Determinants of cross-border intellectual property rights enforcement: the role of trade sanctions.

AuthorChiang, Eric P.
  1. Introduction

    The enforcement of intellectual property rights (IPR) across national borders has become increasingly important. Frequently, IPR are used to disseminate and protect the development of new technologies, academic knowledge, and artistic works. In the international setting, it has been found that IPR promote technology transfer between countries, thus leading to productivity growth. In addition, IPR protect innovations embodied in wade.

    Much can be learned about the effectiveness of IPR protection by studying the circumstances that lead firms to take actions to protect their intellectual property. Court litigation is a traditional venue used to enforce IPR violations against parties from the same country. However, using court litigation to enforce IPR across national borders is difficult for several reasons: IPR laws differ from one country to another, similar laws between countries can be interpreted differently such that a violation in one country may not be found in another, and attitudes toward IPR protection differ in that innovating firms believe stronger protection increases incentives for further research, whereas others argue that stronger protection restricts access to new goods and reduces welfare.

    In addition, court litigation requires that all parties be subject to the jurisdiction of the presiding court. In many cases, factories that illegally reproduce U.S.-patented goods have little or no physical presence in the United States. Therefore, patent owners are unable to use effectively U.S. courts or the courts in the defendant's country, perhaps due to weak IPR laws, corruption, or simply a preference by the courts of the defendant country to protect its country's interests. Although greater efforts via international cooperation have facilitated court litigation across national borders, cases are still sporadic. For these reasons, accurate empirical studies of cross-country IPR enforcement are difficult to construct.

    As an alternative remedy, U.S.-based firms can seek IPR protection from the U.S. International Trade Commission (USITC) by filing a Section 337 investigation that can result in the imposition of trade sanctions on guilty parties. (1) In the past three decades, many firms have successfully used this mechanism. Between 1974 and 2001, 344 out of a total of 459 cases filed (75%) resulted favorably to the complainant. The richness of information contained in Section 337 investigations is an important source that ties the connection between IPR and trade; yet, only few studies have used it, and in limited forms. Mutti and Yeung (1996) offer a detailed look into Section 337 cases (from 1980 to 1991) involving publicly traded complainant firms and find that firms filing Section 337 cases tend to be larger, have greater product range, and have higher R&D expenditures. In addition, they find that successful cases led to higher profits and sales for the complainant firm, whereas unsuccessful cases resulted in lower profits and sales. Harper (1994) shows that successful cases resulted in higher stock returns for publicly traded firms in relation to the market index. Though these studies focus on characteristics of complainant firms, the current study takes a closer look at respondent characteristics to uncover the motivations for filing Section 337 cases. The decision by which firms choose to file cases depends crucially on the conditions facing the firm and the industry. This study evaluates the effects of these conditions on the likelihood and extent of cases. The complete set of Section 337 cases from 1974 to 2001 (459 cases) is studied.

    Determining the factors that influence Section 337 cases is congruent with factors that influence court litigation analyzed in recent studies. Lanjouw and Lemer (1998) present a stylized model on the propensity to file litigation and find that the decision to litigate hinges on the comparison between the expected benefits and costs of taking a case to trial. A subsequent paper by Lanjouw and Schankerman (2001) finds that the value of a patent, the extent to which patents are used within an industry, and market competitiveness within industries all increase the likelihood of patent litigation. These studies provide insights into factors that are likely to influence international IPR enforcement, where country-specific factors become important determinants in the decision to take enforcement actions.

    In the current study, more complaints are filed against countries where there are more U.S. patents to protect, which suggests a trade-off between greater technology access and more patent violations, in addition, the volume of trade also influences the decision to file, with higher levels increasing the incentive to file cases. This brings into question whether the motivation to file Section 337 cases is influenced by the demand for trade protection in addition to the demand for IPR protection. Finally, country-specific variables, including the level of corruption, patent protection, the rate of economic growth, and the implementation of the Trade-related Aspects of Intellectual Property Rights (TRIPS) agreement by the World Trade Organization (WTO) each influences the number of filings.

    The remainder of the article begins with a brief description of the Section 337 mechanism and provides a first look at the data. The framework is then discussed, which ties into the empirical model estimating Section 337 cases. The empirical results show how different industry and country-specific factors within respondent countries affect the likelihood and extent of Section 337 cases. The article concludes by discussing how this study can be applied to general cross-border IPR enforcement issues.

  2. U.S. International Trade Commission Section 337 Investigations

    The primary task of the USITC is to ensure fair trade for the United

    States. In addition to hearing cases involving alleged IPR violations, it also hears cases involving antidumping, which has received much attention in the trade literature. The literature on antidumping parallels that of international IPR enforcement in that both address unfair trade across national borders (see Blonigen and Prusa 2003 for a literature survey). However, differences arise between antidumping filings and Section 337 filings. A key difference is that the legal factor in antidumping cases is the trade practice itself (of which the determination of violation may be subjective), whereas Section 337 cases involve trade practices that violate an external law, that of a patent, copyright, or trademark. Mutti and Yeung (1996) state that antidumping cases filed by inefficient firms to gain market share are not uncommon, while Section 337 cases are less likely to be filed in this manner.

    This study analyzes individual cases of IPR violations filed under Section 337 of the Tariff Act of 1930 and conducted at the USITC. The USITC serves as the primary ombudsman for U.S. and non-U.S. firms to initiate investigations (against entities outside the United States) for alleged violations of U.S. IPR without having to pursue full court litigation. The first modern investigation occurred in 1972 under the rules in force today, with the exception of the 1988 amendment that eliminated the requirement that complainant firms demonstrate injury to the domestic industry. This amendment made it easier for non-U.S, firms to file investigations. Although the presence of foreign-affiliated complainant firms rose since 1988, they still constitute a small portion of cases. The enforcement mechanism used by the USITC comes in the form of exclusionary orders imposed to prevent further importation of products in violation, which are enforced by U.S. Customs.

    The procedure for a Section 337 case differs from both traditional court litigation and USITC antidumping cases. Section 337 cases are generally much shorter than traditional court cases. Each Section 337 application, once reviewed for correct filing, is assigned to an Administrative Law Judge (ALJ) who then sets a target date for the completion of the investigation, normally less than 12 months. Following evidentiary hearings in which parties present their cases, the ALJ issues a decision called an "Initial Determination," of which the Commission either accepts the decision as final or recommends further review. Unlike antidumping cases where domestic injury must be proved, the U.S. Department of Commerce does not play a role in Section 337 cases. Upon determination of a violation, the Commission issues sanctions in the form of exclusion orders (preventing products from entering the United States) and cease and desist orders (preventing the sale of goods already in the United States). Unlike traditional court litigation, no monetary awards are issued.

    Since the inception of modern Section 337 cases in 1972, 505 individual cases of alleged IPR violations have been filed against non-U.S. firms in 40 countries. In this article, we use data from 1974 to 2001 (459 cases). (2) Most case filings involve more than one respondent firm, often located in more than one country. On average, each case involves 6.3 respondent firms located in 1.4 countries.

    Figure 1 illustrates the annual count of case filings and respondent firms, and Table 1 shows the total number of filings by case and total number of respondent firms for each country or region in the sample. A case filing is defined as a complaint filed against a set of accused respondents. A respondent country case (in Table 1) is defined as a set of firms within a single country named in an investigation, without regard to the actual number of firms named. A respondent firm is defined as a single firm named in a case. Therefore, if a case is filed against 16 respondents, 4 of which are located in country A, 4 in country B, and 8 in country C, then we would count this as 1 case filing, 3 respondent country cases, and 16 respondent firms. It is clear...

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