U.S.-Japan Intellectual Property Rights Accord a Breakthrough

Contrary to the often acrimonious character of trade negotiations between Japan and the United States, the two nations last month successfully completed talks aimed at harmonizing their policies regarding technology and intellectual property rights. And though it received little attention, this achievement may have a long-lasting impact on the international competitiveness of U.S. industry.

Rapid technological change and the swift diffusion of scientific discoveries are characteristic of our global economy. Competitive advantage often depends on a company’s ability to manage the rate of technical innovation and diffusion, thereby promoting the rapid introduction of new processes and products on a global scale.

Prior to 1960, less than 20% of new products introduced in the U.S. market were transferred abroad within three years of their domestic rollout. By the late ‘70s, the rate of foreign transfer had increased to nearly 50% in the first year, plus another 20% more in the second or third years.

Today, global product introductions have become the rule rather than the exception for many high-tech industries, from consumer electronics to aerospace to fine chemicals. A new digital cassette recorder, the latest laptop computer or a new anti-ulcer compound can be found in New York, Osaka, Stockholm and Sao Paulo within months of its unveiling. To do otherwise is to waste precious time during which competitors will imitate or improve on the product.

One measure of this growing technological integration is the proportion of patents granted to foreign nationals, which has more than doubled in the United States since 1960, reaching a peak of 51% in 1989. Other industrial countries grant 60% to 90% of their patents to foreign firms. The principal exception is Japan, where a Byzantine registration system has kept the proportion of patents issued to foreign companies below 10%.

In the U.S. system, ideas are subject to patent, rights are granted to the first inventor of record and the process of patent application is secret until a final determination is made. Japan, in contrast, allows patents to be taken only on actual products or devices, grants rights to the “first to file” and makes the patent application public 18 months after filing. This last point is critical, because the process often exceeds seven years in Japan, during which the patent is subject to challenge by any firm with a reasonable claim.

Since Japanese firms are allowed only narrow interpretations of what constitutes novel technology, they tend to patent often, building a network of protection around basic products or processes that thwarts imitators. The U.S. system allows broader interpretations, but insists on greater significance. As a result, more than 720,000 patent applications were filed in Japan in 1990, versus only 150,000 in the United States.

For years, U.S. companies were unable to pursue patent infringement cases in Japanese courts. The 1980s experience of companies like Silicon Technology with its silicon-wafering saws and BP America in temperature resistant ceramics for auto engines seemed to indicate that the best policy was not to file for patent protection in Japan at all. Both U.S. companies waited over 10 years to have their patents recognized--and then had to challenge imitators who had early access to the published technical information.

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Then came the landmark Texas Instruments case. TI first filed for Japanese patents on its basic integrated circuit technology in 1960, but continued delays and the publication of the application led to exploitation of the technology by Japanese firms with no apparent recourse. Only under the threat of retaliation by the U.S. government was the patent granted in 1989; subsequently, TI began to collect considerable sums from Japanese firms.

A second important case was Honeywell’s victory over Minolta in February, 1992. A U.S. court assessed damages of $127 million for unauthorized use of Honeywell’s auto-focusing technology. Since then, nine others have agreed to pay about $170 million in additional damages.

Emboldened by these actions, other U.S. corporations began to pursue infringement cases in friendlier U.S. courts. More than 100 such suits were filed in 1992 and 1993, including the highly public battle between Kodak and Sony over video recording technology. Japanese multinationals responded in kind, increasing their own filings and defending their rights vigorously.

This legal feeding frenzy lent urgency to negotiations begun in 1989 under the auspices of the Structural Impediments Initiative and culminated last month in an agreement whereby Japan will:

* prevent Japanese companies from challenging a foreign firm’s patent application prior to a finding;

* accelerate procedures to reach findings within three years;

* allow applications to be filed in English; and

* eliminate the compulsory licensing of technology to rival companies.

In return, the United States agreed to follow international standards, by publishing pending patent applications 18 months after their filing date and altering a patent’s validity to 20 years from the filing date, rather than 17 years from the issue date.

Unfortunately, the conflict between the first-to-file and first-to-invent systems was left unresolved. First to file--preferred by most large companies and every country except America and the Philippines--allows for greater certainty with respect to the future exploitation of discoveries. It also averts so-called “submarine” filings by previous unknown inventors who surface to demand royalty payments only after the value of a patent has been established.

Nonetheless, the U.S.-Japan accord is a major breakthrough for U.S. companies, in that it grants them easier and quicker access to patent protection in Japan. Now it is up to those firms to pursue their expanded rights and the business opportunities they signify as aggressively as they previously complained about inequities in the system.