreements between
nations, and prudent internal organizational policies
concerning technology transfer.
Kurt Stanberry is associate professor of Legal Studies at
California State University, Long Beach, and has taught in
international business programs in London, Tokyo, and
Seoul.. He has published on a variety of topics in interna-
tional business and law including ethics, insider trading,
and foreign ownership of real property. In London, he
conducted research at the Institute for Advanced Legal
Studies, University of London.