Building the Foundations

-The results of intellectual property reforms are evident in the increased patent and trademark filings and increased investment. Says Michael Cassels, head of the trademark practice at Argentina’s biggest law firm Marval O’Farrell & Mairal: “There has been a definite increase in patent filings from abroad, largely as a result of our new patent law which, as well as providing for the protection of pharmaceutical patents, has also changed the term of patent protection to 20 years from the patent application date.” It is the same in trademarks, he explains: “Now that we have opened up our markets, more products are being imported. The companies want to ensure their marks are protected before they begin their marketing campaigns.”

A similar trend is evident in Brazil. Major improvements have been made to the intellectual property regime following patent and trademark legislation in 1996. This has been put down to economic reform and pressure from foreign investors.

Domestic Companies Catch on
In Mexico, the motor for change has been Nafta, which came into force in 1994. To become a member of the Agreement, the Mexican government had to ensure previously unknown levels of intellectual property protection. As a result, major changes to Mexico’s intellectual property laws were introduced in 1991 with further reforms in 1994. For the first time, a whole range of industries – including pharmaceuticals and food – found their patents could be protected, while trademark owners had their rights brought up to international standards. These reforms have not only encouraged foreign companies to register their rights, as Abraham Alegria, an intellectual property partner in Baker  &  McKenzie’s Mexico City office explains: “Mexican companies are now far more interested in looking at the possibility of getting patents and trademarks. As our economy has been opened up to foreign products they have realized that looking after their intellectual property is an important part of their business strategies.” Arturo Ancona, a partner of Ancona & Associates on temporary leave from the firm to fill the position of the director of Mexico’s Copyright Registry, agrees. He says: “Registrations are increasing because there is far more knowledge than there was 10 years ago. Businessmen are getting more information from abroad, are reading about these issues in magazines and on the Internet, and as a result they are beginning to understand that IP is part of their companies’ value.”

Juan Pablo Capello, general counsel for Patagon, the leading online financial services company in Europe and Latin America says: “When we started doing strategic alliances [with internet companies] in Latin America two or three years ago, we were generally surprised that initial agreements were silent as to intellectual property. A linking agreement would have been a letter of intent. Nowadays [these companies] are much more robust when dealing with their intellectual property.”

Some Work to Do
In Brazil and Argentina too, practitioners report that there is now a better understanding of intellectual property issues among domestic clients. However, Cassels states that there is still work to do: “Our local client base is aware of IP issues but not to the same extent as our foreign clients. They don’t seem to worry about getting protection until far later in the day.” He explains that this is more so in trademarks: “Whereas our foreign clients will frequently register their marks up to three years before they want to start marketing their products, we often see our Argentine clients only thinking about registration after they have developed a marketing campaign. If they come to us at that stage, we often have to tell them that the mark they want is already owned by someone else, or that it is unregistrable.” He believes Argentine companies still have much to learn: “Virtually every foreign company will have rules regarding the use of its trademarks and even a manual outlining how its intellectual property is to be deployed. This is practically unheard of among the local companies here.”

According to Peter D  Siemsen, senior partner of Rio de Janeiro intellectual property firm Dannemann Siemsen Bigler & Ipanema Moreira, his Brazilian clients are more focused on trademarks than on patents: “While awareness of trademark issues is very high, things are only slowly changing when it comes to patents. The government does not yet fully realize the importance of patents as a means of engineering growth, while national companies lack the capital to make substantial investments in the research which leads to patent applications.” He says this will only change when Brazil’s financial institutions look at technology companies, and the patents underpinning them, as realistic investment targets: “We have a lot of very good scientists but many of them are forced to work abroad, especially in the United States. We will only get them coming back to start businesses here if they feel there is sufficient backing for their work.” But that is unlikely to happen soon. The US government dropped its complaint against article 68 of Brazil’s industrial policy law at the WTO in June, paving the way for generic production of patented drugs locally. The Brazilian health ministry announced in August it would issue a compulsory license for nelfinavir, an AIDS drug produced by Roche of Switzerland, if the foreign pharmaceutical did not lower the cost of the drug.

While good for the generic drugs business it is bad for the development of a local pharmaceutical industry as it is likely to exacerbate the brain-drain. But Siemsen believes there are encouraging signs: “We have seen some important changes in university research programs and at government research centers. People are beginning to file patent applications both in Brazil and abroad. It is a slow process but it is on the rise.” Initiatives sponsored by the Brazilian Association of Intellectual Property – a group of representatives from the legal profession, companies and universities – are also helping. Siemsen says: “We put on presentations and run seminars which explain the patent process and attract up to 650 delegates, some even from neighboring countries.”

Problems Remain
Although there have been improvements in intellectual property regimes recently, major structural problems remain. In Brazil, one of these is the time taken to secure registrations. Siemsen explains: “There is a backlog of 200,000 trademark applications and 60,000 patent applications. The Patent and Trademark Office has gone backwards.” He blames the delays on a lack of resources. Until the problems are resolved, rights owners are going to face difficulties: “You can only exercise your rights in Brazil once you have a registration.”

It is also difficult trying to enforce rights through the courts. Says Ana Paula Alfarano, a lawyer with Pietro Ariboni e Associados in Sao Paulo: “It can take up to six years to get a final decision which means it is very difficult to get damages.” However, the government is aware of this and Congress is discussing how to improve the situation. One solution, says Siemsen, is to establish a specialist court: “The 1996 laws authorized the creation of such a court, but at the moment there is not sufficient work for one court to deal with.” However, he says there has been some progress on establishing specific courts: “Here in Rio, six federal courts have been given responsibility for hearing all IP matters and they receive all the cases … when you get in you now know that you will be dealing with someone who broadly understands the subject.” If the aim is to stop an infringement, things are not so bleak. Alfarano explains: “The courts are very receptive to injunctive relief and you can use this as a means to force people into settlement. You may not get damages, but you could get some reimbursement for any losses you may have suffered. And it will be much quicker.”

In Mexico too, there are problems with the court process. Abraham Alegria explains that changes to procedural law have led to confusion about which court to petition to have cases heard following the decision of the intellectual property office. “Since the changes in the procedural law,” he says, “it is difficult to know which court to go to, or where to appeal the IP office’s decision. You have a big problem if you choose a court only for it to tell you it does not have jurisdiction.” Until further clarification, law firms are developing their own strategies for dealing with the problems caused by this uncertainty. What Alegria hopes for, but is not optimistic about, is a definitive Supreme Court ruling: “If it happens at all, it will only happen slowly and, in any case, the chances are that we will end up with a ruling which covers the issues around a specific set of circumstances. It will not address the whole problem.”

Enforcement is Failing
Procedural difficulties are not the only issues. There are also major enforcement problems. This is most evident in the music industry where local producers suffer huge losses because of piracy. The statute books contain international-standard laws that should protect copyright owners but the experience of performers and their record companies is that it is often difficult to get the authorities to take the matter seriously. Says Raul D Vazquez, regional director of the International Federation of the Phonographic Industry (IFPI) Latin America: “Piracy is threatening the viability of our industry in all Latin America, but

Mexico, Brazil and Argentina suffer most because they have very active local artist development programs.” He puts the piracy rate in Mexico at 63% of the total market, in Argentina and Brazil at 50%. As well as local pirating, every year millions of CDs and, increasingly, CD-Roms are imported by organized crime syndicates operating out of south-east Asia and Paraguay. The resultant loss of royalties revenues deprives artists and reduces the number of recordings as producers are unable to recover previous investments costs. It is a situation which threatens local performers and companies, explains Vazquez: “If the problems we face are not confronted, local artist development will stop, independent companies will close and the majors will limit their presence to marketing and sales offices in each country.”

Pirates Beware
In Venezuela the story is similar, although the industry is beginning to organize itself. Says Alejandro Zalles, head of multimedia for LatinWorld Entertainment: “Only recently have record labels started to organize themselves to raise awareness and pressure the government, a month ago there was a rally in Caracas to speak out against copyright infringement.” The rally was organized by the Alianza Nacional para la Defensa de la Industria Musical (ANDIM), which represents record labels and royalty collection organizations. Zalles believes that a lack of awareness of owners’ rights is in part to blame: “It is hard for people to comprehend that even though a piece of music is intangible, it is actually owned by someone and should be subject to the same legal standards as physical property.” He also blames a lack of government resources  to enforce the law: “Last time I checked there was only one prosecutor in the country that was devoted to prosecuting copyright infringement,”  he says.

The music industry is a good news story in Latin America. Local artists enjoy huge popularity and chart domination. Some have broken into the lucrative US and European markets. Yet, the recording companies state bluntly that without adequate enforcement of their legal rights, there is no incentive to find and nurture new talent. It is a message which may at last be getting through to governments. Says Vazquez: “They are slowly becoming aware of the impact that piracy has on their music culture. This awareness is the result of a gigantic lobbying effort by local trade associations, IFPI and RIAA [Recording Industry Association of America].” And there is some proof that things are changing. In Mexico on 6 June 2000, alleged music pirate Ramon Carrizales and accomplices were arrested by the country’s anti-piracy team ADPIF. The group was thought to have distributed 20 million pirate CDs annually. The arrest was hailed by IFPI chairman and CEO Jay Berman: “This is a major success for the anti-piracy unit in Mexico. It is also the latest good news to come out of that country, where increased enforcement is beginning to pay dividends.” In Brazil, IFPI has welcomed a presidential decree of March this year creating an inter-ministerial anti-piracy committee aimed at coordinating the efforts of the country’s different anti-piracy organizations.

Franchising is Booming
One area of growth is franchising. Brazil and Mexico are among the top 10 franchising economies in the world, while Argentina’s industry grew by up to 33% a year in the late 1990s; by 2000 annual sales volume passed $2 billion.

In Brazil, the importance of intellectual property to franchising was reinforced by 1996’s patent and trademark legislation. This provides the foundations on which to build networks. Says Luiz Henrique do Amaral, director of international affairs, Brazilian Franchising Association (ABF): “In order to register a franchising contract the basic requirement is that the relevant trademarks have been registered or filed for registration in Brazil.” He explains why this is so important: “It is only when you have registered the agreement with the Brazilian Patent and Trademark Office that you are able to charge a royalty rate, make fiscal deductions for these payments and enforce your rights against third parties.”

Statistics compiled by the ABF show that in 1999 there were 894 local companies and 22 international chains operating franchising networks in Brazil with a total workforce of over 500,000 and revenues of $12 billion. These are serious figures, especially with the country’s unemployment rate close to 8%.

Franchising is an industry driven forward when intellectual property owners feel confident their rights are being protected. And do Amaral is sure that the 1996 legislation provides the strong regulatory infrastructure necessary to protect the franchisor’s interests, and so encourage continuing growth in what is already the world’s third-largest franchising market after the US and Canada: “Brazilian intellectual property laws properly afford protection to franchisors’ intangible assets, while the legal remedies available in civil and criminal courts ensure strong enforcement mechanisms.” According to Ana Paula Alfarano, a lawyer with the firm Pietro Ariboni e Associados in Sao Paulo, this has given local rights owners more confidence when dealing with infringements: “Companies are far more aggressive in asserting their rights. They are investing against infringers by ensuring they have protection and they are also trying to educate people.” However, the biggest problems her firm faces with franchising remain with trademarks: “We see many cases where the franchisee continues to use a trademark, even though the franchise agreement is over.” But clients are now more willing to act: “As a firm we are involved in a lot more litigation now and we are sending out many more cease and desist letters.” Such letters are often all that is needed, she says, “Because they see rights owners asserting their rights, infringers are now afraid of getting caught. They never were before.”

Trademarks of Success
The same goes for Mexico where, since reforms to the intellectual property system in 1991, franchising has exploded. The country now has over 500 franchise operations through 19,000 outlets. Although, as with Brazil, the majority of franchisors are local companies, there is now a more even split between foreign operators and their home-grown counterparts. Overseas franchisors account for about 40% of the industry, which generates $4 billion a year. Alegria is certain why franchising is booming: “It is all based on the ability to access well-known trademarks. Even if you have a fantastic business, it is very difficult to get off the ground if people do not know your mark. Franchising gives you access to a well-known mark and the value of that brand allows you to build up business quickly.”

The 1991 law has helped to improve Mexico’s image as a place in which to franchise. In the two years after the reforms, franchising grew by over 400%, accounting for 2% of GDP by 2000.

In Argentina, Cassels reports that his firm has also seen a rise in franchising. “It has taken off here to a considerable extent,” says Cassels, “and this has certainly helped to raise awareness of the need to create intellectual property rights and then to get them protected.” Cassels states that when a client comes to him for advice about franchising, it is the intellectual property issues he likes to look at first: “We have to ascertain whether the client has the relevant trademark, or service mark protection, and we may go in to do a full audit of all rights to see if they can support the business the client wishes to begin. Once this is done, we may also discuss regional protection.” And it is here, says Cassels, that domestic clients’ lack of intellectual property awareness is often apparent: “Very few of them understand that they have to actively protect their rights in foreign countries. They assume that because they have the right to use a trademark in Argentina, they will automatically have the right to use the same one in Brazil or Uruguay. We have to tell them that this is not the case.”

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